It seems easy: go to the bank, get a mortgage, and go buy a house. Home owners are happy to be home owners, and in the moment, there are so many terms and documents that it’s overwhelming. Here’s a few questions about mortgages often asked by home owners:
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CHARGE OR MORTGAGE?
1. Terminology: I hear my lawyer refer to my mortgage as a Charge, but my bank calls it a mortgage. What is the difference?
A mortgage, or a charge, are essentially the same thing. A mortgage is registered against a property in exchange for the money that is lent to you by the bank. In easier terms, a mortgage uses your house’s value as a collateral, much like a car loan is based on and against a car. The reason why you will hear “mortgage” and “charge” interchangeably is because the registered document against the house (like your deed, but that’s for ownership) is called a Charge.
IS A LINE OF CREDIT A MORTGAGE?
2. My bank is giving me a line of credit, which I can use when I want. I have already paid off my mortgage, so this is in case of emergencies. Why do I need a lawyer for this?
A line of credit (also referred to as a LOC or HELOC, being a Home Equity Line of Credit) is a product that is normally high in value, and is registered against the property to secure the value. A conventional mortgage gives you a lump sum once, and payments are made over a long period of time. A line of credit allows you to borrow money, pay it off, and then borrow again without asking the bank to renegotiate your borrowing terms. Many lines of credit are not tied to the house, but one that is usually offers much lower interest rates, and much higher available balances.
You will need a lawyer (or a closing company) to register this line of credit against the house, and the document is still called a Charge. Anything leveraged against the property, like a line of credit, a reverse mortgage, construction mortgages, or even a regular collateral or conventional mortgage, is registered as a “Charge”, and is considered a mortgage.
WHAT DOES IT MEAN TO BE PRE-APPROVED?
3. I am buying a house, and my real estate agent recommended I get “pre-approved” for a mortgage. What does that mean?
A pre-approval for a mortgage means that a bank (or other institution that lends money) has looked at a current snap-shot of your financial situation. The lender looks at your current debts, your income, length of time at your job, your credit score and repayment history, and how much you are willing to pay towards a house. The lender then determines of you can afford what you are asking for, and if the lender thinks you can manage that debt, they will offer a pre-approval. The pre-approval is never a sure thing, or a guarantee for a mortgage, but it means that at that moment, and if everything presented to the lender is absolutely accurate, the lender would be willing to lend you the money.
SIDE NOTE ABOUT PRE-APPROVALS
I am not of the intention to create widespread hysteria, but I will add this: any differences to what you told the lender on the application from what is the real story may result in the lender not lending you the money. The lender also has the option to change its mind. A pre-approval is not a promise or a guarantee, but that the lender has agreed to lend you the money as everything stands at that moment, and provided the property (or house) is suitable for collateral.
It’s rare, but there are times when a lender changes its mind or withdraws the pre-approval. However, pre-approval at one lender usually means that there is another that is willing to do the same. If the lender pulls funding, don’t panic as there’s still time to correct the situation, and always, always, always discuss this with your lawyer and your mortgage contact.
HIGH-RATIO MORTGAGES: WHAT ARE THEY AND HOW DO THEY COST ME MONEY?
4. What is a high-ratio mortgage, and how do you calculate loan to value?
The first step in this equation is knowing the value of your home. In the beginning, you will assume that the value is the price you paid for your home. If it’s been years since, or extensive renovations have been performed, the value may have changed. However, for this example, we will say that the house is worth $500,000.00.
A high-ratio mortgage is any mortgage where the principal (the amount borrowed) exceeds 80% of the value of the home.
80% of $500,000.00 is $400,000.00. (500000 x .8)
This indicates that a mortgage that is $400,000 or more placed on a home of that value will be a high-ratio mortgage.
Any time you borrow 80% or more against the value of a property, the Canadian Mortgage and Housing Corporation recommends that the lender obtain mortgage insurance, in case you cannot pay your mortgage. The insurance is at your cost, and is usually held by CMHC or GE Insurance. You will pay 2.8% – 4.5% of the value of the mortgage for this insurance, plus applicable taxes.
You are purchasing a house for $500,000.00 but you only have 5% to put down as a down payment. This means you will need to borrow 95% of the value of the home in order to purchase the house.
At 95%, the principal amount of the mortgage will be: $475,000.00.
High ratio mortgage insurance is calculated at 4.0 – 4.5% of the principal amount. (Assuming a traditional down payment of $25,000 coming from your savings account, we will use 4% as the cost.)
4% of the principal amount is (475,000 x 4%) is $19,000. Depending what province you are in, there’s 8% tax collected on that amount as well, which equals $1,520.00.
Your 95% loan-to-value high ratio mortgage cost you an additional $20,520.00, raising the cost of the house to $520,520.00, plus adjustments and legal fees.
This is why you hear professionals and other financial experts recommending that you have a minimum of 20% to use as a down payment on a house. Sometimes that’s not feasible, or perhaps you cannot see coming up with $100,000 to put down on a house, so you obtain a high ratio mortgage. The more you can put down on your home, the lower the insurance cost will be.
WHAT’S THE DIFFERENCE BETWEEN THE BANK MORTGAGE GUY AND THAT GUY DOWN THE STREET?
5. What’s the difference between a mortgage broker and the mortgage specialist at my bank?
Each institution/bank has their own in-house mortgage agent who promotes and qualifies clients for the products within that bank. For example, let’s say you bank with the Royal Bank of Canada (RBC). If you walked into RBC to apply for a mortgage, the agent or representative would assist you in applying for a mortgage with RBC. Usually, the agent is only able to offer products with RBC – as RBC is their employer.
An independent mortgage broker or agent works for a brokerage instead of a major bank. This agent will meet with you, and take your application, same as a bank agent. The agent will contact different institutions with your information (and consent, of course), and tells these institutions that you are looking for a mortgage. The institutions have the opportunity to deny or accept your application. This agent is paid by the accepting institution or by you, depending on the situation.
Which option is better?
I’ve heard this question asked over and over, and the answer is different with each person. With respect to reaching out to your banking representative, you may have a relationship with them, and you may be comfortable keeping all of your financial “eggs” in one basket. Maybe it’s easier to deal with one bank, and that’s completely understandable. An independent agent can find more opportunities without pulling credit each time, and they may have a relationship with an institution that specifically does business with people who have a credit score like yours. Maybe they are more lenient (if your late payments are still on your report) or maybe they offer a discounted rate (only for people with your stellar credit rating). Both have merits.
Before choosing, ask for recommendations and referrals. See who you are most comfortable with, and make sure you know your credit history before you start. If you know that it might be a finesse-requiring situation, an independent agent might be better. If you have near-perfect credit, you can likely walk into any bank and get exactly what you need.
I hope I have answered some of the questions that you may have, and it’s such an exciting experience when buying a home that it’s easy to forget what terms mean, or what was discussed. Send me your questions, and I will answer them as best I can.
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