Mortgage basics

A mortgage is a contract, or legally binding agreement, between a lender, the mortgagee, and a borrower, or mortgagor. It is the security given to the lender by the borrower. The mortgage is registered against the ownership of the property at the appropriate land registration office to establish the lender's legal claim for the money lent to the borrower. In exchange, the borrower is given a pre-arranged amount of money, called the principal, by the lender. As the principal is reduced by regular repayments, it becomes known as the balance or outstanding balance. The lender usually also receives interest, a charge paid by the borrower for the use of the money from the lender. The borrower and the lender agree on the borrower's repayment schedule and describe the schedule in the mortgage contract or document. The term of the mortgage is the length of time the mortgage loan will be in effect, as specified in the contract. The term can be any period from 6 months to 30 years. (Most lenders do not offer the complete range of term options.) As the balance may not be completely paid off at the end of one term, renewing or refinancing the mortgage for one or more terms will be necessary until the balance is paid off. Borrowers have the right to discharge the mortgage, that is, remove the mortgage claim from title, their property ownership registration, once the outstanding balance has been repaid in full, including all interest due.

In other words:

Mortgages involve a contract between a borrower, known as the mortgagor, and a lender, called the mortgagee. To keep these terms straight, remember the borrower or mortgagor must pay up "or else." The mortgagee or lender could be a bank, a trust company, an insurance company, a credit union, a private investor group, or an individual. The lender may also be represented by agents, brokers, or mortgage brokers who sell the lender's mortgages under their own business names for a commission, but are not employed by the lender. Lenders use their own funds, or those of investors. The mortgage contract identifies the mortgagor and the mortgagee, as well as describing the unique contractual relationship between them. The document also includes a set of terms and clauses that describe the mortgage in detail, specifying the rights and responsibilities of each party.

Mortgages provide cash to the borrower at a cost. The cost to the borrower includes the lender's expenses in setting up, administering, and eventually discharging the mortgage. The borrower's cost also includes the interest charged by the lender against the outstanding balance.

The maximum size of the mortgage is established by an appraiser, who is hired by the lender, at the borrower's expense. The appraiser estimates the lending value of the property, which represents the maximum amount of money that could safely be lent against the property. Lending value refers to an estimate of property value that reflects the value the lender could expect to generate if forced to liquidate the property quickly. A quick sale would become important should legal action for borrower default become necessary. The lending value is equivalent to 100 percent of the value of the home, from a lender's perspective. Lenders will then offer the borrower a mortgage, usually for an amount less than this maximum value, for instance 50 percent or 75 percent of the appraised or lending value. (Note that lending value is less than market value, which is the highest price a willing buyer will pay in an open competitive market. One important factor for achieving market value is exposing the property to potential buyers for a reasonable time period, relative to average sale times.)
Appraisers are qualified specialists who offer professional services for establishing property value. The appraiser's report also describes the type and condition of the property, so that lenders can make sure the property meets their mortgage criteria. For example, if the property is in disrepair, the lending value would fall. To protect the lender's investment in the mortgage, a portion of the mortgage funds may be withheld until repairs are completed.

The mortgage is registered against the ownership of the property to protect the lender's investment. Registering the mortgage, or recording it at the land registration office, ensures that the property cannot be sold before the mortgage is completely repaid. The borrower must pay off the outstanding balance, including any interest due. Once the mortgage is repaid to the lender, it can be legally discharged, or removed from the ownership registration, so that there is no longer a registered claim from that lender against the property. The home is now free and clear of the mortgage debt. All the equity now belongs to the homeowner, unless there are other creditors' claims registered against the property, also expressed as title is free and clear.

Every mortgage is unique. Mortgages vary with the borrower, the lender, and the property, as well as the terms and the purpose of each mortgage.

Every mortgage have four basic components:

Principal
Interest
Term
Amortization

Mortgages can be complicated and a lot rests on the type and terms of the mortgage you choose. Here are some different types of mortgages available to home buyers:

Open mortgage
Closed mortgage
Convertible mortgage
Portable mortgage
Variable rate mortgage
Vendor take back mortgage
Second mortgage
Blanket mortgage
Conventional mortgage
Leasehold mortgage
Piggyback mortgage
Pre-approved mortgage
Reverse mortgage

The borrower makes covenants or legally binding promises to the lender. The mortgage may include any or all of the following covenants or borrower's legal responsibilities:

• to maintain the property in good repair;
• to keep the property insurance in good standing and up-to-date;
• to pay the property taxes;
• to pay the condominium fees, if applicable;
• to repay the principal and pay any interest due.

The mortgage document gives the lender certain legal rights, including the right to:

• enter and inspect the property, arrange any necessary repairs, and add the cost of these repairs to the mortgage debt;
• pay the property insurance if it is insufficient, or if it lapses, and add this cost to the mortgage debt;
• pay the property taxes if they fall in arrears and add this cost to the mortgage debt;
• take legal action against the borrower and recover the mortgage debt should anyone of the covenants be broken.

While the mortgage gives the lender many rights or powers, the lender does not acquire the rights of ownership by signing the mortgage contract. When you mortgage your property, whether with a traditional mortgage or a reverse mortgage, you, the borrower, remain the owner. As long as the mortgage is kept in good standing by upholding the covenants, the borrower has the right of possession of the property.

For either type of mortgage, if the borrower breaks one of the covenants, provincial mortgage laws give the lender the right to take legal action to collect the debt. For instance, the mortgage contract, with certain restrictions, gives the lender the power to sell the property after gaining possession. Here, the lender does not become the owner of the property, but has the legal right to sell it and apply the proceeds of the sale to the outstanding debt. The borrower could still be responsible for any deficiency if the sale does not produce enough money to pay off the debt. However, any excess funds go to the borrower.

The law offers the lender other legal remedies to collect the debt, including suing for foreclosure. Foreclosure is a legal action taken by the lender to gain ownership of the property through the courts. As with all legal remedies, until the lender's legal action is complete, the borrower retains the right to pay off the debt and put the mortgage in good standing or to sell the property to pay off the mortgage debt.

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