The A to Z of Mortgages

A is For Amortization

First Published Date: June 9, 2009

Taking out a mortgage is something that most of us do, sooner or later. There is a lot of fear and uncertainty attached to the idea of taking out a mortgage, not least because the term of a loan taken out to buy a house will generally be longer than if it were taken to buy something a bit smaller. Typically, the term for a mortgage will be in the region of 25 years – a very long time by anyone’s estimation, and a time in which so many things can change. Think about it – the average length of time an individual spends in a job these days has fallen to about three years. Although the average does not apply to everyone, and takes into account that people will spend a very short time in some jobs, it still offers the possibility that you will change jobs more than a couple of times during the term of your loan.

In addition, mortgages are considered to be a little bit nerve-wracking by some because of the jargon which is so often used by those who are selling a mortgage or by the financial experts discussing what the future holds for mortgage owners on the daily news – something of a motif of the age, it has to be said. Maybe most people just about understand what a mortgage is but beyond that, all bets are off. Take the average person (someone without a mortgage, as a preference) and ask them what a “principal” is. Someone who works in a school, or an actor in a lead role? That’s likely to be the response. Even if you mention that you’re talking about money, you’re still more likely to get a confused frown than an accurate reply.

When things get even more complicated, therefore, the average consumer is likely to become still more confused. Ask the average individual, mortgage holder or not, to tell you what “amortization” is, and the eyes will begin to glaze over before you have even mentally added the question mark. This is a pretty important part of a mortgage account, and there are still several people who will be unable to tell you what it is. The reason? No-one has thought to tell them. It could be argued that this kind of thing should be taught in schools, because money smart kids will be less likely to get wrapped up in debt later on.

Amortization is defined as “the allocation of a lump sum amount to different time periods”, and an amortization schedule forms part of any mortgage agreement you may have or take out in future. On a typical amortization schedule, the amount you pay each month towards your mortgage account will be detailed both in terms of how much will go to paying down your principal and how much will pay off the interest on your loan. As time goes on, assuming your loan has positive amortization, you will find that more of your payments are going towards paying off the balance of the loan. The kind of amortization you have will be influential in how efficiently you can pay off your mortgage, so ask any mortgage advisor to take you through your options.

To streamline and minimize blog maintenance, I will be discontinuing maintaining the Canadapersonalfinancewebsite.com website (however, I will still hold the domain). I will gradually move all articles from this site to A Dawn Journal. This article originally published on the above website on June 9, 2009.

Beware of Collateral Mortgage

What Type of Mortgage Is Yours?

First Published Date: March 16, 2015

When you shop for a new mortgage, pay attention to what type of mortgage your financial institution is registering you. You may be lured into collateral mortgage without knowing, as financial institutions may not disclose enough to let you know that’s it’s collateral mortgage you are registered for.

Traditional mortgage represents the exact amount you need to borrow – plain and simple. With a collateral mortgage, the amount you are borrowing is up to 125 percent to 150 percent value of your property. And for that reason the lender will have a promissory note and lien registered against your property. For example, if your mortgage amount is $100,000, the bank will register you for $150,000, although you are receiving only $100,000.

Banks or financial institutions will tell you that it’s a good thing to register you for more than what need because you will have easy access to credit in the future without reapplying or avoiding extra fees and credit.

However, what banks will not tell you is the following:

– Unlike traditional mortgages, collateral mortgages are complicated and expensive to transfer to another lender at the end of the term.

– You could be paying higher interest at renewal because your lender knows it’s difficult to switch mortgage and you will have to stay with them, so they can make pay you more.

– Because you can borrow only up to 80 percent of your property value, collateral mortgage will not be able to let you access you the extra money banks are registering you for if your down payment or equity is less then 20 percent.

– If you want to transfer out of collateral mortgage, you must hire a lawyer and pay $1,000 or more to discharge the collateral mortgage.

So when you are shopping for mortgages, always read the fine print and consult an independent mortgage professional before making your decisions.

Mortgage Free by

Canadian Mortgages Stretching Further

First Published Date: August 28, 2014

A recent CIBC survey that was conducted by Angus Reid finds out that Canadians are stretching their mortgages one year further than previously thought a year ago. 58 is the new mortgage-free freedom age on an average. However, based on where you look at, the picture can be very different.

Here are some of the highlights from this survey:

– 55 percent of Canadians making extra efforts are paying their mortgage faster. It was 68 percent last year.

– Homeowners in British Columbia have the highest expected age to pay off mortgages at 66.

– In Alberta, Ontario, and Quebec the expected age to pay off mortgages is 55, 57, and 56.

– Alberta and Ontario have the highest percentage of homeowners taking extra steps to pay off their mortgages faster at 65 and 61 percent.

– British Columbia (47 percent), Quebec (48), and Atlantic Canada (48) have the lowest percentage of homeowners taking extra steps to pay off their mortgage faster.

– Small efforts can go a long way to save big time.

– For example, someone with a $250,000 mortgage (25 year at 4.99 percent interest) can save about $35,000 if they add $147 to their monthly payments.

– Nearly $30,000 on interest can be saved if the above owner makes $726 payments every two weeks, instead of one monthly payment.

– If the average Canadian tax refund ($1,600) is applied towards a mortgage every year, it would save 4 years amortization and save about $33,103 in interest.

Source: CIBC

Canada New Mortgage Rules

Changes to Canada’s Mortgage Rules

First Published Date: July 22, 2012 ADawnJournal.com

To tame the Canadian housing market, new mortgage rules kicked in starting June 9, 2012 for government insured mortgages. Here is what you need to know briefly:

– The maximum amortization period is now 25 years (down from 30 years).

– Borrowers now can refinance mortgages using 80 percent of the home value (down from 85 percent).

– Homes costing less than 1 million are eligible for mortgage.

– GDS (gross debt service ratio) ratio and TDS (total debt service ratio) are limited to 39 percent and 44 percent. GDS tells you the percentage of gross annual income you need to cover mortgage and housing related payments such as mortgage payments, property tax, 50% condo fees, etc. TDS tells you percentage of gross annual income you need to cover housing related payments and other debts such as credit cards, car loans, etc. So, TDS = GDS + other debts.

A point worth mentioning is that until these new changes, the acceptable GDS and TDS ratios for mortgages usually have been 32 percent and 40 percent. Also, lenders would relax GDS ratio for borrowers with higher credit scores.

What is a Mortgage Default?

Defaulting on a Mortgage

First Published Date : June 25, 2010 ADawnJournal.com

There are few phrases or words more chilling for the holder of a mortgage than “default notice”. While the appearance of those words at the top of a letter are never what anyone wants to see, they hold a special dread and fear for the mortgage holder because of the genuine fear that the bank’s next step will be to take possession of their house. This fear comes about – with good reason – because the money lent in a mortgage is considered a “secured loan” – that is to say that it is given strictly on the basis that collateral is provided. “Collateral”, for the purposes of a loan, essentially means security. If you don’t pay the loan, then the bank have something of equal value that they can reclaim from you.

It is never desirable to default on a mortgage. The payments can be difficult to keep up, that much is undeniable. A mortgage is, in a lot of ways, the most challenging kind of borrowing that an account holder can take out. Although the longer term of the borrowing and the frequently lower interest rates (available because the loan is secured) lowers monthly payments, the fact that they are stretched out over a long term can mean that there is some doubt in the mind of the borrower over whether the conditions will always exist that make it possible to meet monthly payments. Therefore, especially in the early to middle period of the term of the loan, there will be some recurrent dread of one day defaulting on the mortgage. It is for this reason also that many people who are in a position to do so pay off their mortgage early.

If you default on your mortgage it does not mean that the house you have secured it on will be repossessed. In actual fact, banks tend to prefer not to go that far. It is up to you as a borrower to keep in contact with the bank and stay true to your intention of paying monthly payments at a sustainable rate. If you have already made a substantial dent in the principal of your mortgage, the bank may well be willing to restructure a loan for the remainder, over a longer term so as to allow smaller, affordable monthly payments. How long the term will be depends on factors such as your continuing earning potential and how much is left to pay off. Although you may not be able to stick to the original term, a difference of a few years may be all it takes to make that monthly payment manageable.

Aside from this method, you may have the opportunity to remortgage with a different lender – paying off your old mortgage with a loan that covers the remaining principal and interest, although the earlier you decide on this the better – missed payments and particularly expired default notices will put black marks on your credit file, making it harder to get a decent remortgaging deal, if you can get one at all.