Financial Factors of a Mortgage

When looking for a mortgage there are a few financial factors one should keep in mind. Changes to these factors will drastically change the amount of interest paid, possibility of penalty charges and required monthly payment amounts.

The Face Value

The total amount of the mortgage that is registered against the property. This isn’t necessarily the amount the borrower received, but it is the amount for which the borrower is liable.

The Term

This is the time that the contract will be in force. After this time, the contract must either be paid in full or renewed with the current lender. However, one can refinance with or switch to another lender. This has the same effect as paying off the previous mortgage in full. Switching to another lender is often the better option for most people as you can ensure that your next mortgage is the best mortgage for you (best interest rate and terms) in today’s mortgage market. You are not blindly accepting whatever interest rate and terms your previous lender wants to renew at.

The Amortization

This is the total number of years that it will take to fully reply the amount borrowed. FYI, there are no amortization period for interest only payments.

The Interest Rate

The amount of interest charged to the borrower. Remember, slight changes in your interest rate will significantly increase the amount of interest you pay.

The Compounding Frequency

Legally, lenders can only compound annually or semi-annually. They must indicate this on the mortgage.

The Payment Amount

Based on the face value, interest rate, payment frequency and amortization, the contract will lay out the amount of each payment.

There are several financial components to a mortgage. Slight changes can lead to huge savings, so it is important to obtain the best interest rate and terms for you. To do this, find a mortgage agent with access to numerous lenders, so they can compete for your business. Contact me right now to get a personalized solution to your unique situation.

What is a second mortgage?

A second mortgage is a loan that uses a property, which already has a mortgage on it, as collateral. It is often used to pay off higher interest debt. And it is also used to fund higher return investments.

To understand this better, let’s understand mortgage ranking. A first mortgage means that the mortgage was registered first, or before any other mortgages on the property. A mortgage registered after the first mortgage is a second mortgage. The same with a third mortgage. If the borrower defaulted on the first mortgage, the first mortgage lender would begin the power of sale process to recover the money owing. After the property is sold, the remainder of the process go to the other mortgage holders, such as a second mortgage lender. There is a risk being the second lender since there might not be enough money left to pay the full second mortgage. To offset this risk, the second mortgage lender will typically charge a higher interest rate. Now that you understand the lender’s perspective. Look at how this concept could be used by you.

When is a second mortgage helpful? Well, let’s look at a typical scenario. Let’s say you own a property worth $500 000. And you have a mortgage (first mortgage) of $300 000 on it. This means you have $200 00 of equity in your property. Recently, you went through a terrible family emergency or job loss and have accumulated $50 000 of debt on your credit cards. The interest rate on those credit cards are around 20% per annum. So you talk to your mortgage agent, Angeline Fernandes. She explains how you can use the equity in your home to get a second mortgage and pay off your credit cards. You can do this even if you aren’t near your first mortgage renewal date. She gets you a second mortgage for $50 000 at 5% per annum. You use it to pay off your $50 000 credit card debt at 20% per annum. In just three years, this saves you about $22 500 in interest. This example is simplified, but it shows the very real benefits of lowering the interest you pay on debt. If you are looking for a second mortgage, talk to someone who has access to multiple second mortgage lenders. Contact me today to get a personalized solution to your unique situation.

Bridge Financing

Bridge financings is sometimes used when an owner needs extra financing between buying a new home and selling the previous home. 

Bridge financings is sometimes used when an owner needs extra financing between buying a new home and selling the previous home.

Let’s say that you are purchasing Home B and selling Home A. However, the closing date for Home B is October 1st and the closing date for Home A is October 15th. Between the two dates, you will be temporarily owning both houses at the same time. For a short period of time, you will have two mortgages – one on Home A and one on Home B. The biggest problem is that you need to use the proceeds from the sale of Home A as a down payment in order to purchase Home B. Remember that you still need a down payment to get a mortgage on Home B. Bridge financing is for the down payment during this time period.

When you obtain bridge financings, a second mortgage is placed on Home A while waiting for it to sell. This financing is used as a down payment for the Home B. Once Home A is sold, the mortgage on Home A is paid off and the bridge financing is paid off.

Are you selling your home, hoping to use its equity as a down payment on your next home? Just in case you end up with different closing dates, you should speak to someone who has knowledgeable. It’s important to know your options. Contact me now for a personalized solution to your unique situation.

LTV Explained

A mortgage can be either conventional or high ratio. The classification is based on the mortgage’s loan-to-value (LTV). What is LTV?

A mortgage can be either conventional or high ratio. The classification is based on the mortgage’s loan-to-value (LTV). What is LTV?

LTV = Mortgage Amount/ Property Value

For example, let’s say you are purchasing a property for $500 000 and you are putting 20% down ($100 000). The mortgage amount = $500 000 – $100 000 = $400 000. So the LTV = 400 000/ 500 000 = 80%

Mortgages with an LTV less than 80% (because you put more than 20% down) are called conventional mortgages.

Where as, a mortgage with an LTV greater than 80% (because you put less than 20% down) are called high ratio mortgages. If a high ratio mortgage is provided by a bank, mortgage default insurance is needed on the loan. CMHC, Genworth Financial and Canada Guaranty are three default insurance providers. The premium for this default insurance is added to the mortgage amount and amortized over the length of the mortgage.

If the mortgage is not provided by a bank, mortgage default insurance isn’t required. However, lenders often charge a lender’s fee to create a reserve fund and offset the risk of providing a high LTV mortgage. This means that even if you don’t qualify for a mortgage at a bank, you can still get a high ratio mortgage. This is where a mortgage agent can help the most. Contact me right now, so I can find the best lender for your unique situation.