This mortgage is for an amount which does not exceed 75% of either the appraised value of the property or the purchase price, whichever is lower. Your down payment is a minimum of 25% of the purchase price.
With this type of mortgage, you contribute less than 25% of the home’s cost as a down payment and as little as 5%. A high-ratio mortgage requires mortgage loan insurance. CMHC offers Mortgage Loan Insurance for a premium of between 0.5% and 3.75% of the mortgage amount. This premium can be added to your mortgage payments or paid in full on closing.
This usually has a higher interest rate and a shorter amortization than a first mortgage. Secondary financing is often used to make renovations to a home. You can achieve mortgage freedom sooner by increasing the frequency of your payments. By making payments every two weeks, instead of monthly, a 25-year mortgage can be reduced to only 20 years.
Assuming an Existing Mortgage
You take over the vendors mortgage as part of the price you pay for the house. Assuming an existing mortgage is quick and saves you money on the usual mortgage arrangement fees, such as appraisals and legal fees.
When you assume a mortgage, you don’t have to arrange financing from another lender and the rate on an existing mortgage may be lower than the prevailing market rate. Sometimes, if it is specified in the original mortgage agreement, a mortgage can be assumed automatically. If not, you may have to qualify with a lender first.
Vendor Take Back (VTB) Mortgage
This means the vendor lends you the money to purchase the home. It’s basically a second mortgage. For example, on a home that costs $150,000, if the vendor has an existing mortgage of $70,000 that you can assume and you have $40,000 for a down payment, the vendor may lend you the outstanding $40,000, which you pay back monthly.
The vendor may be able to offer this loan at less than bank rates. Some vendors will sell this mortgage to a mortgage broker instead of holding it themselves.
Interest Rate Buy Down
A vendor — usually a new-home builder — pays the lender a lump sum to lower the mortgage interest rate by up to 3% over a fixed term, usually one to two years. A payment of $2,000-$3,000 reduces your mortgage rate by about 2%, increasing the mortgage amount for which you qualify.
New-home builders may offer buy-downs or discounts on the mortgage rate to encourage sales, but vendor financing is usually not renewable. You would then have to be prepared to pay the going market rate when the mortgage is renewed. However, the builder may add the amount into the price of the home and you may end up paying a higher mortgage principal.
Rate of Interest
Interest is the cost of borrowing money and is paid to the lender. Mortgage interest rates are affected by the prevailing market interest rates. Mortgage rates are either fixed or variable. A fixed rate is locked in so that it will not rise for the term of the mortgage.
A variable rate will fluctuate. The rate is set each month by the lender, based on the prevailing market rates. Your monthly payment is fixed to be the same each month for the term of the loan, but the percentage of each payment that goes toward the interest and the percentage that pays down the principal change.
A variable rate can be a good choice if rates are high when you arrange your mortgage and fall afterwards. But if rates rise, you may want to convert to a fixed rate. Bear in mind that this can cost you a cash payment penalty. If you select a variable rate, your lender may restrict the mortgage amount to 70% of the purchase price of the home and require a higher down payment on either a conventional or a high-ratio mortgage. Also, some lenders offer a protected or capped variable rate. This means your interest rate will not rise above a predetermined limit. However, you usually pay a premium for this protection.
The term of a mortgage is the length of time that certain factors, such as the interest rate you pay, are set at a negotiated level. Terms usually last anywhere from six months to ten years. At the end of the term, you either pay off your mortgage or renew it, possibly renegotiating its terms and conditions.
Generally, the longer the term, the higher the interest rate. Many experts suggest you select a long term if interest rates are rising. If rates are falling, you may want to select a short term and then lock in the rate, when you think rates won’t go any lower. Note that the term is not the amortization period.
This is the amount of time over which the entire debt will be repaid. Most mortgages are amortized over 15, 20 or 25-year periods. The longer the amortization, the lower your scheduled mortgage payments, but the more interest you pay in the long run.