Understanding a mortgage: conventional mortgages and accessories

When you borrow to buy a home or refinance your current home, you agree to give it as security for the mortgage loan. As a result, the lender has the right to take possession of your property if you do not meet the conditions of the loan agreement.

To understand your mortgage, you should know about conventional mortgages and accessories given to you by the mortgage program of the lender, which is usually the bank.

Conventional mortgages and accessories

The warranty is registered at the registration office of the province or territory concerned. To qualify this operation, some provinces speak of the registration of a mortgage (in Quebec), also called “right” or “charge” encumbering a building. Two types of mortgages can be registered: the conventional mortgage (also called “mortgage ordinary “) or collateral mortgage.

Recorded amount:

 – A conventional mortgage is registered according to the actual amount of the mortgage, i.e. the

amount you borrow. 

The specific conditions of your mortgage program (e.g., the amount of the loan, the interest rate, the term of the loan and the amount of mortgage payments) as well as the conditions relating to the guarantee (your obligations and the rights of the lender) are included in the conventional mortgage which is recorded.

 – A collateral mortgage can be registered depending on the actual amount of the mortgage or any amount not exceeding the full value of your property.

Registering a mortgage in excess of the loan mortgage gives you the option to borrow again later.

Ancillary mortgages are used when part or all of the loan consists of a revolving credit facility, for example a line of credit.

Borrow additional sums:

 – If you later want to borrow more money from of your mortgage, you will have to redo one

apply for a loan and be eligible for an increase of your mortgage. 

You will also likely pay the discharge fees for your current mortgage and the registration fees for the new mortgage for a higher amount. Legal fees and costs administration could also apply.

 – If you have a collateral mortgage, you can borrow additional sums up to the amount recorded without that it is necessary to register a new mortgage, provided that you be eligible for a new loan. 

The total amount borrowed (mortgage, plus any loan or line of credit secured by collateral mortgage) cannot exceed the amount recorded. A loan with collateral mortgage can save you legal fees as well as registration fees and administration, in addition to giving you the flexibility to borrow other are as needed.

The most popular questions about mortgage loans

  1. When mortgage rates are low, the cost of capital is low. Is no time to buy a property?

One must be careful with this type of reasoning, as it only applies for mortgage loan. Do not forget that a house is also financed with your personal money (down payment and principal portion of mortgage payments). Low mortgage rates indicate that inflation is under control. In these circumstances, the rates of return obtained in stock market investments (including the returns of some mutual funds) are generally very good because the market stock market likes periods without inflation.

So the cost of debt may be low, but the cost of waiving your capital will be high. If your property is mainly financed by a mortgage (85% or 90%), the impact of the opportunity cost is small, but in the

other cases, this is a cost not to be overlooked (you should also discuss this topic indirectly if the Interest rate is not the rate of return).

  1. It is astonishing that, in a book on housing, there is no question at all reverse mortgages. What do you think of this financial product?

First, a clarification: when we talk about reverse mortgage, it is not at all housing issue, but rather debt management and investment strategy. Same if the reverse mortgage “sellers” claim that they allow them to remain in his house, it is only a selling point aimed at keeping the customer away from the real decision criteria. The reverse mortgage is a debt and it represents the beginning of

the erosion of an individual’s capital. If that’s what he wants and this decision makes part of an overall strategy, this is entirely possible. 

Otherwise, you have to think about it before acting. It is quite amazing that this product is becoming fashionable. After sacrificing themselves for years by making regular payments (and sometimes advance payments) in dreaming of the blessed day when their house will be paid, here are some owners starting again reverse the process and increase the balance on their mortgage. In that case, why sacrifice yourself and wait until the house is paid to take advantage of this money? 

The owners can make this choice at any time in their life: they only have to increase the amortization period of their loan, so as to have a payment lower mortgage and thus more money for other elements of their quality of life, or they only have to regularly negotiate the amount of their loan upwards, so as to be able to use the money from this debt for any other expense.

A reverse mortgage is simply a loan, the cost of which is equal to the interest rate. If this sum is used to improve his quality of life, interest is not deductible tax; their real cost is therefore as high as when a “normal” mortgage was in progress. The person who signs such a loan will collect money that will come increase the debt balance. But without realizing it, the interests are added to these sums. 

The debt balance therefore constantly increases since the annuitant does not make any payment.