What is a Mortgage?

Although lots of people have mortgages, very few people could probably explain to you what is involved in the different types available, or even name all of them. This post won’t be naming all of them, but will be focusing on a select few.

The word mortgage comes from two French words “Mort” and “Gage”. Mort means death, and gage means pledge. No the bank is not asking you to cross your heart and hope to die, rather, the word means that you pledge to pay off the loan until its death (aka it is paid off). On this rather morbid note, let us move on to the various types.

Open Mortgage:

This type of mortgage allows you to make payments above those that are defined as your monthly payment. This means if your monthly payments are $500 a month, you can pay $600 or even a $1000. You may incur a penalty depending on the type of open mortgage you have.

                Types of Open Mortgages:

·         Fully open – you don’t incur a penalty, or give notice

·         Open with flexible penalty or notice

·         Limited Open privilege -  No penalty or notice but a set amount over you are allowed to pay

·         Limited Open privilege with fixed penalty or notice

I love open mortgages for the terms. If you are going to buy a flip property or short term, and you are not sure quite how long you will hold onto it, this is an ideal option. However, you will pay a much higher interest rate for this privilege.

Closed Mortgages are those that do not let you pay any amount in advance of the scheduled monthly payments. They usually have the lowest interest rate, however, if you sell before the term of the mortgage is up you may have to pay a high penalty. The penalty is the interest differential and will be 3-5 times bigger than the monthly interest.

This is normally what your bank will offer you.

Creative Financing Mortgages

These are all more difficult to obtain, but if you come talk to us, we can point you in the right direction.

Wrap Around Mortgages

If the seller of the property has a favourable mortgage, the seller can offer the buyer a wraparound mortgage that includes the smaller amount left. This means the buyer pays the seller the monthly payments and the seller is responsible for paying the bank. If the buyer defaults for any reason, the seller has the option of taking back the property. It is important to have a good lawyer involved on such a transaction to make sure you are well protected.

Keep in mind that wraparound mortgages are illegal in some provinces.

Reverse Annuity Mortgage

This is an option favoured by retirees. Essentially, you take out a mortgage on the equity in your home. In return, the bank sends you monthly payments that are tax free. This option puts you a little more in debt every month.

Double-Up

This type of mortgage lets you double your monthly payments as often as you want with no fee or penalty. Depending on the arrangements, the amount you double up is usually applied directly to the principle.

This type of mortgage is also incomparably flexible. Just because you doubled up one month does not mean you have to the next month. Furthermore, if you double up at some point during the year, you can skip a payment later on in the year, although this depends on the bank.

Umbrella Mortgage

This type of mortgage essentially combines all the various mortgages on various properties and combines them into one. You make one payment. This type of mortgage will often have some type of penalty involved and is not one we would recommend.

Piggy Back Mortgage (Oink)

A piggy back mortgage is where you take out two or more mortgages at the same time for the same property.  The first (or senior) mortgage covers a percentage of the property, and the others cover the rest (or most of the rest). The second and third mortgages piggy back on top of the first. If the second mortgage is registered on title you cannot cover the rest.

Leasehold Mortgage

This is a mortgage on a property where you own the building but not the land.