Difference between revisions of "Mortgages and Financing a Home Purchase (No. 408)"

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{{REVIEWEDPLS | reviewer = [https://www.ganapathico.com/our-team/nathan-ganapathi/ Nathan Ganapathi] and [https://www.ganapathico.com/our-team/anna-kurt/ Anna Kurt], Ganapathi Law Group|date= October 2017}} {{Dial-A-Law TOC|expanded = home}}
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Almost everyone who buys a home borrows money to pay for it. Doing so involves giving the lender a “charge” against the home. Learn what’s involved in '''getting a mortgage'''.
  
{{Dial-A-Law TOC|expanded = housing}}
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==Understand your legal rights==
==What is a mortgage?==
 
A mortgage is a type of loan, often used as a way of purchasing a house, where the lender provides part of the purchase price (often the majority of it) in exchange for the guarantee of repayment subject to interest. When you get a mortgage to buy a house, you borrow money from a lender (often a bank) and 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 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 [[Foreclosure (Script 415)|415]], called “Foreclosure”. Another way to finance a house purchase, called an agreement for sale, is described near the end of this script.
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===A mortgage gives the lender an interest in your property===
  
==Who is the mortgagor and who is the mortgagee?==
+
A '''mortgage''' is a type of loan, often used to buy a home or other property. The lender, such as a bank or trust company, provides part (often most) of the purchase price of the property. The borrower promises to pay the lender back, plus interest.
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?==
+
Under the [https://www.canlii.org/en/bc/laws/stat/rsbc-1996-c-250/latest/rsbc-1996-c-250.html#sec231_smooth law in BC], a mortgage gives the lender a “'''charge'''” — meaning an interest or a right — against the property being purchased. That charge gives the lender rights if you “default” on the mortgage. The most common way for a borrower to default is by not making payments under the mortgage as promised.
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 high. The shorter the amortization period, the less total interest you are likely to pay in the long run.
 
  
==What is the term of the mortgage?==
+
===If you default on your 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. However, 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.
+
If you default on your mortgage, the lender can go to court to take the property or sell it to pay the mortgage debt. This process is called '''foreclosure'''. In a foreclosure, the lender cares about getting its money back. They don’t care about getting fair market value for the property or what might be left over for you. It’s important to take quick action if you’re having difficulties paying your mortgage. See our information on [[Foreclosure (No. 415)|foreclosure (no. 415)]].  
  
==What if you want to pay your mortgage off quickly, before the term ends?==
+
===When you get a mortgage, you sign a mortgage contract===
Many mortgages let you do this via 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). However, 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 the mortgage (you can’t add it later on).
+
As the borrower, you will be asked to sign a '''mortgage contract'''. This document sets out the terms and conditions for the loan and its repayment.  
  
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.
+
The mortgage contract will include:
 +
*the principal amount lent to you
 +
*the interest rate at which the money is lent
 +
*the payments you must make
 +
*the frequency of the payments, which can be weekly, bi-weekly or monthly
  
==What is an assumable mortgage?==
+
The key promises the borrower makes in any mortgage contract are to:
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.
+
*make payments under the mortgage on time
 +
*give the property as '''security''' in case of default
  
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.
+
In most mortgages, the borrower also promises to:
 +
*pay the property taxes
 +
*keep the property in good repair
 +
*insure buildings on the property against fire and other risks
  
==What is a portable mortgage?==
+
Most lenders insist on using their own standard mortgage contract, with few variations. But there are typically a few items that can be negotiated. These include the mortgage term, prepayment rights, and whether the mortgage can be transferred if you sell the property. More on these in a moment.
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, allowing you to transfer the mortgage to the new property without a penalty. You should clarify with the lender that all parts of the mortgage are transferable with the current amount still owing.
 
  
==What does cash to mortgage mean?==
+
The lender must give you a copy of the mortgage contract when the mortgage is signed.
Cash to mortgage 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.
+
 +
==Key things to consider in getting a mortgage==
 +
 
 +
===Deciding on the mortgage term===
 +
Two time periods are relevant to most mortgages: the “amortization” period and the “term” of the mortgage.  
  
==What is a vendor-take-back mortgage?==
+
The '''amortization period''' is the total time it would take to pay off the mortgage if you make 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 three-year amortization period, the monthly payments are likely to be high. The shorter the amortization period, the less total interest you are likely to pay in the long run.
This means that the seller 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?==
+
The '''mortgage term''' is the length of time you commit to a specific lender, interest rate, and terms and conditions. Usually, mortgage terms range between six months and five years. Longer terms often have higher interest rates. At the end of the term, you have to pay the remaining amount of the mortgage to the lender. If there are no problems, you can normally just renew your mortgage for another term, at the current interest rate.
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, as they have useful contacts with mortgage companies and often 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 must ask for it—they will rarely 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==
+
===Negotiating the right to “prepay” the mortgage===
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. However, 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. If you want to use an agreement for sale, you should negotiate the terms carefully.
+
Putting extra money toward your mortgage is called making a “'''prepayment'''”. Prepayments allow you to pay down your mortgage faster or pay off your mortgage before the end of the term. This can save you money and give you more flexibility.  
  
==Using a lawyer is a good idea==
+
Prepayment terms vary from lender to lender. One of the most important aspects of getting a mortgage is getting prepayment terms that meet your needs.
Real estate sales and mortgages are complicated and important transactions meaning mistakes can be costly. 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==
+
In an '''open'''mortgage, the borrower can make extra payments or pay out the mortgage at any time during the term of the mortgage.  
Check script [[Buying a House (Script 406)|406]], called “Buying a House”. Also, check the booklet called [http://www.recbc.ca/consumer/buyinghome.html 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 [http://www.recbc.ca www.recbc.ca] and click on “Consumer Info” and then “Publications”.
 
  
 +
A “'''closed'''” mortgage has restrictions on making extra payments or paying out the mortgage early. Some closed mortgages don’t allow any prepayments unless you pay a large penalty. Other closed mortgages allow partial prepayments. For example, the lender may allow you to prepay 10% of the balance owing each year without penalty.
  
[updated April 2015]
+
====If there are no prepayment rights====
 +
If a mortgage does not have prepayment rights, many lenders charge a '''prepayment penalty''' if you want to fully pay it off before the mortgage term ends. Usually the penalty is three months’ interest. This is an extra expense if you want to sell your home before your mortgage term ends. If this is a possibility you can imagine, try to get prepayment rights in the mortgage when you get the mortgage (you can’t add it later).
  
{{REVIEWED | reviewer = Jack Montpellier}}
+
====If you negotiate prepayment rights====
----
+
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 principal will save you a lot of money eventually. That’s especially true if you make prepayments in the first years of the mortgage, when more of each payment goes towards paying interest than to paying off the principal.
  
 +
===Why you might want an “assumable mortgage”===
 +
An '''assumable mortgage''' means if you sell your home, a buyer 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 buyer before the buyer can assume the mortgage.
 +
 +
If the buyer can assume your mortgage, it’s very important to make sure you won’t still be responsible if the buyer 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 buyer under [https://www.canlii.org/en/bc/laws/stat/rsbc-1996-c-377/latest/rsbc-1996-c-377.html#sec24_smooth section 24] of the ''Property Law Act''. Once the lender approves the buyer under this section, you are no longer responsible for paying the mortgage.
 +
 +
===Why you might want a “portable mortgage”===
 +
A '''portable mortgage''' is one you can transfer to a new property. It is useful if you get a very good mortgage rate for a long term and you move before the term ends, allowing you to transfer the mortgage to the new property without a penalty. You should clarify with the lender that all parts of the mortgage are transferable with the current amount still owing.
 +
 +
===On buying a home===
 +
Various financing arrangements can come into play when you buy a home.
 +
 +
'''Cash to mortgage''' means you '''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.
 +
 +
A '''vendor-take-back mortgage''' means the seller of the home is willing to lend you some of the purchase price. As security for the loan, you give the seller a mortgage on the property.
 +
 +
An '''agreement for sale''', also called a '''right to purchase''', means you make a down payment, and then make regular monthly payments to the seller. However, 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 use mortgage contracts that are to their advantage. If you want to use an agreement for sale, you can negotiate terms more to your liking.
 +
 +
===How to 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, as they have useful contacts with mortgage companies and 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 must ask for it — they will rarely offer it automatically. Mortgage brokers can also shop around and negotiate rates for you, but they usually charge a fee for their services.
 +
 +
{| class="wikitable"
 +
|align="left"|'''Tip'''
 +
For expanded coverage of mortgages, including step-by-step guidance on getting a mortgage, see People’s Law School’s information on getting a mortgage at [https://www.peopleslawschool.ca/everyday-legal-problems/home-neighbours/mortgages/getting-mortgage peopleslawschool.ca].
 +
|}
 +
 +
==Get help==
 +
 +
===With more information===
 +
The '''Real Estate Council of BC''', the body that licenses real estate agents in the province, offers a guide on “Buying a Home in British Columbia” that covers getting a mortgage.
 +
:Web: [https://www.recbc.ca/buyinghome-2.html recbc.ca]
 +
 +
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Latest revision as of 15:49, 29 March 2019

This information applies to British Columbia, Canada. Last reviewed for legal accuracy by Nathan Ganapathi and Anna Kurt, Ganapathi Law Group in October 2017.

Almost everyone who buys a home borrows money to pay for it. Doing so involves giving the lender a “charge” against the home. Learn what’s involved in getting a mortgage.

Understand your legal rights

A mortgage gives the lender an interest in your property

A mortgage is a type of loan, often used to buy a home or other property. The lender, such as a bank or trust company, provides part (often most) of the purchase price of the property. The borrower promises to pay the lender back, plus interest.

Under the law in BC, a mortgage gives the lender a “charge” — meaning an interest or a right — against the property being purchased. That charge gives the lender rights if you “default” on the mortgage. The most common way for a borrower to default is by not making payments under the mortgage as promised.

If you default on your mortgage

If you default on your mortgage, the lender can go to court to take the property or sell it to pay the mortgage debt. This process is called foreclosure. In a foreclosure, the lender cares about getting its money back. They don’t care about getting fair market value for the property or what might be left over for you. It’s important to take quick action if you’re having difficulties paying your mortgage. See our information on foreclosure (no. 415).

When you get a mortgage, you sign a mortgage contract

As the borrower, you will be asked to sign a mortgage contract. This document sets out the terms and conditions for the loan and its repayment.

The mortgage contract will include:

  • the principal amount lent to you
  • the interest rate at which the money is lent
  • the payments you must make
  • the frequency of the payments, which can be weekly, bi-weekly or monthly

The key promises the borrower makes in any mortgage contract are to:

  • make payments under the mortgage on time
  • give the property as security in case of default

In most mortgages, the borrower also promises to:

  • pay the property taxes
  • keep the property in good repair
  • insure buildings on the property against fire and other risks

Most lenders insist on using their own standard mortgage contract, with few variations. But there are typically a few items that can be negotiated. These include the mortgage term, prepayment rights, and whether the mortgage can be transferred if you sell the property. More on these in a moment.

The lender must give you a copy of the mortgage contract when the mortgage is signed.

Key things to consider in getting a mortgage

Deciding on the mortgage term

Two time periods are relevant to most mortgages: the “amortization” period and the “term” of the mortgage.

The amortization period is the total time it would take to pay off the mortgage if you make 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 three-year amortization period, the monthly payments are likely to be high. The shorter the amortization period, the less total interest you are likely to pay in the long run.

The mortgage term is the length of time you commit to a specific lender, interest rate, and terms and conditions. Usually, mortgage terms range between six months and five years. Longer terms often have higher interest rates. At the end of the term, you have to pay the remaining amount of the mortgage to the lender. If there are no problems, you can normally just renew your mortgage for another term, at the current interest rate.

Negotiating the right to “prepay” the mortgage

Putting extra money toward your mortgage is called making a “prepayment”. Prepayments allow you to pay down your mortgage faster or pay off your mortgage before the end of the term. This can save you money and give you more flexibility.

Prepayment terms vary from lender to lender. One of the most important aspects of getting a mortgage is getting prepayment terms that meet your needs.

In an “open” mortgage, the borrower can make extra payments or pay out the mortgage at any time during the term of the mortgage.

A “closed” mortgage has restrictions on making extra payments or paying out the mortgage early. Some closed mortgages don’t allow any prepayments unless you pay a large penalty. Other closed mortgages allow partial prepayments. For example, the lender may allow you to prepay 10% of the balance owing each year without penalty.

If there are no prepayment rights

If a mortgage does not have prepayment rights, many lenders charge a prepayment penalty if you want to fully pay it off before the mortgage term ends. Usually the penalty is three months’ interest. This is an extra expense if you want to sell your home before your mortgage term ends. If this is a possibility you can imagine, try to get prepayment rights in the mortgage when you get the mortgage (you can’t add it later).

If you negotiate prepayment rights

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 principal will save you a lot of money eventually. That’s especially true if you make prepayments in the first years of the mortgage, when more of each payment goes towards paying interest than to paying off the principal.

Why you might want an “assumable mortgage”

An assumable mortgage means if you sell your home, a buyer 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 buyer before the buyer can assume the mortgage.

If the buyer can assume your mortgage, it’s very important to make sure you won’t still be responsible if the buyer 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 buyer under section 24 of the Property Law Act. Once the lender approves the buyer under this section, you are no longer responsible for paying the mortgage.

Why you might want a “portable mortgage”

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

On buying a home

Various financing arrangements can come into play when you buy a home.

Cash to mortgage means you 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.

A vendor-take-back mortgage means the seller of the home is willing to lend you some of the purchase price. As security for the loan, you give the seller a mortgage on the property.

An agreement for sale, also called a right to purchase, means you make a down payment, and then make regular monthly payments to the seller. However, 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 use mortgage contracts that are to their advantage. If you want to use an agreement for sale, you can negotiate terms more to your liking.

How to 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, as they have useful contacts with mortgage companies and 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 must ask for it — they will rarely offer it automatically. Mortgage brokers can also shop around and negotiate rates for you, but they usually charge a fee for their services.

Tip

For expanded coverage of mortgages, including step-by-step guidance on getting a mortgage, see People’s Law School’s information on getting a mortgage at peopleslawschool.ca.

Get help

With more information

The Real Estate Council of BC, the body that licenses real estate agents in the province, offers a guide on “Buying a Home in British Columbia” that covers getting a mortgage.

Web: recbc.ca
Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International Licence Dial-A-Law © People's Law School is licensed under a Creative Commons Attribution - NonCommercial - ShareAlike 4.0 International Licence.


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