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Housing and Property

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Mortgages

This pamphlet is the third in a series of pamphlets on Buying and Selling a House. Other pamphlets in the series are entitled Planning for Buying a Home, Preparing the Offer to Purchase and Selling your House.

This pamphlet looks at one important aspect of buying and selling a house – the mortgage. The focus of the pamphlet is on the purchase of a home that is currently owned and occupied.

This pamphlet does not contain a complete statement of the law in the area and changes in the law may occur from time to time. Anyone needing specific advice on his/her own legal position should contact a lawyer.

What is a mortgage?

A mortgage is a long-term loan taken by the purchaser to buy a house. In return for the loan, the borrower (mortgager) promises the lender (mortgagee) to repay the loan. The borrower pledges the property as security.

When you apply for a mortgage loan, you will come across the following terms:

Equity This is the difference between the fair market value of a property and the outstanding mortgage.

Term This refers to the number of months or years over which the interest rate on your mortgage is fixed. It is the “life” of a mortgage. When a term is up, you renew your mortgage for a new term based on current interest rates.

Amortization Many people prefer to spread out their loan payments over a scheduled number of years. The time it would take for you to pay the mortgage on time is the amortization period. Mortgages are often amortized over 25 years. The shorter the amortization period, the higher are the mortgage payments and the lower are the interest costs.

How much interest will I be charged?

Interest rates vary as the economy changes, and different lending institutions may offer different interest rates. The type of mortgage you choose will affect how much interest you are charged. The interest rates at the time you buy a house, (and whether you think they will go up or down!) will probably influence whether you choose a short-term or long-term mortgage.

When will I be paying interest charges?

The amount of the loan – the cash you actually borrow – is called the principal. You are expected to repay the principal, together with interest. Your monthly mortgage payment(s) will be applied towards both principal and interest.

Are there different kinds of mortgages?

Yes. Go mortgage shopping to know what is available. You may want to do this before you go house hunting. Ask about mortgages offered by different lenders. Many financial institutions have prepared brochures to explain the mortgage options they offer. For example, lenders may offer pre-approved mortgages, portable mortgages, blended mortgages and so on.

Collect as much information as possible and then consider which mortgage is best for you.

Where can I apply for a mortgage?

Several sources exist, such as banks, trust companies, private lenders, insurance companies, and credit unions. Private lenders often offer more liberal pre-payment privileges, or slightly better interest rates.

Do I need a downpayment to get a mortgage?

Yes. Conventional mortgages usually do not exceed 75% of the appraised value of the property, or the purchase price, whichever is less. That means generally you must have downpayment of 25% of the home’s total purchase price.

It is possible to get a mortgage that exceeds that limit. If you are able to make a downpayment betwen 10% and 25% of the purchase price you may be able to arrange a mortgage that is insured with a mortgage insurance company. You will have to bear extra costs with this type of mortgage. Generally these extra costs are spread over the life of the mortgage.

Do I qualify for a mortgage?

Look at your available downpayment. Then determine how large a mortgage you will have to arrange to finance the purchase. Before you make any offer to purchase a house, you should determine whether you will qualify for a mortgage loan and, if so, how much.

In deciding whether to grant a mortgage, the lender will consider the property to be purchased and your ability to repay the mortgage. The lender will require detailed information about your financial situation. Then, the lender will decide whether your gross income is large enough to support the monthly payments on the mortgage.

A rule accepted by many lenders is that the monthly mortgage payment (principal and interest) should not be more than 30% of your gross monthly income.

Will the lender have any other requirements?

In addition to the downpayment, most lenders won’t approve a loan without the following:
• a recent survey of the property
• fire insurance
• a signed copy of the offer to purchase,
• a financial profile of the purchaser.

When and how will I receive the funds from the lender?

Your lawyer will have received a list of instructions from the lender. The list sets out the many documents which must be prepared by your lawyer before the mortgage funds will be released. Your lawyer will send draft documents to the lenders for approval, and will make arrangements to have the mortgage funds available for closing. Usually the lender’s cheque is delivered to the lawyer the day before the closing date. The cheque is deposited in your lawyer’s trust account and paid out on closing.

Can a seller allow me to assume or take over the existing mortgage?

Yes, but the seller should be aware that his/her responsibility for the mortgage may not end. If the seller allows the buyer to take on a mortgage that was drawn up in the seller’s name, the seller may be liable for the mortgage payments if the buyer fails to make them.

What happens to the seller’s existing mortgage when I buy a house?

Offers to purchase usually say that the seller must pay off all mortgages, penalties, charges and liens against the title on or before the closing date, at his own expense. This means, for example, that a seller who has a mortgage must pay off the mortgage and register a discharge of that mortgage.

Although the seller may pay off the mortgage on closing, the formal discharge won’t be available until shortly afterward. The normal practice is for the seller’s lawyer to receive in trust the funds to pay off the mortgage on the closing day. The lawyer will pay those funds to the mortgagee, and give a personal guarantee to get and register a discharge of that mortgage as soon as possible after closing.

Public Legal Education and Information Service of New Brunswick (PLEIS-NB) is a non-profit organization. Its goal is to provide New Brunswickers with information about the law.

PLEIS-NB receives funding and in-kind support from the Department of Justice Canada, the New Brunswick Law Foundation and the New Brunswick Department of Justice.

We gratefully acknowledge the cooperation of Consumer Affairs Branch, New Brunswick Department of Justice, New Brunswick Real Estate Council and members of the Law Society of New Brunswick and members of the Law Society of New Brunswick.

Published by:
PLEIS-NB
P.O. Box 6000
Fredericton, N.B.
E3B 5H1
CANADA
Tel: (506) 453-5369
Fax: (506) 462-5193
Email: pleisnb@web.ca

ISBN: 1-55048-237-8

 

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Disclaimer: Please note that our website contains general information about the law. This is not a complete statement of the law on particular topics. We try to update our publications often, but laws change frequently so it is important for you to check to make sure the information is up to date.  The information in our publications is not a substitute for legal advice. To receive legal advice about your specific situation, you need to speak to a lawyer.