Smart Money Podcast
Once you've found a property you like, you will need financing for it, either through a mortgage with a bank or through a private lender. In this guide we cover the differences between the two to help you find the right lending source for your property.
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What is a mortgage?
A mortgage is a loan secured by a property, typically from a bank. Second mortgages and similar loans also exist; these are usually given by a private lender, which simply means a person or business other than a financially accredited institution such as a bank.
In Canada, when working with a bank you can typically expect a mortgage of about four to five times your combined income, whether you're applying alone or as a couple. You can choose different lengths for the mortgage, although most people go for a 25 or 30 year amortization.
With a private lender the requirements vary by lender, but they are generally less strict, because private lenders take on more risk in exchange for a higher interest rate. This type of lending makes the most sense for investment properties you want to pull money out of relatively quickly, or use as a source of cash flow.
Things to consider with mortgages
One choice is between a fixed and a variable rate. A fixed mortgage keeps the same rate for the whole term, typically five years, and has a large prepayment or breaking penalty, often called the interest rate differential (IRD). A variable mortgage follows the market rate, less your discount, and moves as the central bank changes its rate and the banks respond. A variable mortgage usually has a low prepayment penalty, typically three months of interest.
A mortgage payment is split into two parts: interest and principal. Think of the principal payment as the equity you put into the house, and the interest payment as what you pay the bank for the loan it gave you to buy it.
Want to see what a mortgage would cost on a real listing? Try our free calculators.
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