Mortgage Fundamentals
There are really two aspects of a mortgage. Firstly, it is a loan which the borrower has to repay. Consequently, lenders ensure the client is able to meet their debt servicing requirements by examining the borrower’s entire financial picture including their income and other debt obligations.
The other aspect of a mortgage is that it is secured against property to ensure the debt is repaid. Financial Institutions are restricted by the Bank Act to lending a first mortgage only up to 80% of the value of the property, unless the mortgage is insured. This allows a certain amount of equity in the property to remain in case of property price fluctuations. Accordingly, lenders will generally require an appraisal at the time of entering into a mortgage (although some lenders now have internal property valuation systems) to ensure this ratio has been complied with.
The borrower is referred to as the mortgagor and the lender as the mortgagee. The amount borrowed is the principal. The amortization period is the time in which the borrower is expected to repay the entire debt although this period is typically broken into terms ranging from 6 months to 10 years. The mortgagor is expected to repay the principal amount borrowed with interest which has accrued thereon over the amortization period.
Mortgages can be used to finance many different things including, new home purchases, home construction, debt consolidation, renovations or investment purchases, including investment property. As lenders consider a secured loan less risky than an unsecured loan, the interest rate is typically lower. Borrowing against the equity in your property can be an advantageous way of raising funds for other investments. Another benefit to the borrower is that the interest costs of these investments can be written off against their taxable income.