Mortgage Definition: The giving of property, usually real property, as security to a creditor for payment of a debt

Old French words mort "dead" and gage "pledge or promise"

Latin words mort "death" and gage "pledge or challenge"

or simply put Death Game

Many factors should be considered before buying. Generally if you buy a house and own it for at least 5 years it is better to own, than rent. However a real estate bubble burst can cause serious losses if you have to sell your house.

Until your mortgage is paid in full actually owning your house is an illusion. Even if you are mortgage free but you are 3 years in property tax arrears you will lose your house. Be forewarned about selling your house and paying back the mortgage early. On most fixed rate mortgages you will have to pay a 3 month interest penalty or an interest rate differential penalty, whichever is the highest amount. That could be tens of thousands of dollars, if the interest rate jumps up. If these details were not disclosed to you when you took out a mortgage, contact FCAC. Understand completely, the advantages and disadvantages of the mortgage type you choose. If you can't do a 20% down payment then you will have to get a 3rd party second mortgage, or pay additional mortgage default insurance through CMHC. You can finance up to 95% of the house (but only if you "qualify"). These rates could be up to twice the first 80% mortgage interest rate. Only go this route if you plan on owning your home for many years and you plan on paying down the mortgage as fast as possible. If the housing market goes down as it did in the US, (although it would probably never be as bad) be prepared for an increased amortization period plus refinancing fees or putting down a lot more cash to maintain the 80% mortgage value of your home. Almost half of home-buyers are required to buy mortgage default insurance. Remember those smiling faces at the bank when you first got your mortgage ? Miss 3 payments and your credit rating is destroyed and chances are you can't afford a lawyer to keep them at bay while you try to sell your house before they repossess it. Buying a house is a  gamble as prices follow the stock market.  However in 2011 only 1 in 252 Canadian mortgages are in default, versus 1 in 45 in the USA.

Are you ready for the 25 year commitment of mortgage, mortgage insurance and or life insurance, mortgage debt insurance, home insurance, property taxes, utility bills and maintenance repair bills ?

The Bottom Line: If your family income is $100,000 or more with at least 20% banked for the down payment and you plan on living in the home for at least 5 years, go ahead and buy. If you do not meet this criteria you should rent, unless you don't mind paying much higher monthy payments, and being at high financial risk, on a tight budget.

Caveats: Canadians have been living in a bubble for decades and there is a looming global recession which will affect Canada. Hopefully Canada will weather it unlike most other countries. For 99% of the population mortgages are the largest single debt; shop around. Banks will also try to sell you mortgage insurance, home insurance and pay your taxes in one easy monthly payment. Don't go for it - It's a scam. Pay your home insurance and taxes directly and get life insurance instead of mortgage insurance, saving a substantial amount of money with far more benefits and flexibilty. Mortgage default insurance can increase the total mortgage repayment dramatically. Seek 3rd party advice for the best mortgage stradegy.

Example of Purchase Versus Renting 1 year and 5 year with 5% Per Year Growth:

Actual Purchase cost: on a $350,000 house

$70,000 down payment + $280,000 fixed rate mortgage at 4% 5 year term 25 year amortization

(Mortgage payments   $17,674.32 a year @ $1,472.86 a month)

land transfer tax $3,725 in Ontario

Lawyer buying fees $1000

Total cost $354,725 upon purchase

Other expenses such as a home inspection is not included

Rental cost: on similar house

Expenses: Not including utilities

First year $19,000 a year @ $1600 a month

Insurance $300 (home owner pays the building insurance)

Following years 3.1% increase per year

Selling your house after 1 year for $367,500 @ 5% market growth

Mortgage payment $17,674

3 month interest penalty for terminating early $2,746

Outstanding mortgage    $273,312 + $2,746 = $276,059

5% real estate fee $18,375 + HST = $20,763

Lawyer buying fees $1,000

Lawyer selling fees $700

land transfer tax $3,725 in Ontario

Insurance $600

Property Taxes in Ottawa  $4,422

Cost of 1 year ownership $27,442 versus Renting $19,300

If rates go up to 7% -  Interest rate differential penalty for terminating early $35,531

Cost of 1 year ownership $60,227 versus Renting $19,300

Lesson learned in this case: Go with an Open Mortgage and save $35,531 (IRD)

Selling your house after 5 years for $446,698 @ 5% market growth per year

Mortgage payment $88,371

Outstanding mortgage    $243,750

5% real estate fee $22,335 + HST = $25,238

Lawyer buying fees $1,000

Lawyer selling fees $700

land transfer tax $3,725 in Ontario

Insurance $3,314 (5 years @ 5% per year increase)

Property Taxes in Ottawa $23,477 (5 years @ 3% per year increase)

Cost of 5 year ownership $12,877 versus Renting  $102,574

However if the market was bad and the house for sold for $350,000 (a real possibilty)

Cost of 5 year ownership $105,100 versus Renting $102,574

10-year rate history for the 1, 3 and 5 year fixed rate mortgages

Bank and corporate greed in the last 6 years has driven the USA to a near economic depression. Taxpayer funded bailouts, rising inequality, falling home prices, high unemployment, record debt and lack of bi-partisan government action has created growing civil unrest.

Canada's Banks are Heathy

Canadian mortgage calculator

Every year banks post record profits. There almost 4 million home mortgages in Canada are held by banks. In Oct 2011 Canada's central bank the Bank of Canada allows banks to borrow money from them at a rate of 1%. Banks usually pay less than 1/4% on personal savings accounts. Banks lend out mortgages at 3 to 5%. Mortgage payments are structured so that monthly payments in the first 5 years is mostly interest. Mortgage payments are usually locked in and early payment and or renegotiation at a lower interest is expensive. Mortgages at 25 or 30 year amortization means little because the term of the mortgage is from 1 to 10 years. If interest rates go down banks are not obligated to pass on the reduction to you. If the interest rates go up at the end of your term the bank will determine your new increased payments and although rare they can also decline your renewal. Miss 2 payments and their lawyers will send you a default notice at a cost of $3,000 to you. This is to drive the nail in the coffin so they can proceed with a quick repossession. This applies even if you made all your payments for 20+ years and fell on hard times. Banks are ruthless with no empathy. On a repossesion, at a minimum 20% down (5 to 15% down is insured) banks will almost always recover their initial principal and a lot more, even in a bad market. Banks have nothing to lose

Fuzzy Math

As of 2010 Canada Mortgage and Housing Corporation guaranteed over $900 billion in mortgages, with only $9 billion in equity to cover it (a staggering 100:1 leverage ratio). Fannie Mae had a 50:1 ratio in the 2008 US housing crisis coming very close to bankruptcy (They were delisted from the NYSE in 2010). If the Canadian housing market took a dive, who losses? The taxpayers. Excessive leverage was one of the primary causes of the 1929 crash and the following Great Depression.

CMHC's total revenue from mortgage default insurance, including interest on investment, topped $1.6 billion, while operating expenses and claims totaled $256-million. CMHC does 90% of the mortgage insurance business in Canada, making it a monopoly. This Federal Crown corporation has a 100% taxpayer-funded guarantee of its financial obligations compared to the 90% guarantee on private insurance.  Bank mortgage insurance, which protects the borrower should not be confused with CMHC mortgage default insurance, which only protects the lender.

CBC reported: The bank staffers selling mortgage insurance are unlicenced and rarely trained to explain the details and legalities of those insurance products. The result is people who pay premiums and think they are covered, only to realize later that they are not.

A mortgage rate of 3.5% versus 7% on a $350,000 house with 20% down increases the total 25 year interest  2.2 X from $139,386 to $308,351

3.5% mortgage 20% down 5 year term - $1,397 monthly payment Total 25 year interest $139,386 

   7% mortgage 20% down 5 year term - $1,961 monthly payment Total 25 year interest $308,351

3.5% mortgage 10% down 5 year term - $1,604 monthly payment Total 25 year interest $166,200

   7% mortgage 10% down 5 year term - $2,250 monthly payment Total 25 year interest $360,000

Mortgages are compounded. Compound interest was once regarded as the worst kind of usury and was severely condemned by Roman law, as well as the common laws of many countries.

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