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Difference between revisions of "Mortgages and Financing a Home Purchase"
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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}} | {{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}} | ||
Almost everyone who buys a home borrows money to pay for it. Doing so involves giving the lender a | 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'''. | ||
== | ==What you should know== | ||
===A mortgage gives the lender an interest in your property=== | ===A mortgage gives the lender an interest in your property=== | ||
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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. | 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. | ||
[https://www.canlii.org/en/bc/laws/stat/rsbc-1996-c-250/latest/rsbc-1996-c-250.html#sec231_smooth 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=== | ||
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 | 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. [[foreclosure/|See our information on foreclosure]]. | ||
===When you get a mortgage, you sign a mortgage contract=== | ===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. | 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 mortgage contract will include: | ||
* the principal amount lent to you | |||
*make | * 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 | |||
In most mortgages, the borrower also promises to: | The key promises the borrower makes in any mortgage contract are to: | ||
*pay the property taxes | |||
*keep the property in good repair | * make payments under the mortgage on time | ||
*insure buildings on the property against fire and other risks | * 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. | 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. | The lender must give you a copy of the mortgage contract when the mortgage is signed. | ||
==Key things to consider in getting a mortgage== | ==Key things to consider in getting a mortgage== | ||
===Deciding on the mortgage term=== | ===Deciding on the mortgage term=== | ||
Two time periods are relevant to most mortgages: the | 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 '''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. | ||
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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. | 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 | ===Negotiating the right to prepay the mortgage=== | ||
Putting extra money toward your mortgage is called making a | 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. | 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 | 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 | 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 there are no prepayment rights==== | ||
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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. | 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 | ===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. | 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 | 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 [https://www.canlii.org/en/bc/laws/stat/rsbc-1996-c-377/latest/rsbc-1996-c-377.html#sec24_smooth 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 | ===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. | 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. | ||
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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. | 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 | 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=== | ===How to get the best mortgage=== | ||
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{| class="wikitable" | {| class="wikitable" | ||
|align="left"|'''Tip''' | |align="left"|'''Tip''' | ||
For expanded coverage of mortgages, including step-by-step guidance on getting a mortgage, | For expanded coverage of mortgages, including step-by-step guidance on getting a mortgage, [https://www.peopleslawschool.ca/everyday-legal-problems/home-neighbours/mortgages/getting-mortgage see our information at '''peopleslawschool.ca''' on getting a mortgage]. | ||
|} | |} | ||
== | ==Who can help== | ||
===With more information=== | ===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. | 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. | ||
* [https://www.recbc.ca/buyinghome-2.html Visit website] | |||
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{{Dial-A-Law Copyright}} | {{Dial-A-Law Copyright}} | ||
