There are many financial institutions that one can get financing from. Anywhere from banks, credit unions, trust companies, private lenders and even a vendor of the property who holds the mortgage for you. Most people will obtain financing through the conventional route but it is still good to know the alternatives.
In today’s blog I will be going over some of the most popular types of mortgage available today in the market place and how they work.
- The Conventional Mortgage
The first and most popular type of mortgage is the conventional mortgage. These mortgages can either be for a principal residence or an investment property. In these types of mortgages the loan given to the borrower cannot exceed 80% of the appraised value of the home or purchase price of the property, whichever is lesser of the two. Under the Canadian bank act the government requires that all first mortgages greater than 80% to be insured against loss in the event of default. Many people have heard of CMHC (Canadian Mortgage and Housing Corporation) which is a federal crown corporation and requires that all purchasers come up with the 20% of the remaining down payment either through their own means or a vendor take back.
- The High Ratio Mortgage
Investment properties in Canada require a minimum of 20% down payment by law. When you are buying a house as a principal resident and can only afford less than 20% down (minimum is 5% down payment) this would be classified as a high ratio mortgage. By law, these mortgages must be insured by approved lenders accepted by CMHC or Genworth. High ratio mortgages are available up to 95% of appraised value or purchase price, whichever is greater. Many years ago you could amortize your mortgage up to 40 years. Over the years as mortgage lending rules have gotten tighter as amortization periods have gone from 40 to 35 to now 30 years max. Mortgage rules and the bank of Canada are always changing its regulations so it’s important to keep up to date in the market of buying your next home or investment property.
- The Collateral Mortgage
The difference between a conventional mortgage and a collateral mortgage is that the mortgage security is secondary or collateral to another form of security taken by the lender. This type of mortgage has back up protection against the loan that is filled against the property. When we have raised money in the past we have done a similar promissory note as the one used on collateral mortgages. We find a private lender, negotiate on terms and have the lender agree to this note that secures their money not on our property but by us giving a personal guarantee that it will be paid back in an agreed amount of time. With a collateral mortgage once the promissory note has been paid off in full, the collateral mortgage will automatically be paid off. The main difference between collateral and a conventional mortgage is it may be assumed where that a collateral mortgage may not be as it is subject to some other form of security between the two people.
Alongside with understanding what mortgage is best for you, you have to have a clear understating of how a mortgage works. Everything from the amortization, interest rate, term of mortgage, open or closed and pre-payment penalties will help you make an informed decision when you’re deciding what is best for you. It helps when you are working with a knowledgeable banker or mortgage broker. They can help walk you through the process and once looking at your numbers and future goals you will be on your way to getting approved in no time.
I hope you enjoyed reading today’s blog and found it beneficial. As always, like, comment and share. For more information about some of the real estate results programs we offer visit Team Made Real Estate.
Manjit Rukhra, Your Results Coach to Real Estate and Entrepreneurship Excellence