THINGS YOU NEED TO KNOW ABOUT MORTAGES
Roughly 60% of all real estate purchases in Canada involve some form of mortgage, or other financing. The rules, regulations and types of financing available are often confusing to a Purchaser, especially to someone buying their first home. Here are a few definitions, FAQ’s and web-links to help you become more familiar with the standard financing concepts generally encountered in a real estate acquisition, with special emphasis on those types typical of a Rural environment. Financing in rural areas can be quite different from the financing available in large urban centers. We strongly recommend that a new or any, buyer first talk to a financing specialist before getting too involved in trying to find a property, and you will find links and contact information to a few Mortgage Professionals who we have worked with and who have experience in a Country environment. They will be more than happy to elaborate on the basics of mortgage financing which we have touched on below.
What is a ‘high ratio’ or CMHC insured mortgage? “CMHC or Canada Mortgage and Housing, are a Federal Government Agency whose mandate is to facilitate affordable home ownership. They basically insure the Bank or Credit Union you are borrowing from that in the event of a foreclosure, the Bank is fully protected for any losses incurred due to a market turndown, legal costs or the costs incurred to re-sell the property. This mortgage insurance permits banks to lend at very low rates and with very small down payments (as little as 5%). However, this accessability comes with a few strings attached: 1) There is an insurance ‘fee’, which may be as high as 3.15% on a 5% down mortgage, (the more you put down, the smaller this fee becomes). This fee is generally added on to the mortgage balance. And 2) You personally guarantee a CMHC mortgage. In other words, if the bank forecloses on you and there is a shortfall on the re-sale of your home, you are personally liable to pay it, and the creditor is the Government of Canada (who are fairly good at collecting money), so a high ratio mortgage is not to be taken lightly. There are other mortgage insurance companies, but generally speaking, the same rules and responsibilities apply.”
What is a ‘Conventional Mortgage’? “A conventional mortgage is a mortgage that is generally no more than 75% of the purchase price, (although a few institutions will go as high as 80%). In other words, you are putting down 25% of the value. (you’ll hear terms like ‘Loan to Value’ bandied around and that’s what this means – the loan to value ratio on a conventional mortgage is 75%, or less). Whereas these mortgages require a bigger down payment, they generally do not incur an ‘insurance fee’. Furthermore, in Alberta, most Conventional Mortgages do not incur a personal guarantee – the lender may foreclose on you, but cannot (usually) pursue you for a shortfall on resale. I spent a number of years acting as in-house Realtor for a mortgage corporation, and there are some notable exceptions to this general rule, so I advise you to get more information if this is a mortgage product you think you are inclined to pursue.”
What is a ‘VTB’ or Vendor Take Back Mortgage? “A VTB Mortgage means that the seller of the property is playing the part of your “bank’. These types of mortgages are almost always ‘conventional’ mortages in that they are not isured or guantee’d, but may be for more that standard convertional lending ratios. In down times, VTB mortgages may be for as much as the total purchase price, if the seller is motivated to dispose of the property. Take warning, however - these types of mortgages are generally offered at very high interest rates, and usually entail paying the seller top dollar (or more) for the home.