Mortgages and Financing a Home Purchase

What is a mortgage?

A mortgage is a common way of getting money to buy a house. It’s a contract that gives a moneylender some assurance that a borrower will repay the borrowed money. When you get a mortgage to buy a house, you borrow money from a person or company and you promise to pay back that money, usually with interest and in regular payments. The lender makes sure you’ll repay the loan with a “charge” against your house. That charge means that if you don’t make your mortgage payments, the lender has the right, eventually, to take the property or to sue you for what you owe.

If your equity in the house is not more than what you owe, the lender may take the property. Equity is the amount that your house value exceeds your mortgage loan and any other debts, judgments, or liens registered against your house. This legal action is called foreclosure, and you can learn more about it in script 415, called “Foreclosure”. Another way to finance a house purchase, called an agreement for sale, is described near the end of this script.

Who is the mortgagor and who is the mortgagee?

The person who borrows the money is the mortgagor. The person or company lending the money is the mortgagee. The lender may be a bank, a trust company, credit union, or a person, for example, the seller of the house.

What is the amortization period?

The amortization period is the total time it would take to pay off the mortgage if you made regular payments at the same interest rate. Most mortgages for a first home are amortized over 25 years, to keep the payments affordable, although this can vary. On the other hand, if you have a 3-year amortization period, the monthly payments are likely to be very high. The shorter the amortization period, the less total interest you pay in the long run.

What is the term of the mortgage?

The term is the time the mortgage lasts. Because interest rates are always changing, most lenders won’t lend their money at the same interest rate for as long as the usual amortization period. Instead, lenders first calculate the regular payments as if they were lending the money for the full amortization period at the same interest rate. But then they lend you the money for a shorter time, or term. You can usually choose terms between 6 months and 10 years. Longer terms often have higher interest rates. At the end of the term, you have the pay the remaining amount of the mortgage to the lender. If there are no problems, you can normally do this by just renewing your mortgage for another term, at the current interest rate.

What if you want to pay your mortgage off quickly, before the term ends?

Many mortgages let you do this. It’s called a prepayment privilege and there are many types. You may have the right to prepay any amount any time (an open mortgage), or the right to prepay only up to 10% of the mortgage loan each year (a closed mortgage). But if a mortgage does not have a prepayment privilege, many lenders charge a prepayment penalty if you want to fully pay it off before the mortgage term ends. Usually the penalty is 3 months’ interest. This is an extra expense if you want to sell your house before your mortgage term ends. If this is your case, you should get a prepayment privilege in the mortgage when you get then mortgage (you can't add it later on).

If your mortgage lets you prepay, it’s good to do so if you can. Over the whole term of the mortgage, you’ll probably pay several times the principal amount of the mortgage. So anything you prepay to reduce the amount of the mortgage, called the principal, will save you a lot of money in the long run. That’s especially true in the first years of the mortgage, when more of each payment goes to pay interest than to pay off the principal.

What is an assumable mortgage?

An assumable mortgage means that if you sell your house, a purchaser can take over your mortgage. If interest rates have gone up since you got your mortgage, the lower interest rate of your assumable mortgage will be a good selling point. If a mortgage can be assumed “with qualification”, it means your lender must approve the purchaser before allowing the purchaser to assume the mortgage.

If the purchaser can assume your mortgage, it’s very important to make sure that you won’t still be responsible if the purchaser later stops paying the mortgage. Your name stays on the mortgage and you are still responsible, unless your mortgage lets you apply to the lender to approve a purchaser under Section 24 of the Property Law Act. Once the lender approves the purchaser under this section, you are no longer responsible for paying the mortgage.

What is a portable mortgage?

A portable mortgage is one that you can transfer to a new property. It is useful if you get a very good mortgage rate for a long term and move before the term ends. Then you can transfer the mortgage to the new property without a penalty. You should clarify that all of the parts of the mortgage are transferable with the current amount still owing.

What does cash to mortgage mean?

This means that you will assume, or take over, the seller’s existing mortgage. You pay the seller the balance of the purchase price in cash, and then make the regular payments on the mortgage.

What is a vendor-take-back mortgage?

This means that the seller (or vendor) of the house is willing to lend you some of the purchase price. As security for the loan, you give the seller a mortgage on the property.

How do you get the best mortgage?

Shop around and compare, just as you do for other goods and services. Mortgage brokers and real estate agents can be helpful when you’re looking for financing. They have useful contacts with mortgage companies and they know current interest rates and market trends. Banks and other mortgage companies are usually willing to give you a lower rate than they advertise, but you have to ask for it – they won’t just offer it automatically. Mortgage brokers can also shop around and negotiate rates for you, but they usually charge a fee for their services.

Another way to finance a house purchase – an agreement for sale

An agreement for sale, also called a right to purchase, means that you make a down payment, and then make regular monthly payments to the seller. But the seller remains the registered owner of the property until you have paid the full purchase price. You protect your interest in the property by registering a “right to purchase” in the Land Title Office. Sometimes, an agreement for sale may be better than a mortgage, because banks and other mortgage companies have mortgage contracts that are to their advantage. But if you want to use an agreement for sale, you should negotiate the terms very carefully.

Using a lawyer is a good idea

Real estate sales and mortgages are complicated and important transactions, and there’s too much money involved to risk mistakes. There are also tax issues that you need advice on. Sometimes there are problems with the way the real estate agent drafted the contract for sale and purchase, or other issues that need legal expertise. There are also fraud risks with real estate transactions. The Land Title Office also has very specific requirements about documents that it will accept for registration. For these reasons, you should see a lawyer when buying a house or getting a mortgage.

More information

Check script 406, called “Buying a House”. Also, check the booklet called “Buying a Home in BC Information Booklet” prepared by the Real Estate Council of British Columbia. For a free copy, call them in Vancouver at 604.683.9664 or toll-free 1.877.683.9664 elsewhere in BC. Or go to their website at www.recbc.ca and click on “Consumer Info” and then “Publications.”

[updated February 2013]

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