The Canadian Mortgage – Glossary

Canadian Mortgage - GlossaryClosed Mortgages

Most mortgages are “closed” meaning that you are locked-in with the lender for a specific term. You have a guaranteed interest mortgage rates for a specified period of time and an “agreement” with the lender to keep the mortgage for that period of time. If you should choose to pay out the mortgage early you will be subject to paying a penalty for breaking the contract. The mortgage document will allow provisions to avoid this penalty if you have the mortgage assumed by the new purchaser of your home or if you port the mortgage to your next home. Most closed mortgages have pre-payment options attached to the mortgage that allow you to pay down the mortgage faster; You may pay 10-20% of the mortgage principal off each year without penalty. Closed mortgages may have either a variable rate or a fixed rate. Closed mortgages are available in 6 months, 1,2,3,4,5,7,10, and at times 25 year terms.

Open Mortgages

Open mortgages are open to any prepayment at any time without penalty. The interest mortgage rates is guaranteed for a minimum of 6 months up to a 5 year term. Open mortgages will generally have a higher interest rate attached to it because of this added flexibility. Unless you plan to pay your mortgage off in that specified period of time, it is usually more cost effective to sign up for a closed mortgage.

Fixed Rate Mortgages

A fixed interest rate means that you have a guaranteed interest rate for the term of the contract from the lender. The interest rate will not change during the term of the mortgage. Fixed rate products are best suited in times where the interest mortgage rates are not stable and there is a strong belief that the rates will increase in the future.

Variable Rate Mortgages

These mortgages fluctuate with the bank’s prime rate. With some lenders the change in prime may affect your monthly payment, Variable rate products are best suited in times where the interest mortgage rates are stable to declining. These products are usually less pricy then fixed rate because of the risk embedded in it.

Taking a mortgage for a Purchase

Buying a new home or an investment property is one of the biggest financial steps of your life. Getting the best rate and best product custom made to suit your needs is as important as finding the right house. There is a big advantage in exploring your options, getting pre-approved, and securing your finance before you put an offer on the house.

Refinance

Due to a major increase in property value’s over the past few years, some home owners are sitting on a significant amount of new equity) the difference between the current value of the property and the balance on the existing mortgages(., while struggling with many loans (credit cards, car loan, business loans). The solution is to refinance: One commitment with One lower monthly payment!

Another good reason to refinance is to take equity out of your house for investment opportunities or simply to lower your monthly payment.

Refinancing is easy and quick and it is the perfect means to get your priorities back in check!

Secured Line of Credit

A Secured Line of Credit is a type of line of credit, secured by your property, that allows you to use the equity in your home to borrow money. A Secured Line of Credit provides you with a flexible alternative to the traditional mortgage. A Secured Line of Credit is usually priced at “prime” and is open for payout at any time without penalty. With the Secured Line of Credit, you can access up to 90% of the price of your home (less outstanding mortgage balance).

When using a combination of mortgage and a secured line of credit, your available credit increases as your mortgage balance decreases after each payment.

This feature gives you more control and flexibility in achieving your objectives. You may use your available credit to renovate your house, invest, study, or start your own business.

Second Mortgage

A Second Mortgage is a mortgage registered against real estate property which is already encumbered with one mortgage. Date and time of registration determines which is first and which is second.

Although the rate for a second mortgage is usually higher, a second mortgage is sometimes the best solution in cases of debt consolidation, challenged credit or in other life challenges that may come your way. Home equity is the difference between the current value of the property and the balance on the existing mortgages.

It is common for people who want to use their equity to go for refinancing. However, in some cases it makes sense to keep the first mortgage and to take a second mortgage in order to keep your lowest rate or to avoid penalties of refinancing. Another reason to consider taking a second mortgage on top of a first is to avoid paying an obligatory insurance premium.

Bridge Financing

Bridge financing is a loan required to provide the funds needed for closing of the property you have purchased to the time of the later closing of the property you have sold. A bridge financing is usually taken for few days up to 2 month. In order to get a bridge financing the client will need to provide the bank with a solid selling agreement.

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