All About Mortgages

Mortgage Contract Overview

There is lots to learn about mortgages, especially if this is your first, or your first in a long time. This page covers some of the more important terms you will come across on your mortgage quest, and some of the decisions you will need to make including considerations. There is also a link to a glossary for other terms, just in case. We will weave into the discussion opportunities to reduce the life-time cost of your mortgage. I'll describe what documents you will see and when. Where more in-depth information is available or warranted, I will link out to those for your quick review.

Mortgage Overview - what is exactly is a mortgage?
Paperwork Journey
Mortgage Terms
How to Save Money Over the Life of your Mortgage
More Resources
Return to 'Can You Get a Mortgage' Overview

What Is a Mortgage?

First things first, a mortgage is simply a loan for a property. The mortgage contract is for a certain length of time called the term. Five years is the most popular term for mortgages but there are other terms for as little as 6 months and up to 10 years. Prior to the end of your term, you will need to renew your mortgage contract for another term. This is easy assuming you have paid on time as agreed with the lender and your credit rating is still good.

You keep renewing your mortgage until your house is paid for in full. Your mortgage payment is calculated by targeting how many years you would like to fully pay off your loan from start to finish if you made the same payment every month - this is called the amortization period. If you renew your mortgage term every 5 years, a mortgage set at a 25 year amortization would take the initial 5-year contract term plus 4 renewals to completely pay for / amortize your mortgage. The maximum amortization permitted for low down payment house mortgages is currently 25 years.

If you sell your house or move, you can usually take your mortgage contract with you (port it) to the next house, or cancel it, subject to a penalty.

The mortgage rate is the rate of interest you are expected to pay to the lender in compensation for the money that you borrow. Think of it as the rental rate for money. The mortgage rate offerings available to you will depend on a number of factors such as the contract term, the property-type, your financial situation, and external economic factors affecting all interest rates.

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Mortgage Paperwork Journey

As we have discussed on other pages, the approval process is a journey from information gathering, asking the question "Can You Get a Mortgage?" and hearing a yes, a Pre-Approval where you provide and we review your income support documents, application, and credit, and finally the "live" Approval where all of your hard work pays off.

At the live approval stage, we formally make a request for a mortgage approval where we indicate the property that you want to finance, information about you, and the specific mortgage terms (characteristics) that you are seeking. Upon reviewing and approving this request, the target mortgage lender issues something called a mortgage "Commitment Letter," which contains the essential terms that you have asked for and will be agreeing to. For example, if you are asking for a 5-year contract with a 25 year amortization, the Commitment Letter will provide for a 60-month (5 year) term and a 300-month (25 year) amortization. We are going to go through many of the terms you will find in the Commitment Letter next, and please refer to the graphic.

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Example terms from a mortgage commitment for a CMHC-insured purchase of a $265,000 property.

Key Mortgage Terms

As you work your way down the list, follow the links for further information and to get context for some of the decisions you will have to make, then return here and continue your reading.

Interest Rate & Type - the interest rate that you will pay and whether it is Fixed or a floating rate.
Amortization Period - how many months or years it takes to pay off a mortgage start to finish
Contract Term & Payout Penalties - how many years you are tied to a particular lender before you need to renew or renegotiate your mortgage or pay it off in full and what happens if you terminate early.
Loan Amount - how much money you are borrowing
Mortgage Default Insurance - how much of the loan amount is the premium for default insurance
Payment and Payment Frequency - what you pay and how often
Extra-Payment and Other Privileges - how much extra you can pay against your mortgage each year without penalty
Open or Closed Mortgage - how much repayment flexibility you have
Standard or collateral charge - the legal type of mortgage contract that will be shown on your land title
Other important mortgage features worth mentioning - assumptions, porting, conversions
Glossary - other terms you may run into.
Summary of the above, written as FAQs, plus a little more on porting, assuming and cash-back mortgages.

WARNING: Read your mortgage agreement / commitment letter carefully and be sure to ask about anything that you do not understand. All federally regulated financial institutions must provide you with certain information about your mortgage in the loan agreement as described above. This information must appear clearly in an information box at the beginning of the mortgage agreement.

What Things Are Important to You in Your Next Mortgage?

Having read the above, you are welcome to register your mortgage needs or things you would like to discuss further using this form Mortgage Feature Selection

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How to Save Money Over the Life of Your Mortgage

To save money over the life of your mortgage, there are a number of steps that you can take.

A low interest rate helps, but its worth knowing the trade-offs. If you are solely focused on rate, then to quote Benjamin Franklin you may discover that “the bitterness of poor [lender choice] remains long after the sweetness of low price is forgotten.” Some lenders make a significant portion of their profits from penalties and fees that they - dare I say - hope to charge you!
Avoid or reduce penalties - choose the right contract term.
Avoid or reduce penalties - think about your next step: the mortgage or property after this one. Will you be able to port the current mortgage or will you need a new one? How will this mortgage impact my ability to borrow again?
Save on interest expense - pay more toward your mortgage than the minimum and pay faster
Have a market view about direction of interest rates.
Have a market view about direction of housing prices.
Consider renting if you are only going to own the property a couple of years, as you may not recover the selling transaction costs (Realtor fees) on short-term ownership.