Getting a necessary overview of mortgages will help devise a better plan for your own mortgage strategy. Mentioned in this post are some of the most common questions people have about the mortgage and managing mortgage account.
Finding the best mortgage in your interests can become a confusing task with much of the mortgage-related jargon flying around. However, you do not need to worry. Here are a few common and basic mortgage-related FAQs that will put your mortgage research into the right track.
1. How Does a Mortgage Work?
A mortgage is a type of loan that you take out to buy real estate. On approval, you are required to repay the loan as per the conditions listed in the mortgage documents. If you fail to repay the amount along with interest generated, you lose the possession of your property to the lender. The latter is then completely authorised to sell the property and collect any money overdue.
2. What is the Difference between Mortgage Amortization and Mortgage Term?
Mortgage amortization is the length of time over which you can pay back the loan taken. Commonly amortization period in Canada is up to 25 years but can still go anywhere up to 30 years. If you amortize the loan for fewer years, then your periodic payments increase, but then your interest paid will get reduced.
Mortgage term specifies the period of your agreement with the mortgage lender. The mortgage term is a part of the amortization period in which you will pay back the loan as per mortgage option.
3. What is the difference between Short-term Mortgage and Long-term Mortgage?
A short-term mortgage is a mortgage term of 3 years or less. Individuals who think that the interest rates will decline in a few years go for a short-term mortgage. Since it comes with a lower interest rate, you can opt for it if you plan to pay off the mortgage early or sell the property.
A long-term mortgage is a mortgage term for longer than 3 years. It usually has a higher interest rate. Individuals who think that the interest rates will increase tend to lock in a long-term mortgage to secure the interest rate for a longer period of time.
4. Factors Affecting Qualification to Seek Mortgage
If you want to qualify for a mortgage, then the following 4 factors come into play:
- Income source: Lenders will check if you have a stable income source and your employment status. You will generally be required to produce a letter of employment confirmation from your employer. Also, you will also need to submit Notice of Assessment forms from CRA that will provide the knowledge of your tax history and impending taxes.
- Credit History: Your credit history is a direct representation of how you interact with your credit. The lenders seek out your prior credit record to determine your credibility as a borrower. Usually, a credit score of 680+ is preferred in the lending circle.
- Choice of property: Since the possession of the property will come to the lender, then your property under consideration is another important metric. You need to have your property in the optimum standards to qualify for a mortgage. If the property has construction problems and undesirable market value, then you might not qualify for a mortgage.
- Down payments: It is the amount of money available to you that you can put in to purchase the property. The amount of down payment will decide the mortgage options available to you. For example, your down payment can’t be less than 20% of the value of the house in a conventional mortgage, while in a high-ratio mortgage it can go as low as 5% of the value of the house.
These 4 factors together determine the best mortgage option as well as the interest rate charged on your mortgage account
5. What are Prepayment Charges and when do they apply?
Prepayment charges are the penalties incurred if you prepay your mortgage balance.
The charges may apply if you:
- Pay your mortgage before the maturity day.
- Choose a new mortgage option and select a new term.
- Renew your mortgage before the maturity date.
- Transfer your mortgage to a different lender.
- Prepay more amount than the finalised annual prepayment amount.
While seeking a mortgage, always get the proper documents in place. It is highly advisable to seek a mortgage option that not only suits you right now but in the long run as well. Also, study the prepayment charges and how you can avoid them. This will give you an upper-hand when paying out your mortgage dues.