mortgage information in calgary

Oct 27, 2020 | Mortgages | 0 comments

What is a Mortgage?

Mortgages | 0 comments

Have you ever wondered what the word “mortgage” actually means? Let’s break it down so that you’ve got a better understanding of what a mortgage is and how it works so that you can better decide how it can help you achieve your home purchase.

What’s a mortgage and how does it work?

A mortgage is a legal agreement by which a bank or other creditor lends money, at interest, in exchange for taking title of the debtor’s property, with the condition that the conveyance of title becomes void upon the payment of the debt. Mortgages can also be referred to as “liens against” or “claims on” the property.

To sum it up, a mortgage is a loan, secured against a real estate asset that is paid back over a set period of time.

There are a lot of other terms that come up as you’re stating the search for the right mortgage for your home purchase, here are a few key terms you should understand. 

Down Payment

The Down Payment is your initial contribution to the home purchase. Typically ranging from 5-20% in Canada, minimum down payment requirements are based on the price of the home. Your lender deducts the down payment from the purchase price of your home. Your mortgage covers the rest of the price of the home.


Mortgage rate

Mortgage rate or interest rate is the rate of interest charged by the mortgage lender. The bank lends the money at a cost to you, in Canada today, mortgage rates are under 2%. Depending which financial institution you work with, your mortgage rate will differ. Buyers often work with a mortgage broker to shop around and find the best combination of mortgage product and mortgage rate.Mortgage rates can be fixed or variable. A fixed rate holds your payments the same for the mortgage term and a variable rate floats with the Bank of Canada overnight lending rate. When you’re choosing the best rate, your broker will ask you lots of questions to help you make the best decision for you.

What’s the Amortization Period?

The amortization period is the full length of time over which you will repay the loan. The typical amortization period in Canada is 25 years although with 20% down payment, borrowers do have the option of stretching their repayment over 30 years. The longer the amortization, the more interest you will pay for the loan, however, longer amortizations allow for lower monthly payments which can be very important when you’re balancing your monthly cashflow. You can decrease your amortization by making lump sum payments on your mortgage or increasing your monthly payments.


Mortgage Term

The mortgage term is the length of time that you commit to a certain rate and product. The most common mortgage term in Canada is 5 years. If your amortization is 25 years, this means that you will negotiate 5 separate mortgage terms with your lender over the course of the loan repayment. Although 5 year terms are the most common, terms between 6 months and 10 years are available in Canada.



Frequency of Payment

If you are still interested in pursuing a no down payment mortgage, here are some tips that will help you navigate it:

Payment frequency is the number of payments you make each month. Your mortgage can be paid monthly, biweekly or weekly. If you choose biweekly and weekly options, you can choose to make those payments, “accelerated or non-accelerated.” With accelerated payments, you sneak in a couple extra payments per year that are applied directly to the principal, this will ultimately reduce the amortization of your mortgage.

Types of Mortgages

A mortgage is typically identified as either as a closed or open mortgage:    

Open mortgage is a term used when a client requires full flexibility to repay the mortgage very quickly. This means that you can pay the entire mortgage off at anytime without penalty.  Open mortgages are usually used by Canadians who would be expecting to have a large amount of money become available in the first year of their mortgage to pay the loan to zero. 

A Closed mortgage, on the other hand, is a traditional mortgage.  Low rates, regular payment schedules and ability to pay only a portion of the loan in addition each year. Closed mortgages are the best option if you’re planning on staying in the home for more than a year and want to pay the least amount of interest.   

Bottom line

Ultimately, a mortgage is a loan, from a bank or credit union, secured against a home. The terms of the mortgage will be negotiated before the money transfers hand and the lender will register a lien against the title of the property as security. Knowing more about what a mortgage is and how they work, will give you a better idea about what will work best for you.


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