Mortgage Basics You Should Know — and Why!

11 April 2018
Joshua Chisvin

About to buy your first home, cottage or other kind of property? Then you should be prepared to understand just what exactly a mortgage is, how it works and why you’re inevitably going to need one.

By definition, a mortgage is a loan obtained from a bank — or other lender — which will help you finance your real estate purchase. There are a variety of mortgages to choose from, but traditionally, each type will consist of two parts: the principal sum (the amount borrowed) and interest (the cost of borrowing that money).

The best option is always one which minimizes the amount of interest you pay. That said, it somewhat oversimplifies the whole thing, as mortgages are more than just math.

ASSUMABLE MORTGAGE

Here’s a plan that allows a buyer to assume the mortgage when they buy the property. It was a popular option back when mortgage rates were much higher, as it enabled buyers to bypass most of the excessive bureaucracy and adherence to rules and formalities involved with qualifying for a mortgage.

It works like this: once a buyer assumes a mortgage, he/she will proceed in making the same monthly payments at the identical interest rate the seller was remitting, and over the same remaining term of the mortgage. Then, once the term is completed, the buyer will have to qualify for a new mortgage.

BLANKET MORTGAGE

Usually restricted to housing co-ops — although occasionally found on condos — a blanket mortgage is registered against an entire property. With this plan, the owners of units will assume their portion of the mortgage in one of two ways. They’ll either qualify and obtain their own mortgage, or they’ll qualify for their own portion of the blanket mortgage. At least that’s how it goes with co-ops.

In the case of condos, if the condo developer has procured a blanket mortgage, they will use those funds to construct the property and then remove individual portions of that blanket mortgage as each unit gets sold.

CONVENTIONAL MORTGAGE

A conventional mortgage refers to a plan that does not carry any form of high ratio or lender insurance premium. So, say you have 20% or more to put down on a house or condo. In that case, a bank or lender will offer you a conventional mortgage. Which means if you’re buying a house for $450,000, then you’ll need a $90,000 down payment to qualify.

HIGH RATIO MORTGAGE

This plan permits you to borrow more than 80% of the purchase price for a property. Or, conversely, its appraised value. Whichever is less. But to avail yourself of this type of mortgage, you’ll be required to buy mortgage loan default insurance. For what it’s worth, your lender is legally mandated to possess this insurance, but they pass on the cost to you.

Credit the high ratio mortgage with providing more prospective buyers — those with less than a 20% down payment, to be specific — access to the market. It’s not always affordable, though.

VENDOR TAKE-BACK MORTGAGE

The VTB mortgage lets you buy a property with the help of the sellers, who lend you a portion of the purchase price. This plan can typically includes flexible — or even favourable — terms, such as being able to pay off the balance of the loan without penalties.

  Real Estate