February 11, 2007, 11:02 am

The Mortgage

by: admin    Category: Types of Financial Products
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The Biggest purchase of your life will surely be your house. As most individuals can’t afford the full payment, banks created several financial products to fulfill this need. The most common type is called a mortgage. In this section, we will do a quick overview of this kind of credit before we can go deeper in the characteristics.

Definition

The mortgage is an amount of money granted to an individual purchasing a property. This property can be a house, a condo or even a rental property. In order to secure its loan, the financial institution will take a 1sr rank lien on the property. In other words, the lender is legally binding the property to the mortgage. In the event of default, the creditor will obtain legal possession and right of use of your property. You would therefore loose your asset and the bank will pay itself with the sale of the property.

Since mortgages are contracted for significant amount, they have also bigger amortization. Mortgages have a term and an amortization. The term determined the date of renewal. It usually goes from six months to ten years. As previously mentioned in another article, the amortization represents then length of the loan. As we are dealing with more substantial amount than with the personal loan, the amortization is longer. It was recently increased up to forty years depending of the institution and the type of product.

Needs

The most common need for a mortgage is obviously to buy a property. However there are other needs that can be fulfilled by this product. As an example, an individual could apply for a mortgage to purchase another asset. If he has enough equity in his main residence, he can give it as collateral to purchase a second residence, a rental property or even a car. He would definitely get better lending conditions (amortization, rate, flexibility, etc). Another usage is to consolidate debts. Since de loan will be secured, the individual will get a better rate than with a regular consolidation loan.

Qualification

As mortgages are secured loans, it is easier to qualify for. Most banks will look at your TDSR (Total Debts Servicing Ratio). This ratio should be lower than forty percent. However, if your ratio is higher, financial institutions might approve a lower percentage of financing. Liquid assets like mutual funds, GIC’s or stocks will also be considered to compensate for a high debt ratio. Credit rating and net worth will also be part of the picture. Showing a growing net worth on your balance sheet will demonstrate that you can accumulate assets. Therefore, you are financially mature enough to respect a mortgage contract and all other property expenses. Adding your spouse on the loan will also help out. Banks are more comfortable with more than one individual on the mortgage documents.

Negotiation

The mortgage industry is highly competitive. Therefore, it gives you the opportunity to negotiate several points on you loan. I would suggest you meet with two to three different institutions in addition to meeting a mortgage broker. They will offer different products, rates, terms and one might suits your interest more than the others. The mortgage broker will take your file and shop around for the best rate in town. That requires less effort and you might end up with a better rate than with your negotiation skills. As mentioned in my previous articles, consolidating all financial products with the same institution will give you better lending conditions. A good credit rating could also help to reduce the interest rate. In the end, it is really important that you understand different products offer by banks in order to select the kind of mortgage that suits you best.

The mortgage is probably the biggest loan you will ever sign for. Therefore, it is really important you understand every characteristics of each mortgages. You can negotiate the rate, the term and the amortization in order to get the best deal possible. In the end, you mortgage will bring you to your dream: ownership.

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