How to Buy a Home in Canada: Collateral vs Conventional Mortgage

Why are many people interested in the issue of collateral vs conventional mortgage today? Which option to choose when buying a home? Houses in Canada tend to rise in price every year due to the constant influx of new immigrants and growing demand. 

Having a home is a dream and a goal for many because your home in Canada is not only a family nest for many years but also a good investment. But first — you need to understand the difference between the two key mortgage types. 

What is a Mortgage?

Let’s start from the basics. A mortgage is a loan that is issued to a borrower to buy a real estate property. This means that you take money from the bank at interest, and the guarantee of the return of this money is a pledge of real estate, whether it be a house, apartment, or land plot.

When purchasing a home on a mortgage, the buyer enters into a loan agreement with the bank and a purchase agreement with the seller. The mortgage is subject to state registration. Until the loan is repaid, the house is pledged by the bank. With the termination of the loan obligation, the pledge ceases, and the mortgage registration record is repaid.

Mortgages (buying a home using borrowed funds) are extremely powerful, even though the house payment can take up to 50% of your family’s income (according to statistics). 

What to choose if you consider collateral vs conventional mortgage options?

Now — to the difference between the two types. As you know, a mortgage is usually perceived as a home loan. But this is true only when it comes to conventional mortgages. You can also mortgage real estate you already own and take money from the bank for a new apartment or house. This is a collateral mortgage.

The key difference between collateral vs conventional mortgage is that in the first case, money is issued against the security of existing housing. In the first case, their second case, the acquired housing becomes collateral.

Each type of mortgage has its pros and cons. Potential clients of ordinary mortgages are frightened by the fact that they may not be able to cope with the repayment of the debt, which will have to be paid for many years, and the lender will take away their housing.

At the same time, the issue of the interest rate on a mortgage loan is usually of much greater concern. Since payments are due for many years, there will be significant overpayments in both cases.

Key points on collateral vs conventional mortgage 

Conventional mortgages are issued with certain laws, they are not just a loan issued for 25 years. Banks cannot change these rules; their and all conventional mortgages banks have the same rules. Only interest and payment terms change.

A collateral mortgage is not actually a mortgage in its pure form. In fact, it’s a loan that is issued against the security of real estate. 

A collateral mortgage received for real estate security is beneficial primarily to those who plan to carry out those actions with the purchased apartment that are impossible with the conventional mortgage.

A borrower who has bought a house or an apartment with credit money using collateral mortgage can immediately sell it, make a pledge or donate it – and will not be liable under the law because he is its rightful owner. 

All of the above actions are impossible with an object of a conventional mortgage since, in this case, the apartment will belong to the bank until the full settlement of the debts.

What do you need to know out before getting a mortgage loan?

Whatever type you choose, a mortgage is a serious step — as serious as it gets — and it will stay with you for a long time. Therefore, before you get it, you need to answer some questions:

Down payment size?  

How much money do you have for a down payment, and how much should you borrow? As a rule, in mortgage agreements, there is a condition according to which you must pay part of the cost yourself, that is, make an initial payment. For example, you must pay 30% of the cost of a house or apartment at your own expense, and 70% is given to you by the bank on credit.

How much can you afford to pay?

What part of your income are you willing to return to the bank every month to repay the mortgage, and over what period can you do it? Assess your income and upcoming expenses. If your mortgage payments exceed a third of your annual income, there is a risk of not coping with the debt repayment. Take your time, be selective, compare offers from different banks, and carefully study the contract terms. Make sure you understand each point.

How will you repay the mortgage?

Mortgage payments are made up of two parts. You pay part of the principal and interest on the loan. Don’t forget about the rest of the expenses as well. You will have to pay for the mortgaged property insurance.

The bank can’t charge you for the fulfillment of its obligations in the process of obtaining and servicing a mortgage, as well as for services that the bank provides to you in its interests.

The mortgage is paid off in differentiated or annuity payments. Differentiated payments are when you pay back a fixed portion of the principal monthly, plus you pay interest on the outstanding portion of the debt.

Every month the payment decreases, and for the entire mortgage period, you spend less interest than annuity payments. But first, the payments on the mortgage will be significantly higher compared to payments at the end of the term.

Annuity Payments you pay equal parts monthly. You are gradually extinguishing the principal debt: its share in the annuity payment increases every month, and the amount of interest for the next month of using the credit, accordingly, decreases. With a constant loan payment, it is more convenient to plan your budget.

The payment method is offered by the bank and indicates it in the agreement; therefore, carefully study the conditions of various creditors and choose the most convenient for you. Also, the bank is obliged to give you a schedule with information on the repayment amounts of principal debt and interest, as well as the dates of returns. There must be a scheme for determining payments and name the total amount during the term of the agreement.

The Bottom Line

A conventional mortgage will be the best option for those who have practically no savings of their own and a rather small income because it will be possible to pay a little and for a long time. However, when there is very little left to collect up to the amount to buy a home, and the income allows you to pay large sums, you can also consider the option of a collateral mortgage because in this case, the purchased house can be disposed of as you like from the first day. 

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