So you've spent months looking for the perfect home and have finally found it. You are ready to make an offer, but you don't have the couple hundred thousand dollars that it costs to buy it. Fortunately, you can obtain a mortgage to fund your purchase of your dream property.
The term mortgage/charge technically means "security" – not "loan." A mortgage or a charge is essentially a legal agreement between a bank or other creditor who lends money to an individual, the "mortgagor", who offers their real property as "security". The real property is used as security for the mortgage loan and the mortgage is the security agreement. If you cannot repay your mortgage loan, the lender can legally sell the property to complete repayment of the loan.
There are many different kinds of mortgages/charges:
A conventional mortgage typically requires a down payment of at least 20% of the purchase price of the property. The down payment can be cash you've saved up or from the proceeds from the sale of other property that you own. Be aware that the down payment in a conventional mortgage cannot be borrowed money, but it can be a gift (for example, from your parents). A lender for a conventional mortgage will register your home with the Land Title or Land Register office in your municipality and then mortgage can then be registered, transferred or discharged from your lender. This provides the added benefit of being able to transfer your mortgage between lenders easily.
Since the buyer will be making a larger down payment, the lender will face lower risk of defaulting and therefore the borrower will have more options available like a Home Equity Line of Credit. Additionally, conventional mortgages do not often require mortgage insurance due to the lower risk factor.
A high-ratio mortgage/charge is one where the borrower places a down payment of less than 20% of the purchase price of the property. The loan money will be greater than 80% of the purchase price of the property. High-ratio mortgages are considered risker for lenders and therefore require mortgage insurance. Mortgage insurance is typically purchased by the lender through one of Canada's three default insurers: Canada Mortgage and Housing Corporation, Genworth Financial, or Canada Guarantee. While the mortgage insurance protects the bank in the event of a default on the loan, the premium cost ultimately gets passed down to borrower. Keep in mind that if the borrower defaults, the proceeds go to the lender, not the borrower. Additionally, high-ratio mortgages often do not offer options such as Home Equity Line of Credit. It should be noted that with mortgage insurance, lenders view high-ratio mortgage as safer investments and therefore, offer lower interest rates than conventional mortgages.
In a collateral mortgage/charge, the lender will register the mortgage against the property for greater than the loan advance and often times equal to the current property value. The effect of a collateral mortgage/charge is that one is only able to register or discharge (not transfer) mortgages from your lender.
The benefit of a collateral mortgage is that your lender can loan more money as your property value increases without having to refinance your mortgage. You can register up to 125% of the current value of your home and you can borrow the money without any legal fees or timely delays (because you do not have to re-register your mortgage).
Most of the time, you will be seeking mortgages from lenders such as banks. However, you can also borrow money with a mortgage agreement from non-traditional money lenders. Private loans can be sought from family and friends. However, it is important to handle the transactions properly to avoid future conflicts and ruined relationships. It is crucial a contract is formed and signed by all parties. The contract should detail every aspect of the agreement including, but not limited to, amount loaned, repayment agreement, how much will be repaid and how often, interest rates, what if payments aren't received (grace periods), can the borrower prepay, how the payments should be made, what can the lender do if the borrower misses payments.
Even if parties are close friends or family, it is difficult to remember what was agreed to 5 years ago and a written contract will ensure certainty. A secured loan allows the lender to take the property (through foreclosure or power of sale) and get their money back if borrower defaults. While it is understandable that close friends or family may have all the intentions to pay back their loan, you never know what may happen in the future. A borrower may die or get sued unexpectedly. In such a case, a secured mortgage helps protect the lender's loan. A secured loan on property may also have the added benefit of helping with taxes.
The rules for qualifying for a mortgage have recently changed. On January 1st, 2018, a new "stress test" was implemented to make it harder for home buyers to be eligible for a mortgage. The purpose of the new strict qualifying criteria is to determine if a home buyer would be able to afford their mortgage should interest rates increase. Home buyers with a down payment of 20% or more will be subject to the new rules. This stress test will use either the 5-year benchmark rate published by the Bank of Canada (currently 5.14%) or the customer's mortgage interest rate plus 2% - whichever is higher. It is important to keep in mind these new rules when looking for a house to buy. The rules may affect your budget drastically.
Maio Law has assisted both property owners and lenders with mortgage transactions throughout Ontario. Whether you are buying a home and obtaining a mortgage through one of the top 5 financial institutions or refinancing and require assistance with placing a second mortgage on property to payout debts, I can help!
Our office also assists many Private Mortgagees who loan money throughout Ontario to property owners. Private Mortgages are another avenue that home owners can turn to where they have difficulty obtaining funds through standard conventional means. Private mortgages vary in amounts from as low as ten thousand to amounts in excess of one million. Interest rates on such mortgage can range from 6 percent to as high or greater than 12 percent Qualifications for such loans are different from the major financial institutions, but interest rates are higher and most often payments are interest only.
If you are new to this area, or simply need assistance navigating the "seas" contact my office and I will be happy to assist you with the transaction.