Although millions of Canadians hold a mortgage very few would consider themselves experts. The fact is that once a homeowner arranges a mortgage they soon forget their newly acquired expertise. It’s kind of like cramming for an exam and then forgetting the material soon after you pass the course. After all, the average Canadian only touches their mortgage once every 3 years and many much less often then that.
Presented here for your convenience are mortgage study notes in case you have a mortgage transaction coming up and need a refresher.
Term vs Amortization
These two often get confused. Term is the length of time the mortgage rate is guaranteed by the lender and committed by you. In the case of a variable rate mortgage all that can be guaranteed is the discount or premium to prime. If the borrower wants to pay-out the mortgage before the end of the term or renegotiate the rate they will be subject to a penalty if their mortgage allows it at all. The lender on the other hand cannot change or renegotiate the rate during the mortgage term.
The amortization on the other hand is how many years it will take to pay off your mortgage based on the current rate and payments. Usually the amortization is much longer than the term so the payment will need to be adjusted several times during the life of the mortgage.
There are 3 types of insurance associated with a mortgage so it’s easy to see why this gets confusing. CMHC insurance or simply mortgage insurance is required if you have less than 20% equity in your home. This insurance is in place to protect the lender and not you.
Mortgage life insurance or MLI is simply life insurance that will pay-off your mortgage balance in the event of your death. MLI is optional and you should never be pressured to accept it by your lender or mortgage professional.
Title insurance is designed to protect ownership interest registered with the land titles office. There are lender policies that only protect the interest of the lender in the event of a title dispute as well as policies that will protect the home owner. Often your real estate lawyer will purchase title insurance as part of their regular process.
There are 2 types of pre-payment privileges, the percent of the initial balance you pay down with a lump sum each year as well as the percentage you can increase your regular payment each year. Lenders often display these two percentages as 15/15, in this case meaning each of the two privileges allowed are 15%.