For the first time homebuyer, mortgages can seem like a black pit of mystery designed to suck up money. Rest assured that is not the case. If not taken seriously, then a mortgage can be a great way to kill your credit rating and make sure you are never granted a loan again. On the other hand, a mortgage can help build up one's financial portfolio if used in a smart and serious manner. Here, in this article, we will take a look at the concept of a mortgage in Canada and help define some of the terms we hear thrown around.
To begin we will be very clear about what a mortgage is. Ready? A mortgage is a loan. That's right, a loan. It is called a mortgage because it is a loan that holds property as the collateral for the money the bank gives you. However, since the bank is too busy counting its money to actually use the property, you are permitted to use it while you pay for it. Now the bank isn't stupid, they know it will take awhile for you to pay the loan back. In the banker's mind that money they gave you to buy the property could have been spent on something else, like Friday Donut Day. Consequently they want a little reward for no donuts on Fridays, hence the interest rate.
The federal government knows the banks are lending money out in exchange for donut money, but it would be unethical for banks to set their own donut price. Plus, it is the job of the government to keep the economy healthy. Part of keeping the economy in good shape is making sure people can pay back their loans. If the donut money is at too high a percentage for people to manage amongst the other expenses of life, or there is a rise in inflation, or a surge in job losses, then it is the job of the federal government to lower the rate of interest. The bankers' donut fund goes down.
Certain bankers are happy to have their donuts from Timmy's; others want Tiffany-inspired desserts with their Friday afternoon tea. Therefore each bank adds on a little percentage to the government-sanctioned interest rate. This is where a mortgage broker becomes helpful, even invaluable. The broker knows which bank is on a donut-free diet and which one will not settle for anything less than designer cupcakes. Not only that, mortgage brokers know all the ins and outs of the mortgage loan approval process, so they can help borrowers get the job done correctly. Perhaps the best part about using a broker: you don't pay them! The banks pay brokers, but it is the job of the bank to attract brokers with their low interest rates. So if a banker gets too greedy with his donut fund, then the brokers won't bring him any customers. If the donut fund is kept low, then more customers are directed to the bank, more money goes in the donut fund and the bank pays the broker a finder's fee.
No doubt everyone has heard a lot of discussion about fixed rate mortgages and variable rate mortgages. The terms don't refer to the actual mortgage amount, per say. They mean the interest rate charged per quarter, which will effect monthly or bi-monthly payments. For example, if at the time of signing the mortgage load agreement you chose a fixed interest rate, then your payments will be fixed at a certain rate until the time of renewal. A variable rate mortgage means your payment amount will change if there is a significant fluctuation in federal interest rates. Typically each payment will have a certain amount allotted to the principal and a certain amount paid into the donut fund. Usually the variable rate mortgage loan agreement will include a clause allowing the borrower to switch to a fixed rate after a certain period of time.
Although it is in the best interest of the national economy to keep the interest rates steady and avoid a sudden spike, sometimes it happens. The banks, the brokers, the government, everybody wants to avoid mortgage defaults and bankruptcies because it ends up costing everyone far more. So if and when an interest rate is raised, it is done with caution. Rarely are there extreme hikes.
There is a lot more to be said about mortgages. In fact we have not even touched upon the approval process, property appraisals, credit ratings, mortgage loan insurance and so on. If owning real estate is in your future, then it is in your best interest to educate yourself on every detail of the subject. Don't rely entirely upon the media, the brokers or the banks for your information. Do your own research, then you will feel more empowered when it comes time to make the purchase.
To begin we will be very clear about what a mortgage is. Ready? A mortgage is a loan. That's right, a loan. It is called a mortgage because it is a loan that holds property as the collateral for the money the bank gives you. However, since the bank is too busy counting its money to actually use the property, you are permitted to use it while you pay for it. Now the bank isn't stupid, they know it will take awhile for you to pay the loan back. In the banker's mind that money they gave you to buy the property could have been spent on something else, like Friday Donut Day. Consequently they want a little reward for no donuts on Fridays, hence the interest rate.
The federal government knows the banks are lending money out in exchange for donut money, but it would be unethical for banks to set their own donut price. Plus, it is the job of the government to keep the economy healthy. Part of keeping the economy in good shape is making sure people can pay back their loans. If the donut money is at too high a percentage for people to manage amongst the other expenses of life, or there is a rise in inflation, or a surge in job losses, then it is the job of the federal government to lower the rate of interest. The bankers' donut fund goes down.
Certain bankers are happy to have their donuts from Timmy's; others want Tiffany-inspired desserts with their Friday afternoon tea. Therefore each bank adds on a little percentage to the government-sanctioned interest rate. This is where a mortgage broker becomes helpful, even invaluable. The broker knows which bank is on a donut-free diet and which one will not settle for anything less than designer cupcakes. Not only that, mortgage brokers know all the ins and outs of the mortgage loan approval process, so they can help borrowers get the job done correctly. Perhaps the best part about using a broker: you don't pay them! The banks pay brokers, but it is the job of the bank to attract brokers with their low interest rates. So if a banker gets too greedy with his donut fund, then the brokers won't bring him any customers. If the donut fund is kept low, then more customers are directed to the bank, more money goes in the donut fund and the bank pays the broker a finder's fee.
No doubt everyone has heard a lot of discussion about fixed rate mortgages and variable rate mortgages. The terms don't refer to the actual mortgage amount, per say. They mean the interest rate charged per quarter, which will effect monthly or bi-monthly payments. For example, if at the time of signing the mortgage load agreement you chose a fixed interest rate, then your payments will be fixed at a certain rate until the time of renewal. A variable rate mortgage means your payment amount will change if there is a significant fluctuation in federal interest rates. Typically each payment will have a certain amount allotted to the principal and a certain amount paid into the donut fund. Usually the variable rate mortgage loan agreement will include a clause allowing the borrower to switch to a fixed rate after a certain period of time.
Although it is in the best interest of the national economy to keep the interest rates steady and avoid a sudden spike, sometimes it happens. The banks, the brokers, the government, everybody wants to avoid mortgage defaults and bankruptcies because it ends up costing everyone far more. So if and when an interest rate is raised, it is done with caution. Rarely are there extreme hikes.
There is a lot more to be said about mortgages. In fact we have not even touched upon the approval process, property appraisals, credit ratings, mortgage loan insurance and so on. If owning real estate is in your future, then it is in your best interest to educate yourself on every detail of the subject. Don't rely entirely upon the media, the brokers or the banks for your information. Do your own research, then you will feel more empowered when it comes time to make the purchase.
About the Author:
The Canadian Equity Group Inc was formed by a group of mortgage professionals in December of 2001 with the vision to expand the mortgage market and to be a front-runner with major banking institutions. We predict very soon that more than 75% of all mortgages in Canada will be placed through the services of a mortgage broker. If you want to find the best mortgage rates, visit us online today!
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