Relationships and Mortgages

Why it’s important for BOTH parties to educate themselves

In my many years as a mortgage broker, there is only one phrase guaranteed to make me cringe:

My spouse/partner/significant other handles our mortgage; I don’t know anything about it.

The reason it bothers me so much is because in life, we don’t know what’s going to happen from one moment to the next.  In a perfect world, there is no death or divorce and we all celebrate at least 50+ years with our partners and then walk off into the sunset together.  However, that’s not always the reality — death and divorce are real.

My life philosophy is “plan for the worst and hope for the best.”  That said, this article is geared towards people who don’t understand mortgages, as well as to anyone who allows their partner to handle their finances, in particular their mortgage(s).

Mortgages are not hard to comprehend;  you just need to familiarize yourself with the following key terms:

Amortization – Length of time over which the debt will be repaid.

Blended Payment – A mortgage payment that includes principal and interest. It is paid regularly during the term of the mortgage. The payment total remains the same, although the principal portion increases over time and the interest portion decreases.

Closed Mortgage – In some cases, a closed mortgage cannot be paid off, in whole or in part, before the end of its term. In other cases, the lender may allow for partial prepayment in the form of an increased mortgage payment or a lump sum prepayment. However, any prepayment made above stipulated allowances may incur penalty charges.

CMHC (Canada Mortgage and Housing Corporation) – A Crown corporation that administers the National Housing Act for the federal government and encourages the improvement of housing and living conditions for all Canadians. The CMHC also develops and sells mortgage loan insurance products.

CMHC Insurance Premiums – When a home buyer takes out a mortgage loan with less than a 20% down payment, an insurance premium is paid to CMHC, and a mortgage loan insurance policy is issued to the lender. The CMHC Mortgage Loan Insurance premium is calculated as a percentage of the loan and is based on a number of factors such as the purpose of the property (owner-occupied or rental), the type of loan (e.g. purchase/construction or refinance loan), the ability of a self-employed borrower to supply income verification, and the size of your down payment (i.e. the higher the percentage of the total house price/value that you borrow, the higher percentage you will pay on insurance premiums).

Compound Interest – Interest calculated on both the principal and the accrued interest.

Conventional Mortgage – A mortgage loan up to a maximum of 80% of the lending value of the property. Typically, the lending value is the lesser of the purchase price and market value of the property. Mortgage insurance is usually not required for this type of mortgage.

Debt Consolidation – Using the equity in your home to pay out other debts such as higher interest credit cards.  This can be done prior to the end of your current mortgage or at time of renewal.

Fixed Mortgage Interest Rate – A locked-in rate that will not increase for the term of the mortgage.

High-Ratio Mortgage – A mortgage loan higher than 80% of the lending value of the property. This type of mortgage must be insured — by CMHC or a private company, for the benefit of the approved lender, against payment default.

Interest – The cost of borrowing money. Interest is usually paid to the lender in regular payments along with repayment of the principal (loan amount).

Interest Rate – The price paid for the use of money borrowed from a lender.

Maturity Date – The last day of the term of the mortgage. On this day, the mortgage loan must either be paid in full or the agreement renewed.

Mortgage – A mortgage is a security interest given in the property you are purchasing which secures repayment of the loan related to the property. That security interest is discharged on payment of the principal and interest owing on the loan in accordance with the mortgage document. In Quebec, “mortgages” are called “hypothèques”.

Mortgage Payment – A regular payment to the lender that includes both the interest and the principal.

Mortgage Term – Length of time that the mortgage contract conditions, including interest rate, is fixed.

Open Mortgage – A flexible mortgage that allows you to pay part of or all of it before the end of its term.  An example of an open mortgage is a Home Equity Line of Credit.

Payment Schedule – The monthly, bi-weekly, or weekly mortgage payments.

Principal – The amount that you borrow for a loan (not including interest).

Renewal Date – The end of a mortgage contract in which contract conditions, such as interest rate,  are fixed.

Term – Mortgage term is the length of time that the mortgage contract conditions, including interest rate, are fixed.

Variable Mortgage Interest Rate – Fluctuates based on market conditions, but the mortgage payment remains unchanged.

Personally, I think people shy away from learning about mortgages because they feel it’s too complicated.  However, as you can see, there is nothing overly difficult to understand. Once you know the basics, you can learn the rest in time.

I truly believe that knowledge is power and learning about your finances is essential to you and your family.  Who knows? Perhaps after familiarizing yourself about your mortgage you’ll feel like tackling your investment portfolio.

Wishing you a lifetime of happiness and financial bliss.