For a mortgage arrangement that's best for you, it's wise to understand your options before signing any documents. This section will help you make more informed decisions to suit your financial situation and tolerance for risk. 

	What is a Mortgage?
	Mortgage Qualifications
	Conventional & High Ratio Mortgages
	Mortgage Options
	Mortgage Refinancing

What is a Mortgage?

It's a contract that guarantees a property (home, cottage or other edifice) as collateral for a loan to purchase the property. Although you have possession of the home, the lender maintains a position on the home title until you pay off the mortgage. If you can’t repay it, the lender has the legal right to repossess your home.

Mortgages have a total amortization period generally between 15 - 25 years (occasionally up to 35 years) over which the mortgage must be repaid and a term (usually from 6 months to 5 years) for which the interest rate applies. When the term expires, the mortgage is renewed for another term at a new interest rate.

Mortgage payments are split between interest and capital reduction. Most of the initial payments go to interest costs, with only minor capital reduction. Interest costs can be significantly reduced by paying off the mortgage as quickly as possible (i.e. reducing the amortization period). Example: A $100,000 mortgage at 8% amortized over 20 years incurs interest costs of $98,804 versus only $44,769 if repaid in 10 years! 

Mortgage Qualifications

Typically, mortgage payments, property taxes and heating costs must be less than 32% of your gross yearly family income, if both spouses own the home. Or, if one spouse owns the home, that the other has guaranteed the mortgage. If you have any personal loans outstanding requiring fixed monthly payments in addition to mortgage debt, your Total Debt Service (TDS) ratio must not exceed 40% of gross family income. To support future mortgage payments at potentially higher interest rates, borrowers qualifying for a mortgage amount must use the greater of the contract rate or the interest rate for a 5-year fixed rate mortgage when calculating the GDS and TDS ratios.

Mortgages also incur up-front administrative expenses including appraisal fee ($250 range), lawyer’s fee/disbursements, land transfer tax (generally, about 1% of purchase price), insurance, land survey fee (approx. $500) and closing adjustments on property taxes, insurance and heating costs;

Mortgage Types: Conventional and High Ratio

Conventional mortgages typically require a minimum down payment of 25% (occasionally 20% depending on your financial institution).  Individuals may refinance up to 95% of the property value.

High ratio mortgages enable an individual to borrow up to 90% of the purchase price or property appraised value. However, the individual must be creditworthy and pay a mortgage insurance premium based on the loan size which can range from .065% of the loan to 2.75%.

Mortgage Options

Learn about the many mortgage options (Short or Long Amortization; Short or Long Term; Fixed or Variable Rate; Open or Closed) and which works best for you. 

• Term is the length of the current mortgage agreement. A short term (6 months to 2 years) is more appropriate when interest rates are high and expected to fall at term renewal. A long term (2 + years) is better when current rates are low and can be ‘locked-in’ for a long time.
   
• Short term mortgages (6 months to 2years) are attractive if interest rates are likely to fall in future. Longer term mortgages (typically 3- 5 years) lock you in at a fixed rate/payments to provide more ‘peace of mind’. Generally, the longer the term, the higher the rate you’ll pay. At the end of the term, the entire balance may be paid off without penalty, or the mortgage can be renewed for another specified term;
   
• Fixed rate mortgages lock-in your interest rate and monthly payments for the entire loan. Variable rate mortgages offer a lower interest rate than a fixed rate because fixed rates are riskier. This is because interest rates will move up or down over the term while monthly payments remain the same. Thus if rates fall, more of each payment goes to capital reduction for a faster amortization period. If rates rise, more goes to interest costs, lengthening the amortization period. Consequently, this options suits individuals who feel that rates will fall and are less risk averse.
    
• Open mortgages permit capital pre-payments or unlimited monthly payment increases anytime during the term or a total discharge without penalty. If you are expecting a future cash windfall, this may be your best option. Closed mortgages offer a lower rate, but typically restrict your annual pre-payment to 10% to 20% of the original loan without penalty. Monthly payment increases are available at the lender's discretion;
   
• Mortgage payment options. Accelerated bi-weekly payments reduce debt significantly faster than monthly payments because it results in the equivalent of an extra month's payment yearly against capital (i.e. 13 payments vs. 12);
   
• Reverse mortgages enable seniors 60 years old and over to borrow money to a maximum of 40% of their home equity, although at a higher rate than a conventional mortgage or Line of Credit.  No payments are required on the outstanding loan balance until the home is sold or the owners move out. At that time, both the outstanding balance and accumulated interest costs are due and paid from the house sale proceeds.
   
• Portability privileges, if available, enable you to move your current mortgage to your new property should you sell;
   
• Mortgage pre-approval is important because it lets you know the amount you can borrow from your lender who typically will hold the interest rate for a minimum of 30 days. This maximizes your property shopping focus and purchasing flexibility;
   
• Title insurance protects you against frauds, forgeries, etc. that can affect the legal ownership of the property you have just purchased.
   
• If you sell your property and the buyer assumes your existing mortgage, you may still be liable if he/she defaults on payments. Ensure you are released from the personal covenant if your mortgage is assumed;

Mortgage Refinancing

Refinancing typically occurs when interest rate are declining. You apply for a new loan at a lower interest rate that pays off the current higher rate loan. Savings are generated because new loan payments are lower than current monthly payments. [Note: you also have the option of maintaining your current monthly payments to reduce total amortization  period/interest costs and build equity faster.] Qualified individuals with a conventional mortgage may refinance up to 95% of the property value (up to 90% for a high ratio mortgage).

Refinancing viability depends on how long you plan to own the house, how much lower the new loan interest rate is, closing costs (typically about 2% of the new loan) and equity position in the home.

To calculate monthly savings, obtain the new loan interest rate and related monthly principal and interest payments (click here for mortgage calculator). Then subtract your current monthly principal and interest payments. Example: Assume a hypothetical refinancing with an existing 8% mortgage and a $3,000 refinancing cost. Reducing your rate by a full percent to 7% has a short 25 month payback period. If you live in the  house longer than 25 months, refinancing saves you money. If you plan to sell before that, keep your current mortgage.