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What are the typical mortgage terms and conditions in Canada?

There are many aspects tobuying real estate and you should approach each one with as much knowledge as possible. First, you will have the hope that your offer to purchase will be accepted. You will then go through the process of inspecting the property and obtaining your mortgage offer. Once themortgage is approved, you will sign your mortgage agreement, which has many potentially complicated terms.

It is important to understand the terms and conditions of your mortgage agreement as well as possible, as breaching some of these terms could be costly. This article outlines some of the most common variations in the mortgage contract and what you should look out for.

The important thing to do first is to read the agreement several times. You need to understand exactly what you are signing. It may be a good idea to discuss the terms of your mortgage with a mortgage broker who understands all the ins and outs. A real estate lawyer will also have additional knowledge that will be useful to you.

Mortgage with changeable (transferable) collateral or mortgage that can be assumed

The question to ask here is the likelihood of selling your property before the end of the mortgage term. Sometimes we have no intention of selling at the time of signing; however, life changes, and it can come as a surprise. Sometimes you have to aim for as much flexibility as possible.

A portable mortgage allows you to transfer your mortgage to another property. This essentially means that if you sell your property to buy another, you can probably transfer the mortgage to the new property with your current mortgage rate and terms. By doing so, you avoid the risk of penalties or prepayment fees that would normally be imposed if you break the contract before the end of your mortgage.

However, not all mortgages are transferable. As a general rule, most fixed-rate mortgages are portable, but variable-rate mortgages are not.

Another option is to have a mortgage that can be assumed. This can be advantageous if you are selling your home, but not buying a new one. An assumable mortgage allows you to transfer your current mortgage with your current terms and rates to the buyer of your property. This is a way to avoid triggering the prepayment clause in your mortgage contract. This can also be attractive to potential buyers, especially if you have signed your mortgage agreement. You got much better rates than what is currently available in the market.

Prepayment situation

As we have seen, making prepayments can be an important factor in considering the terms of your mortgage. You can discuss with your mortgage broker the prepayment options in your terms. Different mortgages and different lenders offer varying levels of flexibility regarding prepayments. Some will allow you to increase your monthly payments or make lump sum payments on your mortgage without penalty.

For example, if your mortgage has a 15/15 prepayment option, you will be able to increase your monthly payments by 15% once a year and/or make a payment on the mortgage that does not exceed 15% of the balance of your mortgage.

This can be advantageous if you have a large amount of excess cash in your bank account, as you will be able to pay off your mortgage faster without incurring any prepayment fees.

Prepayment penalties and charges

It is important to understand exactly what would cause the agreement to trigger a prepayment penalty. These are potentially significant fees that you will have to pay if you decide to break your mortgage early. The most common causes of contract termination are:

  • Refinance your mortgage before the end of the term.
  • Selling your property before the end of the term
  • Paying off your mortgage sooner than expected

We obviously discussed the fact that there are potential ways around all of these options. However, it is always important to think about the consequences of any action involving your mortgage contract.

Generally, if you have a variable rate mortgage, the cost of breaking your mortgage contract is three months’ interest. This amount will probably be more than three months’ interest if you have a fixed-rate mortgage.

Accessory or not

When you application your mortgage, you may have had the opportunity to obtain a secured mortgage. You can then obtain additional financing as part of your mortgage agreement, otherwise known as a re-amortizing mortgage. Simply put, it allows you to borrow money against your home for the life of your mortgage without going through the process of refinancing your loan.

The problem is that an accessory (collateral) mortgage is not transferable to other lenders. This means that if you want to change lenders at some point, you’ll have to go the legal route to try to find a solution.

It’s worth discussing your options with a mortgage broker to fully understand which mortgage product may be most beneficial to your personal situation. If you want to have a lot of flexibility in the future, the collateral mortgage is probably not for you. However, if you have found your dream home and want to have the financial means to make it absolutely perfect, this may be exactly the option you are looking for! Remember to read your terms and conditions carefully and consult a lawyer or broker if necessary.

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Jean-Maximilien is an expert in Canada and France about Loyalty programs, Credit cards and Travel. He is the Founding President of Milesopedia.

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