Basic Mortgage Concepts

Learning Outcomes

1. Explain the term “mortgage”

2. Explain the role of a Mortgage Broker
3. Explain what constitutes the mortgage contract
4. Describe the documents related to the registration and discharge of a mortgage
5. Explain how mortgages are ranked (1st, 2nd, etc.)
6. Describe the need for mortgage financing
7. Discuss the 2 main purposes for mortgages: purchasing and financing
8. Differentiate between a conventional and high ratio mortgage
9. Differentiate between a standard mortgage and a collateral mortgage

1. What is a mortgage?
 Mortgage: A loan secured by real property.
o Loan: the amount of money advanced to a borrower
o Secured: this means a Charge is registered on the title of the property to secure
the loan. If the borrower defaults on the loan, the lender has the right to
exercise its interest in the security.
o Real Property: the home and the land upon which it resides, which differentiates
other types of property such as personal property (chattels)

2. The Role of a Mortgage Broker

 Assesses a borrower’s financial goals with respect to real estate financing
 After detailed analysis, provides solutions to meet borrower’s financial goals by acting
as an intermediary with the appropriate lending source
 Has 2 clients: the Borrower and the Lender

3. The Mortgage Contract

 Standard Charge Terms: a document created by the Lender that must be registered
with the Director of Titles under the Land Titles Act.
o Contains the lender’s and borrower’s covenants, and remedies available to the
lender if the borrower doesn’t meet their obligations.
 Borrower Covenants: the borrower’s obligations in the mortgage contract.
o Repay the loan
o Insure the property
o Maintain the property
o Not to commit waste
o Pay property taxes
o Follow the terms of the Standard Charge Terms
 Lender Covenants: the lender’s obligations in the mortgage contract
o Certificate of Discharge
 o Assignment of a mortgage
o Provide quite possession

4. Mortgage Registration Documents

 The Charge/Mortgage – the instrument used to register the debt/loan against the
borrower’s property, forming the security of the debt
 The Discharge or Charge/Mortgage – the instrument used to discharge the debt/loan
against the borrower’s property, releasing the lender’s interest in the property

5. Mortgage Ranks
 The rank of a mortgage refers to the order in which the mortgage was registered. First
mortgage was registered first.
 Mortgage rank has nothing to do with the amount of the mortgage
 Most lenders will not advance a second mortgage that is larger than the first mortgage,
or if it exceeds a max percentage of the first mortgage
 Typically, the interest rate on a mortgage increases with the rank due to the increased
level of risk attached to it.
 If the borrower defaults of the first mortgage, the first mortgage lender begins the
Power of Sale process. When the property is sold, the proceeds are used to pay the first
mortgage, and the remainder pays the subsequent mortgages in order of rank.

6. The Need for Mortgage Financing

 Housing costs are increasing exponentially and it is not plausible for the average
Canadian to save the purchase price of a home.
 It is becoming increasingly difficult for individuals to save for a down payment.

7. The Purpose of Using a Mortgage

 Purchase – mortgage is used to assist in purchasing a home in combination with a down
payment, or to borrow the complete purchase price
o Home Buyer’s Program (HBP): a program from the CRA that allows a first time
buyer to use up to $25,000 of their RRSPs towards a down payment without tax,
as long as the amount removed is repaid within 15 years.
 First time buyer – individual or their spouse/common-law who hasn’t
owned a home used as their principal residence during the period
between January 1 of the fourth year before year of RRSP withdrawal,
and ending 31 days before the withdrawal.
o Home Buyer’s Tax Credit (HBTC): since 2011, the federal government provides a
non-refundable tax credit for certain home buyers that acquire a qualifying
home
 The HBTC is calculated by multiplying the lowest personal income tax rate
for the year by $5000. The current max credit is $750.
 Refinance or ETO
 o Refinance: increasing the size of the mortgage or renegotiating the terms in
some fashion.
 the refinanced mortgage will reflect the lender’s current rate of interest,
which may be higher or lower than the borrower’s current rate
 if borrower refinances during the term of the mortgage, they may have to
pay a penalty for repaying the mortgage before the end of the
contract/term, unless the mortgage is fully open.
o Equity take-out (ETO): when a borrower increases the size of their mortgage or
takes out a second mortgage or another debt against the property, such as a LOC
 Often used to consolidate higher interest rate debt
 If used to pay off other debts, the lawyer, on closing, will issue cheques to
the creditors being paid out of the proceeds.
 Equity can be taken out of a property to purchase other assets like a boat
or cottage or any other reason allowed by the lender.

Conventional vs. High Ratio Mortgages

 High Ratio Mortgage: mortgage in which the LTV exceeds 80%
o A purchase with less than 20% down payment; A refinance where there is less
than 20% equity in the property
o For high ratio mortgages provided by federally regulated banks, the bank must
obtain mortgage default insurance;
 the premium is typically added to the mortgage amount, which will
increase the mortgage payment
o For high ratio mortgages not provided by federally regulated banks, mortgage
default insurance is not required.
o “Self-insured” lenders will just charge a lender’s fee (self-insured fee) that
similar in amount to the mortgage default insurance that is typically used to
create reserve fund that helps offset losses suffered by a borrower’s default.
 Conventional Mortgage: mortgage in which the LTV is 80% or less
o A purchase with 20% or more down payment; A refinance where there is more
than 20% equity in the property.
 Loan to Value = Mortgage Amount/Property Value
Req’d Mortgage Amount = Purchase price – Down payment

Collateral Mortgage
 Promissory note with a lien on the property for the total amount registered.
 LTV regulations don’t apply so you can register more debt against the property than the
property is worth
 Allows for the “re-advancing” of principal, like a revolving credit, which means the
balance can rise.
 Allows lender to lend more money to borrowers, based on their qualifications, after
closing without registering a new mortgage
 o This is because the current mortgage is registered at a higher amount than is
actually advanced.
o The rate can also be increased because the rate on the collateral mortgage is
registered at a higher amount than is charged
 Most chartered banks won’t allow transfers of collateral mortgages from other
chartered banks
o Results in legal fees over and above the normal fees for a straight transfer on
renewal because the collateral mortgage must be fully discharged as opposed to
just simply being transferred
o
Glossary
Mortgage: a loan secured by real property

Charge: a legal document outlining the terms of the loan)

Title: term referring to the ownership of a bundle of rights that an owner has in a property;
typically a fee simple ownership.
 Anything registered “on title” means it is officially registered against the ownership of
the property through the Land Titles Office, where property ownership is recorded.
