Mortgages 101

Find a desk, paper and pen, pour yourself a drink and put on your thinking cap. You need to understand yourself first before thinking about a mortgage. A mortgage forms part of your long-term financial plan and if you are like most people, you don’t have one; so that is where you have to start.

Ask tough questions.
What do I want out of life? Am I planning on getting married? Do I have a financial plan? How do I save money? Do I need money for my kids’ education? When will that be? How much can I afford to spend on a home relative to my daily expenses and savings goals? How far away is retirement and am I financially prepared for it? Do I have good financial discipline? Do I have credit issues? Am I prepared to change my lifestyle in order to own a home?

The key to this exercise is to gain some clarity about what is important to you so that the mortgage you eventually select is tailored to your needs.

Notice that nowhere is the question: ‘What is the interest rate?’ Interest rates are what they are. There is no mystery about them and there is little you can do about them. Naturally, you want a low, competitive interest rate. You can spend your time searching and negotiating a low rate, but why would you go to all that effort? Any mortgage professional already knows the lowest interest rates; so ask a mortgage professional – a mortgage broker.

If you go to see a big-five banker, they are unlikely to tell you their best rate upfront, so you will have to ask what the bank’s posted rate is and whether they can do better. On the other hand, a mortgage broker will represent your interests and structure your mortgage while cutting through lenders’ red tape to obtain the best rates. Mortgage brokers give you access to a broad array of products from the best lenders.

Now that you do not have to worry about rate, you can spend your time wisely discussing your personal needs with your mortgage broker. This is where your preparatory work is going to pay off; you have thought about who you are, your life and your needs.

Rather than talking price, you are on the value-added curve, talking financial and life planning. Armed with specific information, your mortgage broker can help you to select mortgage options, tailored from the right lending institution, to match your needs.

How do you find a good mortgage broker? Start with a family or friend. See if any of them have used a broker. Ask a trusted real estate lawyer, accountant or financial planner. Professional advisors work regularly with mortgage brokers and can provide a good, arms-length reference. Alternatively, there are a number of large national mortgage brokers you can contact. You can also search online for a broker with the Canadian Association of Accredited Mortgage Professionals (CAAMP).

To find the right broker, perform some due diligence. Ask how they like to work and how often they want to meet with you after the mortgage is closed. If the broker does not want to meet at least once a year, maybe they are not prepared to invest in a long-term working relationship with you. Ask about education and prior work experience. You want to satisfy yourself that the mortgage broker has integrity and credibility. Ask if they charge a fee and how they get paid. If they hesitate to disclose such information, consider finding a more transparent broker.

To recap, make your life easy by focusing on yourself first. The more you know about how you want to live your life, the easier it will be to select the right mortgage options.

Finally, find yourself a good mortgage broker. Spend your time figuring out the mortgage structure that makes sense to you and which mortgage products are available from different lending institutions. Using a broker is the easiest way to obtain the right mortgage. Convenience, flexible terms, great service and an attractive, low competitive rate are just minutes away.

Pierre Pequegnat is an associate director and head of marketing & strategy for Macquarie Financial Limited in Toronto. Macquarie Financial Limited (MFL) is a Canadian retail mortgage lender and a subsidiary of the Macquarie Group of companies. Visit www.MacquarieFinancial.com for more information.

The opinions expressed in this article are not necessarily those of KMI Publishing and Events Ltd.

What’s out there
Pre-approved mortgage
A free and no-obligation deal that lets you know – before you go looking for your home or signing an offer to purchase – how much you can afford to borrow based on your qualification and personal credit rating.

Conventional mortgage
A loan that does not exceed 75% of the purchase price or appraised value of the home, whichever is less. This type of mortgage does not have to be insured against default.

High-ratio mortgage
A loan that is above 80% and up to 95% of the purchase price or appraised value of the home, whichever is less. These mortgages must be insured against loss and the premiums can be added to the mortgage amount or paid at closing.

Open mortgage
A mortgage that allows you the flexibility to make repayments at any time without penalty. Open mortgages are available in shorter terms – six months or one year – and the interest rate is higher than closed mortgages by 1% or more. They are normally chosen if you are thinking of selling your home or if you expect to pay off the whole mortgage from the sale of another property.

Closed mortgages
A mortgage that offers the security of fixed repayments for terms from six months to 10 years. Interest rates are considerably lower than an open mortgage and as much as 20% of the original principal can be prepaid every year. If you wish to pay off the full mortgage prior to maturity, a penalty is charged. The penalty is usually three months of interest, or the interest rate differential.

Fixed rate mortgage

A mortgage in which the interest rate is set so that the monthly payment of principal and interest remains the same throughout the term. Regardless of whether official rates move up or down, you know exactly how much your repayments will be. This simplifies your personal budgeting.

Adjustable rate mortgage (ARM)
This mortgage provides a lot of flexibility, especially when interest rates are on their way down. The rate is based on prime minus 0.375% and can be adjusted monthly to reflect current rates. For the first three months of the mortgage, a large discount on the rate is often given as a welcoming offer. Typically, repayments remain constant, but the ratio between principal and interest fluctuates. When interest rates are falling, you pay less interest and more principal. If rates are rising, you pay more interest and least principal. If rates rise substantially, the original payment may not cover both the interest and principal. Any portion not paid is still owed, or you may be asked to increase your monthly repayment. Usually after three years, this type of mortgage is fully convertible without any cost. It also offers a 20% prepayment privilege at any time throughout the year.

Bridge financing
This refers to a special short-term loan needed to cover the time gap that arises when you are selling one property and buying another, and the closing dates don't match – the property being purchased closes before the one that was sold. There is a small set-up fee charged by the lender to have the bridge loan arranged, plus the cost of the interest as now you are carrying both properties for a short time. The rate charged on a bridge loan is about 2–3% above the bank's prime.

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