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The following descriptions are for your general information to help you understand the key mortgage terms and products.
A conventional mortgage is usually one where the down payment is equal to %25 or more of the property’s value, a loan to value of %75 or less this mortgage dose not normally requires mortgage loan insurance.
A mortgage where the borrower is contributing less than %25 of the value of the property as the down payment. The minimum down payment required is %5 of the property value.
High-ratio mortgages must e insured through Canada Mortgage and Housing Corporation (CMHC) or GE Capital Mortgage Insurance Canada, the two mortgage insurance companies in Canada.
The insurance premium on high-ratio mortgages is charged only once per mortgage, when the mortgage funds are advanced. The premium can be paid up front or it can e added to the mortgage amount. Insurance premiums are calculated based on the loan to lending value ratio of the mortgage and are higher when there is more than one advance.
An open mortgage allows the mortgagor to prepay all or part of the principal amount at any time or without notice or bonus. Open mortgages usually have short terms of six months to one year. Interest rates on open mortgages are higher than close mortgages with similar terms.
Closed mortgages are mortgages that do not allow any prepayment or early repayment except on the sale of the property, in which case penalties are required.
FIXED RATE MORTGAGE
The interest rate is determined and locked in for the term of the mortgage. Lenders often offer different prepayment options allowing for quicker repayment of the mortgage and for partial or full repayment of the mortgage, however, lenders do charge penalties for early repayment.
VARIABLE RATE MORTGAGE (VRM) / ADJUSTABLE RATE MORTGAGE (ARM)
This type of loan differs form a constant payment mortgage in that the interest rate charged on the loan may e charged during the term of the mortgage. Generally, these loans are initially set up like a standard loan, based on the current interest rate. The loan is reviewed at specified intervals and if the market interest rate has changed, changing either the size of the payment or the length of the amortization period (or a combination of both) alters the mortgage repayment plan.
Capped rate variable mortgages are variable rate mortgages on which the lending institution has set a “capped” limit. This means that the interest rate of the mortgage will fluctuate as the prime rate fluctuate but the lender has set a rate and guarantee that the borrower will not have to pay interest at a rate higher than that limit.
CONVERTIBLE RATE MORTGAGE
Convertible rate mortgage are fixed rate mortgages for terms of six months to one year.
This product allows a borrower to lock in or convert to a longer-term mortgage.
VENDOR TAKE – BACK MORTGAGE (VTB)
This loan is like a conventional first or second mortgage except it is the vendor who carried the financing. If the VTB mortgage rate is different than the market rate, this could affect the sale price of the property.
Lenders also offer other options to borrower, such as “Cash Back” mortgages, This option gives you cash back in the amount of a certain % of the mortgage principal. Cash back mortgages usually apply to fixed rate mortgages. There are numerous other offerings available and borrowers must calculate in the benefit.
INTEREST ONLY LOAN
To avoid the income risk with interest accruing loans, most lenders require that interest earned be paid periodically rather than permitting it to accumulate as added debt. One common form of such a mortgage is the “interest only” loan where the borrower contracts to make regular payments of only interest to the lender. During the life of an interest only loan, the borrower always owes the principal amount, but this amount never increases since the interest is paid when due.
The interest only loan reduces the lender’s income (interest) risk but still leaves the entire principal at risk. Interest only loans are often
Used in real estate development, as they keep a developer’s financing payments to minimum during the period when cash is required for actual construction costs. Upon completion of construction, the developer will likely sell the property and pay out the lender from proceeds of the sale. Lenders do not often approve these loans over long periods because the full amount of principal is outstanding and at risk over the life of the loan.
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