This article will provide a brief overview of the mortgage instrument itself, define certain common terms associated with mortgages, and provide a brief overview what may trigger the foreclosure process.
Almost every person purchasing a house in Alberta will do so by obtaining a mortgage. However, not every current or prospective home owner understands the nature of the mortgage attached to their home.
What is a Mortgage?
A mortgage is a contract pursuant to which a borrower pledges his land as security for the repayment of money he has borrowed from a lender. This contract spells out the rights and obligations of both parties, such as the interest rate, amount and frequency of payments, and when the balance becomes payable.
- Amortization Period – this is the period of time it will take a borrower to repay the balance of the principal owed on the mortgage. This can take longer than the term of the mortgage. During shorter amortization payments, while borrowers tend to make higher mortgage payments, borrowers will also pay off the mortgage in less time and pay less interest overall.
- Fixed Rate v. Variable Rate Mortgages – for fixed rate mortgages, the interest and mortgage payments remain unchanged throughout the entire term of the mortgage. Whereas, with variable rate mortgage, the interest rate charged under the mortgage will vary as the prime lending rate (usually based on the Bank of Canada’s lending rate) changes. Changes to interest rate may also affect the payment amounts and the amortization period.
- High Ratio Mortgages – these are mortgages where the initial principle advanced is greater than 80% of the value of the real estate property. To advance funds pursuant to these mortgages, lenders tend to require the borrower to obtain mortgage default insurance.
- Principal v. Interest – the principal is the amount initially borrowed under the mortgage, while interest is the amount paid on the borrowed money and is usually based on an annual percentage rate.
- Term – this is the period the lender will lend the money to the borrower. At the end of the term, the full amount owing pursuant to the mortgage, including principal and interest, becomes due. The lender can either demand payment or enter into a mortgage renewal agreement with the borrower to extend the term of the mortgage.
Default and Foreclosure
In the event the borrower defaults on a terms of the mortgage the lender will have the right to commence foreclosure proceedings to enforce its security. Common acts of default include missed payments, failure to repay the balance owing at the end of the term, or failure to pay municipal taxes, among others. Unless the mortgage is an insured, high-ratio mortgage, the lender’s right to recovery under the mortgage is limited to the lands (or the value of the lands) secured by the mortgage.
Overall, mortgages are common instruments that allow most persons to purchase a home. Every current or prospective homeowner should be aware of their rights and obligations pursuant to their mortgage.
If you have any questions about purchasing a home or would like to better understand your rights, we welcome you to contact our office at 780-469-0494 or email us directly at email@example.com.