Mortgages on property

The basic mortgages available and what they are.

You’ve gone out and bought a new home, but can’t afford to fork over the $300,000 in full right away, so you’ve applied for a mortgage with your financial institution. You’ve been approved? That’s great! Was it the right mortgage?

Essentially, a mortgage is a loan. Mortgages can be taken out on any property owned by someone – a boat or a car for example – but typically are used for real estate. Like everything in life, there are ups and downs to taking out a mortgage on real estate, regardless of whether it is for personal or commercial use. The positive is that whoever is purchasing the property doesn’t have to fork over the full amount right away and can make monthly payments until it is paid off. The downside is that interest is going to build up on the balance and the amortization period chosen determines just how much.

The amortization period of a mortgage is how long the term is. This time period is usually chosen by the person taking out the loan. Each individual financial institution determines the minimum loan period and the maximum loan period – for example, in Canada, the minimum is usually 15 years and the maximum recently was moved up to 35 years. The United States has a fairly similar demographic as Canada, and while most mortgages have amortization periods of 40 years, some banks have started toying with loan period of 50 years.

You can’t have a mortgage without the rates involved. No bank would willingly approve a mortgage loan without getting anything in return. That $300,000 you just paid for a new home? If you have a fixed interest rate of 4.5%, assuming you make all your payments on time and pay off extra when you can, the bank is going to make $135,000 in interest. That’s almost half the cost of your new home!

There are many types of mortgages, including but not limited to:

Fixed Rate Mortgages have set interest rates. If your mortgage starts with 4.5% interest, it is going to stay at 4.5% interest even if the interest rates increase or decrease over time.

Variable Rate Mortgages are just what they sound like. When interest rates increase or decrease over the loan term, your interest rate will increase or decrease with it. So your payments and interest will vary from month to month.
Pre-Approved Mortgages allow you to shop around for your new home or property and know just how much you can afford!

Remember that when you take out a mortgage on a property, it belongs to the bank you took the loan from. This bank can repossess the property at any time you fall into arrears – have missed several payments. Be sure to do your research before applying for a mortgage and know what you can afford. With the many types of mortgages that are available and the right guidance from your financial adviser, it is easier to choose the mortgage that fits your financial position.