Mortgage Basics
Down Payment
Credit & Score
Conventional vs. High Ratio Mortgage
Premium Insurance (CMHC/Genworth/AIG)
Closed/Open term Mortgage
Term
Fix/Variable Rate
Amortization
Payment Frequency
Payment Options
Prepayment
Mortgage Types (1st, 2nd and 3rd position or mortgage)
Secured Line of Credit (LOC)
Mortgage Basics
Mortgage is a loan to buy a property. The mortgage is a percentage of the purchase price which is called Loan to Value (LTV). LTV can be as much as 100% of the purchase price.
Down payment is part of the purchase price that you have at the time of buying a property. The source of down payment should be identified. The source of down payment can be from sell of another property, car, etc. Saving (RRSP, GIC, Term Deposit). Usually if it is from savings 3 months history of the money is required to prove your own money. The more down payment you put the less monthly payments would be. If you are employee (income qualified) source of down payment can be gift from parents or sinter and brother.
How Credit history is made?
Credit history is made by having a debt and paying it on time and regularly. Such as having one or two credit cards, any kind of loan such as car loan, consolidation loan, student loan, or line of credit. Having these kinds of debts and paying at least the minimum payments can make your credit history in 6 months to a year. The best from the point of the lenders is 2 years.
Why credit history is important?
Lenders and Banks look at your credit history to lend you money. Every one needs to have credit history (Husband and wife separately). Bad credit means higher interest rate Mortgage and fees which is charged by sub-prime lenders. Good credit history is a major factor in getting a good mortgage with best rate.
What is a Credit Score?
Credit history makes credit report and a score which is called Beacon score. This credit report and score shows your credit quality. Credit report maintained in a company named Equifax. Score can be average of 500 – 800. Usually score of 680 and above is considered a good score for Lenders.
How Credit Score is increased?
Your good habit in payments increases your score. On time payments for debts like Visa credit card, LOC, car loans & student loans. Few Credit cards but longer active period is better than many credit cards and less activities on those.
How Credit Score is decreased?
Late Payments or not paying them decreases the score. Filling up credit card or LOC to the limit For example: You have $10,000 limit and your balance is $10,000 or above. You are better off to keep balance to %60 of your limit. Too many enquiries in short period of time like 5 enquiries in one month reduce the score. Often your department store credit cards are filled up to limit through store at the time of shopping (Watch for this) Such as Brick Card, Future Shop Card. Unpaid bill and past due 30 days (utility like Gas, Hydro, Phone, Cell phone) shows as collection item in your credit report.
How to check your credit score?
www.equifax.com is the web site of Equifax. If you check your score is called “Soft Check” and no point is reduced. If a financial institutions or bank check your score you loose at least 2 points. If you want to see your score in Equifax web site choose Equifax Credit Report -> Score Power – Credit Score. Cost is $23.95 and result is an online report including your credit report and score, same as what bankers see. It is better of to check your credit every 6 months to 1 year. Review your credit and make sure you are not a victim of fraud activity or any thing strange happening in your credit report.
Conventional vs. High Ratio Mortgage
Conventional mortgage usually is with 80% Loan to Value (LTV). This means if you put down payment of at least 20% you do not need any insurance or premium insurance to be paid on top of mortgage. So, conventional mortgage is vs. High Ratio which you can finance up to 95% or 100% of the price of the house and you have to pay insurance on top.
Premium Insurance (CMHC/Genworth/AIG)
If you do not have a high ratio mortgage you have to get insurance from one of three companies of CMHC/Genworth or AIG. Some times lenders offer a private insurance and called a fee. CMHC stands for Canada Mortgage and Housing Corporation and is a governmental Canadian company. However Genworth and AIG are American. The insurance paid is called premium insurance and is paid on top of mortgage. In other word you do not pay it up front in cash but added to your mortgage and paid in 25 – 35 years.
Mortgage term can be closed or open. Closed term means that you can not pay off all mortgages or if you want to do that you have to pay 3 months interest as penalty to the bank. This 3 months interest is almost 3 months monthly payments. Please see “Prepayment Options” in this page. However, the open mortgage can be paid as any time after the mortgage is received and paid off with in the term without any penalty. If you have a high ratio mortgage which you paid insurance premium on top you may not want to pay off your mortgage before you term is over, even if mortgage is Open, as your insurance part would be lost and you loose money.
Term of mortgage is the period of time you have contract with bank for the current mortgage. Usually this term is 5 years. However the term can be 1, 2, 3, 4, 5, 7 or 10 years. The reason why 5 years term is usually like standard is that it offers the best rate.
Fix rate mortgage is a mortgage which the rate and the payments of the mortgage is not changed within the term of mortgage (for example 5 years). However, when the rate is variable it will change depend on the Prime rate of lending in Canada. This prime rate is set every few months by Bank of Canada. Usually, a variable rate is Prime minus a number for example Prime minus 0.6%. So if the Prime is 4.75%, the rate of Prime minus .6% becomes 4.15% in which you payment can be $1500. If the prime reduces to 4.5%, then the rate would reduce to 3.90% which for example your payment reduces to $1400. People who want peace of mind during their term of mortgage (for example within the next 5 years) and want a fixed payment amount usually choose fix rate vs. variable rate. However, when the Prime rate is down people usually choose variable rate. Variable rate can be changed once to fix. But be careful that the change is set at the time of the request and depends on the fix rate at the time of the request and will not be back dated to when the mortgage is approved.
Amortization is the number of years in which the mortgage payment will be calculated based on. The amortization is increased nowadays from 25 to 35 in which it reduces the mortgage payments.
Payments of mortgage are usually monthly unless you need to change it to bi-weekly or even weekly. The bi-weekly way is calculated based on monthly payment divided by 2. If you pay in monthly you have 12 payments in a year, however when you pay bi-weekly you have 26 payments. This means you have 2 more payments comparing to monthly payment. Or if you would have paid monthly now you have to pay 13 months in a year. The advantage of bi-weekly is that it reduces the interest paid to the bank and overall reduces the amortization.
As of payment options banks usually give you the option of increasing your payments as of 15%-20%. This means paying more principal of your mortgage or reducing the interest.
In a closed term mortgage, the banks usually let you pay 15% – 20% of your balance to the bank each year. This is called pre-payment and it will decrease the amount of total interest you pay to the bank and reduce your balance.
Mortgage Types (1st, 2nd and 3rd position or mortgage)
The first mortgage you get is named 1st mortgage, it has the first rank on the title of the property. Later on or when you buy the property you can get another mortgage which co-exist with current 1st mortgage and is called 2nd mortgage. 2nd mortgage has the second rank on the title of the property.
Secured line of credit is a product which can be 1st or 2nd position mortgage which is usually offered by banks/lenders and secured on the property.
The best Surrey Mortgage broker will provide you services you will be surprised. Fast approval and best rates are our goal.
