FAQs for Financing Your Investment
The first step in buying a new home should be to take a look at what you can afford and how you are going to pay for it. If you're like the majority of home buyers, you will have to finance your purchase with a mortgage.
So what exactly is a mortgage?
- A mortgage is a loan that uses the home you buy as security. This loan is registered as a legal document against the title of your property.
- The principal is the amount of the loan that is actually borrowed.
- The interest is the amount the lender charges for the use of funds borrowed. Interest rates vary according to a number of factors including terms and conditions of the mortgage and the borrower's credit history. Mortgage payments are usually comprised of both principal and interest.
- The amortization period is the number of years that it will take to repay the entire mortgage loan in full. A longer amortization period will result in lower payments but will take longer to pay off the loan which means you will pay more in interest.
- Maximum amortization for insured mortgages is 25 years.
- Maximum amortization for conventional mortgages is 30-35 years.
- The term is the length of time for which a mortgage agreement exists between you and your lender. A longer term means you will keep the interest rate agreed upon for a longer length of time. Rates and therefore payments vary with the length of the term. Terms usually range from 1-10 years with a five-year term being the most common. Generally a longer term, because of the added security, will be at a higher rate than a shorter term.
- The maturity date marks the end of the term, when you can repay the balance of the principal or renegotiate the mortgage at interest rates in effect at that time. If you choose to repay or renegotiate the mortgage before this time, penalties may be charged. Once your mortgage matures you are free to renew with your current lender or shop around to other lenders for the best rate.
- The payment schedule is the frequency at which you will make your mortgage payments. These can occur monthly, semi-monthly (twice a month), bi-weekly (every other week) or weekly.
What is the lowest downpayment required
- 5% downpayment. Note that if you put anything less than 20%, you will be required to purchase mortgage loan insurance from either Canada Mortgage and Housing Corporation (CMHC), or Genworth Financial Canada (GE).
What is the longest amortization for a mortgage?
- Since early 2011, the longest amortization has been reduce to 30 years.
What type of Mortgage should I get for my investment property?
- For those investors looking to purchase an investment property, you should look into getting either a variable "open" mortgage or a home secured line of credit. Both of these options do not have any penalties for paying off the loan early or selling the property at any time. This is especially important for investors because many times they will not know how long they will be keeping the property. A good offer may come along, and you do not want to miss out on selling the property because of your mortgage terms. Even though you run the risk of short term increases in the interest rate, majority of the time, the high cost of penalties means you do not want to take the chance and lock-in your mortgage.
What are the benefits of getting an "interest-only" line of credit?
- Many people are uncomfortable with the idea of interest-only credit facilities, instead of the traditional mortgage loans. As the name suggest, interest-only facilities means you are not required to make any payment towards the balancing owing, and your monthly payments are lower because you only need to cover the interest on the loan. This is ideal for investors (especially those with multiple properties) as they want to minimize their monthly debt obligations, and the interest payments can be written-off for tax purposes.
Mortgage Terms
AMORTIZATION PERIOD:The actual number of years it will take to pay back your mortgage loan.APPRAISED VALUE:
An estimate of the value of the property, which is conducted for the purpose of mortgage lending by a certified appraiser. This appraisal is not to be confused with a building inspection.
ASSUMABILITY:
Allows the buyer to take over the seller's mortgage on the property.
CLOSED MORTGAGE:
A mortgage that locks you into a specific payment schedule. A penalty usually applies if you repay the loan in full before the end of a closed term.
STRATE / MAINTENANCE FEE:
A common payment among owners which is allocated to pay expenses.
CONVENTIONAL MORTGAGE:
A mortgage loan issued for up to 75% of the property's appraised value or purchase price, whichever is less.
DOWN PAYMENT:
The buyer's cash payment toward the property. The difference between the purchase price and the amount of the mortgage loan.
EQUITY:
The difference between the home's selling value and the debts against it.
HIGH-RATIO MORTGAGE:
A mortgage that exceeds 75% of the home's appraised value. These mortgages must be insured for payment.
INTEREST RATE:
The value charged by the lender for the use of the lender's money. Expressed as a percentage.
LAND TRANSFER TAX, DEED TAX OR PROPERTY PURCHASE TAX:
A fee paid to the municipal and/or provincial government for the transferring of property from seller to buyer.
MATURITY DATE:
The end of the term, at which time you can pay off the mortgage or renew it.
MORTGAGEE:
The person of the financial institution that lends the money.
MORTGAGE INSURANCE:
Applies to high-ratio mortgages. It protects the lender against loss if the borrower is unable to repay the mortgage.
MORTGAGE LIFE INSURANCE:
Pays off the mortgage if the borrower dies.
MORTGAGOR:
The borrower.
OPEN MORTGAGE:
Allows partial or full payment of the principal at any time, without penalty.
PORTABILITY:
A mortgage option that enables borrowers to take their current mortgage with them to another property, without penalty.
PRE-APPROVED MORTGAGE:
Qualifies you for a mortgage before you start looking for a home. You know exactly how much you can spend and are free to make a "firm" offer when you find the right home.
PREPAYMENT PRIVILEGES:
Voluntary payments in addition to regular mortgage payments.
PRINCIPAL:
The amount borrowed or still owing on a mortgage loan. Interest is paid on the principal amount.
REFINANCING:
Paying off the existing mortgage and arranging a new one or re-negotiating the terms and conditions of an existing mortgage.
RENEWAL:
Re-negotiation of a mortgage loan at the end of a term for a new term.
SECOND MORTGAGE:
Additional financing. Usually has a shorter term and higher interest rate than the first mortgage.
TERM:
The length of time the interest rate is fixed. It also indicates when the principal balance becomes due and payable to the lender.
TITLE:
Legal ownership in a property.
VARIABLE-RATE MORTGAGE:
A mortgage with fixed payments, but fluctuates with interest rates. The changing interest rate determines how much of the payment goes towards the principal.
VENDOR TAKE-BACK MORTGAGE:
When the seller provides some or all of the mortgage financing in order to sell their property.