Residential Mortgages
What is a mortgage? It is a conveyance of land securing a contract between you (the "mortgagor") and your lender (the "mortgagee"). You are obliged to:
- pay the principal and accrued interest on time,
- pay the property taxes and certain utilities,
- keep adequate fire and other insurance, and
- maintain the property in a reasonable condition.
Your lender is obliged to discharge the mortgage when it is paid in full, and not to interfere with your use and enjoyment of the property in the meantime.
There are two types of institutional mortgages: "conventional" and "high ratio", which refer to the amount loaned as a percentage of the property value.
A "conventional mortgage" is a loan up to 75% of the property value (for example, if the property is worth $100,000; the mortgage would be up to $75,000 and your down payment would be $25,000 or more). Value is either price or appraised value, whichever is less. Mortgage insurance is generally not required for a conventional mortgage.
A "high ratio mortgage" is a loan of 75% or more than the property value -- in other words, when your down payment is less than 25%. For these mortgages, institutions require mortgage insurance -- usually from the Canadian Mortgage and Housing Corporation (CMHC). CMHC will insure a mortgage up to 90% of the property value for the first $180,000 and then 80% for any balance. The maximum property value insured is capped at different amounts across Canada, depending on regional market conditions.
For first time home buyers (those who have not owned a home as a principal residence in the last five years), CMHC will insure up to 95% (i.e. 5% down) for the first $180,000 and 80% of any balance.
How much will your mortgage cost per month? Please e-mail me a note, John Allen and I'll send you an amortization schedule (at not cost).
How much will your institution lend you? It depends on your credit rating, job security, other assets, and general risk. However, institutions and the CMHC rely heavily on the following two ratios:
- Total monthly payments for mortgage payments, taxes and utilities ("GDSR") must not be more than 32% of your gross monthly income.
- Total debt service payment, i.e. mortgage payments, taxes, utilities and monthly payments on all other loans ("TDSR") must not be more than 42% of your gross monthly income.
CMHC will charge you, the borrower, an insurance fee based on the amount loaned and the ratio of loan to property value, as set out in this table:
| Loan to Value Ratio (LVR) | Fee | GDSR | TDSR | Max Loan |
| Up to and including 65% | 0.05% | 32% | 42% | none |
| Up to and including 75% | 0.75% | 32% | 42% | none |
| Up to and including 80% | 1.25% | 32% | 42% | none |
| Up to and including 85% | 2.00% | 32% | 42% | none |
| Up to and including 90% | 2.50% | 32% | 42% | 90% $180,000 |
The fee can be paid up-front, or amortized over the life of the mortgage. The provincial sales tax of 8% on the insurance fee, however, cannot be amortized but must be paid up-front. Should you later sell your property and require CMHC insurance on a new home, the insurance premiums paid cannot be transferred. Also, if your loan to value ratio increases when you renew your mortgage, a new CMHC fee on the entire loan is payable, not just the incremental amount.
In addition, CMHC charges a processing fee of $75 if the institutional lender appraises the property, and $235 if CMHC appraises the property.
Mortgages are classified as either "open" or "closed". During the term of the mortgage (usually 6 months, 3 years, or 5 years) an open mortgage has no restriction on repayment of principal. Such "privileges" may save you money if you accumulate savings and pay down the mortgage during the term. Also, you may have a job relocation and need to sell your home before the term ends (to do so, you'll need to discharge the mortgage before closing the sale -- in effect, prepay the entire amount of your mortgage). Often prepayments come with a penalty (such as 3 months interest), but at least you'll have the option to prepay. A "closed" mortgage does not permit any prepayment of the mortgage during the term.
You may have the option of either monthly or bi-weekly payments. The more often you pay your mortgage, the sooner your principal diminishes, and the lower overall interest you'll be charged. If you are paid a bi-weekly salary, consider choosing bi-weekly mortgage payments.
Sometimes your institutional lender will ask whether you want them to pay your property taxes, by increasing your monthly or bi-weekly payments. Because property taxes are paid in three or four instalments per year, your institution will have the use of your funds (and be earning interest) during the weeks or months between property tax instalments. Consider paying the property taxes yourself, thereby earning interest on your money between property tax instalments.
Finally, when choosing a mortgage, why not shop around? Speak to a couple of banks and trust companies, and perhaps hire a mortgage broker (usually for a modest fee), who can help you get the best deal -- it may save you substantial funds during the term of your mortgage.