When it’s time to take out a mortgage to finance the purchase of a home, you’ll be overwhelmed with all kinds of options and you may wonder which one is right for you. You can hear about two types of mortgages: a “subsidiary mortgage” and a “conventional mortgage.” The question is what are these types of home loans and how to compare them.
What is a conventional mortgage?
If you can make a down payment of at least 20% (20% of the agreed purchase price), then you can qualify for a conventional mortgage. A conventional mortgage can not be borrowed more than 80% of the estimated value of a property. Therefore, if you are unable to put at least 20% down payment, you may need to look for other options. If you have to borrow more than 80% of the estimated value of the home, your mortgage is considered a high ratio mortgage, which is the percentage of borrowed funds relative to the value of the home. These home loans can be approved with a down payment of only 5%. In general, the down payment for conventional mortgages can not be borrowed.
Benefits of a conventional mortgage
One of the main advantages of a conventional mortgage is that you do not pay the extra premium for CMHC insurance. Also known as mortgage loan insurance, this type of policy protects lenders when they lend money to borrowers who need more than 80% of the mortgage to buy their home. The higher the mortgage ratio, the higher the default risk of the borrower. As such, lenders want to have the assurance that, in the event that a borrower defaults, they will be reimbursed for the money lent. That said, CMHC’s insurance comes with additional fees for the mortgage. The actual amount paid will depend on the amount of the down payment. The following table summarizes the percentage paid in relation to the purchase price of the house according to the amount of the down payment:
For example, if you can only put a 5% down payment on a $ 500,000 ($ 25,000) home purchase, you will need a loan amount of $ 475,000. Based on your down payment, you will have to pay 4.00% of your loan amount on the CMHC premium, which equals $ 19,000.
With a conventional mortgage, you would not have to pay these extra fees. Any down payment of 20% or more excludes you from the obligation to take out mortgage loan insurance.
Another major benefit of a conventional mortgage is the fact that you immediately have the equity on the property you just acquired because you are paying a larger down payment. If you need to use the equity in your home for a major purchase, you can qualify through a home equity line of credit. The bank will consider you to have a much lower risk due to your real estate capital and may agree to approve you for such financing arrangements.
What is a subsidiary mortgage?
A collateral mortgage is a type of mortgage product that is “reversible,” which means the lender can lend you more money as the value of your home increases without the need to refinance your mortgage. In this case, your lender would register your property with a guarantee fee, often for an amount greater than the required loan amount. Once your property is registered with incidental fees, you are then allowed to borrow money from your home at any time without having to incur mortgage refinancing. This arrangement is similar to a home equity line of credit that allows you to borrow at any time from your home equity as long as you stay within your limit. This type of home loan is essentially a secondary guarantee for the lender and constitutes a form of lien on the property for the entire amount registered. This amount can represent up to 125% of the value of the house.
A subsidiary mortgage allows borrowers to provide more money for principal or reissue of principal already repaid.
Benefits of a subsidiary mortgage
The main advantage of a sub-mortgage is that it will probably be easier and more affordable to borrow money in the future from your current lender. This is because you would not have to pay the fees associated with using a real estate lawyer that would be needed if you were to refinance your mortgage.
Disadvantages of a subsidiary mortgage
It is important to understand that you can not transfer a hypothecary mortgage to another mortgage lender, even when the term of your mortgage ends, because the agreement is not registered with the registrar. As such, other lenders may not accept the current conditions contained in the mortgage documents. In order to change lender, a real estate lawyer would be needed to help you break the guarantee agreement, which costs money.
How do conventional and sub-prime mortgages compare?
The main difference between a subsidiary mortgage and a conventional mortgage lies in the terms and conditions. Essentially, lenders are able to charge a higher interest rate with a subsidiary mortgage than what was originally offered to borrowers. With a conventional mortgage, only the mortgage amount is recorded on the property. If you borrow $ 400,000, for example, your lender would write $ 400,000 as a liability on your house. On the other hand, with a subsidiary mortgage, an amount greater than the mortgage loan can be registered on the property.
Before accepting a specific type of mortgage, it is essential to seek the advice of an independent advisor, especially if you are not completely sure how the terms of the mortgage work. This will allow you to make a smarter decision since you will be bound by the terms of your mortgage for many years.