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RateSupermarket.ca > Mortgage rates > Mortgage guide

Mortgage guide index

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What is a mortgage?

Very few people can afford to purchase a home or property on their own without any financial help. That's where a mortgage comes in handy. According to wikipedia, a mortgage loan is: "a loan secured by real property through the use of a mortgage (a legal instrument)."

A mortgage loan typically amounts to most of the value of a property or home, and allows people to buy, live and use property without paying the total value of the property all at once. In exchange, the mortgage holder is required to pay a set amount of interest on the loan.

The person/people purchasing the property don't actually own it until the mortgage is fully paid off, the mortgage lender (i.e. the bank) effectively owns it in the meantime.

Most mortgage lenders require a down payment, which is a percentage of the total value of the property you are buying, in order to loan you the money. For example, if a property was valued at $100,000 and you needed to put down a 10% down payment, this would equal a $10,000 down payment ($100,000 x 10%). This would result in the mortgage lender providing you with a $90,000 mortgage ($100,000 property value - $10,000 down payment) and a loan to value (LTV) ratio of $90,000/$100,000 = 90%.

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Well, like all loans, there is a catch - interest. Your mortgage must be paid back with interest, which is the profit the mortgage lender makes on the loan.

Mortgage lenders provide various repayment options which make up the different mortgages that are available.

In Canada, if you have a down payment of 20% or more of the property purchase price, you will need what is called a conventional mortgage. If your down payment is less than 20% of the property purchase price, you will need a high ratio mortgage, which is unique to Canada.

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A high ratio mortgage means that the lender is providing more money to purchase the property, as the borrower is only providing a small down payment, this results in higher risk for the lender. Therefore, the lender requires protection in the form of insurance. This insurance is called mortgage default insurance and it protects the lender if the borrower can't pay back the loan. The insurance premium is paid for by the borrower.

There used to be quite a few mortgage default insurance providers in Canada, but with the recent financial crisis, some of the recent US competitors have pulled out of the market leaving Canadian Mortgage and Housing Corporation (CMHC) and Genworth Financial as the main Canadian mortgage default insurance providers.

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There are 3 main types of mortgages:

• Open
• Closed
• Convertible

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