What you should know
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, 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.
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
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.
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.
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.
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.
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.
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.
For expanded coverage of mortgages, including step-by-step guidance on getting a mortgage, see our information at peopleslawschool.ca on getting a mortgage.