Canadian Mortgage Penalties
The Canadian mortgage trends have shown over the years that there is a large majority of people who prefer to buy houses through mortgages. There are several advantages of this mode of financing the purchase of a home. But there are many other factors which the home buyers need to consider.
The Canadian mortgage rules are extremely important to understand. This is because they are the basic determinants of whether the home buyers can actually qualify for a mortgage or not. Same is the case for mortgage brokers and brokerage firms. Home buyers need to identify suitable brokers who will help in processing their mortgage application.
The Canadian mortgage and housing market has grown steadily over the years. It is necessary therefore, that all home buyers should understand the basics of these loans. One key aspect which tends to get ignored somehow is the affordability factor.
People only get attracted by the low mortgage rates and leave the rest of the calculations to the lenders and brokers. They are unaware of their total monthly expenditure and their debt ratios. They tend to take up high-ratio mortgages too. These require insurance from the Canada Mortgage and Housing Corporation. What most home buyers do not understand is that these insured mortgage loans actually end up increasing the carrying costs.
It is also important to note here that the mortgage penalties play a huge role in the mortgage transaction. These too are usually ignored y the home buyers. The Canadian mortgage and housing market has faced trouble in the past due to which many home owners were unable to pay off their mortgages. This is one reason why the government keeps emphasizing the need to understand and comprehend the Canadian mortgage rules so that such situations can be avoided in future.
Types of penalties
In the Canadian mortgage and housing market there are basically two types of penalties that are charged. The first is known as the interest differential and the second is known as the three month interest penalty.
The type of mortgage that a borrower has taken at the time when the loan is paid off or the terms are negotiate help determine two major factors in the case of penalties. It depends on the terms of the agreement whether a borrower even has to pay a penalty or not and the type of penalty that is applicable.
Type of Mortgages
The two basic types of mortgage loans available in the Canadian mortgage and housing market have different criteria when it comes to penalties. For open mortgages, the borrowers have the option of paying additional amounts. These payments can even be as high as the mortgage balance without any penalties being charged.
In the case of closed mortgages, interest rates are usually lower. However, there are policies against making extra payments that exceed the monthly amount. For borrowers who would like to pay off their closed mortgages early, the mortgage contract includes the clause where penalties may be charged by the lender.
The Interest Rate Differential
The closed mortgages offered in the Canadian mortgage and housing market seems to be attractive options for home buyers. This is because these mortgages have lower interest rates than open mortgages. The lenders and borrowers agree on a certain rate of interest which is included in the contract as well.
If a certain borrower tries to pay off their mortgage amount earlier than the agreed period, the lender will charge a penalty. The penalty amount will be based on an approximation of the investment loss which will be borne by the lender. The formula used to calculate this amount is often complicated.
According to the Canadian mortgage rules, it is preferable if the amortization periods for mortgages are kept lower. However, if a brooder is paying a closed mortgage earlier than the agreed period, it would be a loss. In such situations, the lenders calculate the investment loss based on the interest rate being offered to the borrower, the new rates being offered in the market along with the number of years remaining on the loan payment.
The Three Months Interest
This type of penalty is also very common in the Canadian mortgage and housing market. For this mortgage penalty, the lender takes into consideration the mortgage balance. This is multiplied by the annual interest and divided by four. The result amount is known as the three months interest penalty. The amount charged under this penalty calculation is significantly lower than that of interest differential. It also goes to show how important it is to verify the type of penalty being charged.
A Better Understanding
In 2010, the Canadian mortgage rules were revised and gave the lenders the authority to charge which ever type of penalty they preferred. When negotiating the terms of mortgage agreements with lenders, the borrowers need to consider this factor as well.
For the Canadian mortgage and housing market many borrowers tend to overlook some key factors in the mortgage agreement. Because of lack of knowledge and understanding of the Canadian mortgage rules, they are unable to make well-informed decisions and cannot negotiate with the lenders properly.
Many banks and mortgage lenders now offer a very useful tool known as the mortgage penalty calculator. Canada and other developed countries have experienced high levels of growth in their mortgage sectors. For this reason it becomes difficult to regulate the sector and due to this there are many problems that are being faced. By using these calculators, home buyers can easily assess themselves and their mortgage terms.
In order to reduce their own risk, home buyers need to understand the Canadian mortgage and housing market completely. Exploring alternatives and options will help in better decision making too. They should always consider all the aspects that are covered by the mortgage agreements being offered by different lenders and give special attention to the penalties that are being charged by each lender. The Canadian mortgage trends will help in identifying the best options available in the market.