The conventional mortgage

This mortgage is called conventional because it is the customary, prevalent and most commonly used method of obtaining a mortgage loan. It usually implies a first mortgage, and that the purchaser has at least 25% of the purchase price as a down payment.

When an agreement to buy a house is made, a conditional clause is often inserted in the agreement, giving the buyer about ten days to arrange a new mortgage.

Immediately on acceptance of the purchase agreement by buyer and seller, the buyer makes application (usually through the suggestions of the real estate broker who made the sale) to a mortgage lender such as a bank, insurance or trust company.

It is a sound move to follow the suggestion of a real estate broker in making the application, because the broker should know not only where the best flow of money is, but where he can get the fastest action on the application.

If the buyer is a person of means with an excellent credit rating, he could buy the property without the conditional clause simply because he would have no difficulty in obtaining financing. Vendors are more willing to sell without conditional clauses in the sales agreements.

Most lenders have a clause to allow you to prepay 10% of the value of the loan once a year on the anniversary date, without penalty. In some cases they allow up to 15% annually.

Another variation is to allow you to increase your monthly payment by 10% or 15% as the case may be.

Some lenders offer both options. You can increase your monthly payment by 10% as well as prepay an additional 10% lump sum annually. In all cases any increase over your regular monthly payment is credited against the principal balance.

For an additional monthly cost lenders offer life insurance to cover the mortgage amount in the event of death, or even insurance to cover job loss. They offer weekly, biweekly, semi-monthly or monthly payment plans. The more frequent the payment the more you save in interest cost over the life of the mortgage.

Some lenders accept extra payments and then if you fall on hard times and miss a payment or two later, those extra payments are credited as regular payments and you are not considered in default.

If you sell your home some lenders will waive the penalty for paying off the mortgage in full, while others will allow you to transfer your mortgage to another property, increase the mortgage, blend the rate and take it with you to the new home that you purchased.

These are some of the ways to avoid paying the penalty. Because of these alternatives it is becoming hard to find a property for sale where the vendor requires you to assume a mortgage. Usually the lender requires that the purchaser who wishes to assume an existing mortgage be qualified and approved by the lender.

If you must prepay your mortgage over and above the stipulated limits or payoff the mortgage in full, penalties are usually three months' interest or based on the interest rate differential, whichever is greater. For example, your principal balance remaining is $100,000. The current interest rate in the marketplace is 9% per annum but your interest rate is 10% per annum and two more years remain in the term. If you pay $100,000 in full, three months' interest is $2500. The interest rate differential would be:

(10% - 9%) x $100,000 x 2yr = $2000

Since the three months' penalty is greater, your cost to prepay this amount would be $2500.

Lenders are so competitive that they are willing to pay legal fees and application cost if you transfer your mortgage from another lender to them, so shop around.

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