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MORTGAGE FINANCING

There are several things that you should consider when you are thinking about placing a mortgage on your property.

Interest Rate:

Consider both short and long range trends in interest rates when choosing the length of the term of your mortgage. Choose longer terms when rates are low and shorter terms when rates are high. It is always hard to predict what rates will do in the future but reading about financial trends may allow you to make an educated guess about the path that rates are likely to follow. Check the compounding period - the more frequently interest is compounded the higher the effective rate will be. A mortgage bearing interest at the rate of 10% compounded monthly will have an effective annual rate of 10.2017%. Most mortgages are compounded semi-annually. Interest rates may be fixed or floating - if this is the borrower's choice you should lock in the rate in a rising market and let the rate float in a declining market. Most conventional residential mortgages are fixed and most commercial mortgages carry a floating rate.

Term:

Most lending institutions offer a term of up to five years, with some now offering seven years, at the option of the borrower. The rate of interest and prepayment privileges will vary with the term that you choose. Each of these elements must be considered in deciding on the appropriate term for you. At the end of the term the balance owing on the mortgage will be due and you will negotiate a new term with your present lender or arrange new financing with another lender.

Amortization Period:

The amortization period determines how long it will take at current payments to pay the mortgage in full. The longer the amortization period, the greater the amount of interest cost to the borrower over the long term. A longer period will reduce monthly payments but result in monthly payments which are almost purely interest and do nothing to reduce the mortgage debt. If your budget allows it, larger payments are recommended.

Payment Frequency:

Most mortgage documents are prepared on the basis of monthly payments. However, most lending institutions allow borrowers to pay on a weekly or biweekly basis. More frequent payments significantly reduce the time it takes to pay off a mortgage in full. If your budget allows it, more frequent payments are recommended.

Prepayment Privileges:

It is always preferable if the borrower has the privilege of prepaying all or part of the principal at any time without notice or bonus. However, most lenders will only allow limited prepayments (for example 10% of the original principal amount once yearly) and will charge a penalty (for example three months interest) on any other prepayment. Keep in mind that there are no penalties for a substantial prepayment when a mortgage is renewed at the end of the term. If you anticipate making a large prepayment arrange for a mortgage which has no prepayment penalty or a short term.

Portability and Transferability:

Many lenders now provide an option to transfer your mortgage to a new property if you sell your present home. This allows you to avoid a prepayment penalty on a sale and transfer a favourable interest rate to your new property. It is less common for lenders to allow a purchaser of your property to assume your mortgage, especially if the interest is less than the current rate. It is very important to make sure that anyone assuming your mortgage is solvent because if they can't pay the mortgage off and the value of the land is insufficient to pay the lender, then you will bear the responsibility of paying even if you are no longer the owner. Check with your lender to find out if these features are included in your mortgage.

Mortgage Assumption - Be Careful

If you sell your house and the purchaser takes over or "assumes" your mortgage, are you off the hook? NO! You could still be liable until the mortgage is paid off. Before agreeing to an assumption you should speak to your lawyer to make sure you have a full understanding of all your potential liabilities.

Additional Costs:

In addition to legal costs for the preparation and registration of the mortgage you should check to determine if any of the following special costs will result: application fees, brokerage fees, appraisal fees, survey costs, life and disability insurance premiums, or assumption fees. When the mortgage is paid in full there will be an additional charge for the preparation and registration of the discharge of the mortgage.

We recommend that you review your proposed financing commitment with a Solicitor in your area prior to signing. If you are in the Midland, Penetanguishene or Georgian Bay area, DEACON TAWS LAW FIRM would be pleased to review your financing commitment with you at mutually agreeable time.

 

The foregoing articles are meant for informational purposes only and are not to be taken as legal advice. In the case of any questions, issues or needs arising from the above please contact us at Admin@deacontaws.com, Phone: (705)526-3791 or Fax: (705)526-2688

 

 

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