Mortgage Glossary

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A B C D E F G H I M O P R S T V

Agreement of Purchase and Sale

An Agreement of Purchase and Sale (APS) is a legally binding contract between a buyer and a seller that outlines the terms and conditions for the sale of a property. This document typically includes:

Identification of Parties: Names and contact information of the buyer and seller.

Property Description: Details about the property being sold, including its address and any specific features.

Purchase Price: The agreed-upon price for the sale.

Deposit Details: Information about the deposit to be paid by the buyer, including the amount and due date.

Conditions: Any conditions that must be met before the sale can proceed (e.g., financing approval, home inspections).

Closing Date: The date on which the transfer of property and funds will take place.

Signatures: The signatures of both parties to validate the agreement.

The APS serves to protect both parties by clearly stating their obligations and rights throughout the transaction process.

Amortization Period

The amortization period is the length of time it takes to pay off a loan or mortgage through regular payments. It determines how much you'll pay each month and affects the total interest paid over the life of the loan. Common amortization periods for mortgages are 15, 20, or 30 years.

Shorter amortization periods typically result in higher monthly payments but less total interest paid, while longer periods lower the monthly payments but increase total interest paid by the borrower.

Appraisal

An appraisal is an essential step in the mortgage process, serving several key purposes listed below,

1-Determining Market Value: An appraisal evaluates the property's current market value, ensuring it aligns with the amount the buyer intends to borrow.

2-Lender Protection: Lenders use appraisals to assess the risk of lending. They want to ensure that the property's value covers the loan amount in case of default.

3-Negotiation Tool: If the appraisal comes in lower than expected, it can be used as a negotiating point for the buyer to lower the purchase price or reconsider the loan.

4-Insurance Requirement: Lenders often require an appraisal to protect their investment, ensuring that the property value is sufficient for the mortgage's terms.

5-Informing Buyers: Appraisals provide buyers with a better understanding of the property's worth, helping them make informed decisions about their investment.

In summary, an appraisal is critical for establishing property value, protecting lenders, and facilitating informed financial decisions for buyers.


Assets

In real estate, assets can be broken down into specific categories that pertain to property ownership and investments. Here are some examples of real estate-related assets:

Residential Properties: This includes houses, apartments, and vacation homes. These properties can generate income through rent or appreciate over time to provide a return on investment.

Commercial Properties: Real estate used for business purposes, such as office buildings, retail centers, hotels, and warehouses. These properties often generate rental income and can appreciate in value.

Land: Undeveloped or raw land which can be used for future development, agriculture, or resource extraction. Land can appreciate over time and provides opportunities for development.

Real Estate Investment Trusts (REITs): Companies that own, operate, or finance income-producing real estate. They offer a way to invest in real estate without directly owning or managing properties.

Industrial Properties: Properties used for manufacturing, production, distribution, or storage, such as factories and logistics centers. These can generate rental income and appreciate over time.

Mixed-Use Properties: Developments that combine residential, commercial, and sometimes industrial spaces within a single property. These can offer diverse income streams.

In the context of real estate, these assets are not only important for generating income but also for their potential to appreciate in value, contributing to the overall wealth of the owner or investor.



Assumption Agreement

An assumption agreement pertaining to mortgages in Canada is a legal arrangement where a buyer takes over the existing mortgage obligations of the seller. This arrangement typically allows the buyer to assume the mortgage's terms, including the interest rate and payment schedule, rather than obtaining a new mortgage.

Here are some key points regarding assumption agreements:

Transfer of Responsibility: The buyer agrees to take on the mortgage loan and becomes responsible for making the mortgage payments in place of the seller.

Lender Approval: Most mortgage agreements include a clause stating that the lender must approve the assumption. This means that the lender will need to evaluate the buyer's creditworthiness before allowing them to assume the mortgage.

Benefits for Buyers: Assuming a mortgage can benefit buyers if the existing mortgage has a lower interest rate than current market rates. This can lead to significant savings over the life of the loan.

Liability for Sellers: Depending on the terms of the assumption agreement and the lender’s policies, the seller may still be liable for the mortgage loan, particularly if the lender does not release them from the agreement. This is known as 'joint liability.'

Legal Documentation: An assumption agreement typically requires legal documentation to formalize the transfer of the mortgage responsibilities. It may also involve additional fees or adjustments based on the terms negotiated between the buyer and the seller.

Types of Mortgages: Not all mortgages are assumable. Generally, government-backed mortgages (like those insured by CMHC) are more likely to allow for assumption than private mortgages.

Lenders may allow an assumption agreement under specific circumstances. Here are several scenarios in which a lender might permit a buyer to assume an existing mortgage:

Assumable Mortgages: Some mortgages are explicitly designed to be assumable. Government-backed loans, such as those insured by the Canada Mortgage and Housing Corporation (CMHC) or loans backed by the Department of Veterans Affairs (VA), often have assumable features.

Creditworthiness of the Buyer: The lender will typically require the buyer to undergo a credit approval process. If the buyer demonstrates sufficient creditworthiness, financial stability, and the ability to make payments, the lender is more likely to approve the assumption.

No Default on the Loan: The original borrower (seller) must be in good standing with the mortgage and not in default. Lenders are generally hesitant to allow assumptions if the mortgage is delinquent or if there are outstanding payments.

Terms of the Original Mortgage: If the original mortgage agreement includes an assumption clause and doesn't prohibit the transfer of the loan obligations, the lender may allow for an assumption.

Favorable Loan Terms: If the existing mortgage has advantageous terms (such as a lower interest rate than currently available), the lender may be more inclined to permit the assumption, as it may not negatively impact their interests.

Existing Relationships: Lenders may consider their established relationship with the current borrower. If the borrower has a good repayment history, the lender might be more amenable to allowing the assumption.

Payment Adjustments: In some cases, a lender may allow assumption agreements when the new buyer can provide a larger down payment or adjust the loan amount through a secondary arrangement.

It is important for both sellers and buyers to review the original mortgage agreement and consult with the lender as well as a mortgage professional to understand the policies and potential fees related to assumption agreements. In many cases, obtaining legal counsel can also ensure that all parties are adequately represented and informed throughout the process.






Blended Payments

Blended payments in a mortgage refer to a payment structure that combines both principal and interest in each payment installment. This type of payment is particularly common in amortizing loans, where the borrower pays off the loan over a specified term.

Here is a breakdown of blended payments:

Combination of Principal and Interest: In a blended payment, each payment covers both a portion of the loan amount (the principal) and the interest charged on the outstanding balance. As the loan progresses, the portion of the payment applied toward the principal increases while the interest portion decreases.

Consistent Monthly Payments: Blended payment mortgages typically result in consistent monthly payments throughout the loan term, making budgeting easier for borrowers since they know exactly how much they need to pay each month.

Amortization Period: The loan is amortized over a specified period, which can be 15, 20, or 25 years. Blended payments are structured so that the loan is fully paid off by the end of this term.

Simplified Payment Calculations: Borrowers benefit from the simplicity of blended payments, as they do not need to calculate different amounts for principal and interest separately; the lender provides a single monthly payment amount.

Impact on Long-Term Interest Costs: While blended payments help borrowers manage their cash flow more easily, it's important to note that in the early years of the mortgage, a larger portion of the payment goes toward interest rather than principal. This means that building equity in the property takes time, especially in the initial years.

Blended payments are a popular choice for those taking out residential mortgages, as they provide predictable monthly costs, offering peace of mind and financial stability for borrowers throughout the life of the loan.

Canada Mortgage and Housing Corporation (CMHC)

CMHC is a federal Crown corporation that administers the National Housing Act (NHA). Among other services, they also insure mortgages for lenders that are greater than 80% of the purchase price or value of the home. The cost of that insurance is paid for by the borrower and is generally added to the mortgage amount. These mortgages are often referred to as 'Hi-Ratio' mortgages.

Closed Mortgage

A closed mortgage is a type of mortgage that prohibits the borrower from making extra payments, paying off the loan entirely, or refinancing the loan without facing penalties, during the term of the mortgage. Here are some key characteristics of closed mortgages:

Penalties for Early Payment: If the borrower wants to pay off the mortgage in full before the end of the term or make additional payments beyond the scheduled monthly payments, they typically incur a prepayment penalty. This penalty can be a percentage of the remaining balance or a specified fee.

Fixed Terms and Rates: Closed mortgages often come with fixed interest rates and set terms (e.g., 1, 3, 5, or 10 years), providing borrowers with stability in their monthly payments throughout the term of the loan.

Lower Interest Rates: Generally, closed mortgages tend to have lower interest rates compared to open mortgages, making them appealing for borrowers who are confident they will not need to make extra payments or pay off the mortgage early.

Predictable Payments: Borrowers benefit from predictable, consistent monthly payment amounts, which can help with budgeting and financial planning.

Limited Flexibility: Closed mortgages offer less flexibility than open mortgages, which allow for extra payments or early repayment without penalties. This makes closed mortgages suitable for those who plan to maintain the mortgage for the full term.

Renewal Options: At the end of the closed mortgage term, the borrower may have the option to renew the mortgage with either the same lender or a different one, typically reevaluating the terms and interest rates then.

Closed mortgages can be a good option for individuals who prefer lower interest rates and have a stable financial situation without plans to pay off the mortgage early or make extra payments. However, borrowers should carefully consider their future plans to determine if a closed mortgage aligns with their financial goals.



Closing Date

The closing date is the final step in the home buying process, marking the official transfer of property ownership from the seller to the buyer. On this date, several critical activities take place:

Final Walkthrough: The buyer typically inspects the property one last time to ensure it is in the agreed-upon condition.

Signing Documents: Both the buyer and seller (as well as any relevant parties, like real estate agents) sign a series of legal documents, including the mortgage agreement, deed, and settlement statement.

Payment of Funds: The buyer pays the remaining balance of the purchase price, often through a cashier's check or wire transfer. This payment includes closing costs, which can encompass fees for inspections, appraisals, and other services.

Transfer of Ownership: Once all documents are signed and payments made, the title of the property officially transfers to the buyer, and the sale is recorded with the appropriate government office.

The closing date is typically agreed upon during negotiations and is often set several weeks to a few months after the purchase agreement is signed. It's essential for both parties to understand and prepare for this date, as it signifies the culmination of the home buying process.

Collateral

An asset, such as term deposit, Canada Savings Bond, or automobile, that you offer as security for a loan.

Conventional Mortgage

In Canada, a conventional mortgage refers to a type of home loan that is not insured by the Canada Mortgage and Housing Corporation (CMHC) or any other private mortgage insurer. Typically, conventional mortgages require a down payment of at least 20% of the home’s purchase price, which distinguishes them from high-ratio mortgages that require mortgage insurance due to lower down payments (usually less than 20%).

Conventional mortgages can be fixed-rate or variable-rate. With a fixed-rate mortgage, the interest rate remains constant throughout the loan term, which can range from a few years to 25 years or more. A variable-rate mortgage has an interest rate that can fluctuate based on market conditions, which may offer lower initial rates but carries more risk due to potential rate increases over time.

These mortgages often provide greater flexibility in terms of amortization periods and payment options. Borrowers with a conventional mortgage may benefit from more favorable terms, such as lower interest rates, compared to high-ratio mortgages. However, qualifying for a conventional mortgage usually requires a strong credit score, a stable income, and a healthier financial profile.

In summary, a conventional mortgage in Canada is suited for borrowers who can afford a significant upfront payment and prefer a loan that isn't subject to government insurance premiums..

Credit Scoring

A system that assesses a borrower on a number of items, assigning points that are used to determine the borrower's creditworthiness.

Your credit score or beacon score is a numerical expression representing your ability to repay creditors on time, as per your contractual obligations. Credit scores are calculated using your payment history, type of debt, amount of debt, and the length of your credit history.

Credit score ranges vary based on the scoring model used, but are generally similar to the following:
300-579 = Poor
580-669 = Fair
670-739 = Good
740-799 = Very good
800+ = Excellent

Many borrowers will vocalize their goal of attaining 'perfect credit', which is irrelevant. The number you should really strive for is 800. On the standard 300-850 range used by FICO, a credit score of 800+ is the unicorn of credit history. This will give you access to the best rates on the market. A score of 850 will not end up saving you more money.

Demand Loan

A loan where the balance must be repaid upon request.

Deposit

A sum of money deposited in trust by the purchaser on making an offer to purchase. When the offer is accepted by the vendor (seller), the deposit is held in trust by the listing real estate broker, lawyer, or notary until the closing of the sale, at which point it is given to the vendor. If a house does not close because of the purchaser's failure to comply with the terms set out in the offer, the purchaser forgoes the deposit, and it is given to the vendor as compensation for the breaking of the contract (the offer).

Equity

The difference between the market value of the property and any outstanding mortgages registered against the property. This difference belongs to the owner of that property.

First Mortgage

A debt registered against a property that has first call on that property.

Fixed-Rate Mortgage

A mortgage for which the interest is set for the term of the mortgage.

Gross Debt Service Ratio (GDS)

It is one of the mathematical calculations used by lenders to determine a borrower's capacity to repay a mortgage. It takes into account the mortgage payments, property taxes, approximate heating costs, and 50% of any maintenance fees, and this sum is then divided by the gross income of the applicants. Ratios up to 32 % are acceptable.

Guarantor

A person with an established credit rating and sufficient earnings who guarantees to repay the loan for the borrower if the borrower does not.

High-Ratio Mortgage

A mortgage that exceeds 80% of the purchase price or appraised value of the property. This type of mortgage must be insured. To avoid the cost of the insurance, a 1st mortgage up to 80% is arranged and a 2nd mortgage for the balance (up to 90% of the purchase price).

Home Equity Line of Credit

A personal line of credit secured against the borrower's property. Generally, up to 75% of the purchase price or appraised value of the property is allowed to be borrowed with this product.

Interest Adjustment Date (IAD)

The date on which the mortgage term will begin. This date is usually the first day of the month following the closing. The interest cost for those days from the closing date to the first of the month are usually paid at closing. That is why it is always better to close your deal towards the end of the month.

Interest-Only Mortgage

A mortgage on which only the monthly interest cost is paid each month. The full principal remains outstanding. The payment is lower than an amortized mortgage since once is not paying any principal

Mortgage

A mortgage is a loan that uses a piece of real estate as a security. Once that loan is paid-off, the lender provides a discharge for that mortgage.

Mortgagee

The financial institution or person (lender) who is lending the money using a mortgage.

Mortgagor

The person who borrows the money using a mortgage.

Open Mortgage

A mortgage that can be repaid at any time during the term without any penalty. For this convenience, the interest rate is between 0.75-1.00% higher than a closed mortgage. A good option if you are planning to sell your property or pay-off the mortgage entirely. *some conditions may apply

P.I.T.

Principal, interest, and property tax due on a mortgage. If your down payment is greater than 25% of the purchase price or appraised value, the lender will allow you to make your own property tax payments.

Portable Mortgage

An existing mortgage that can be transferred to a new property. One would want to port their mortgage in order to avoid any penalties, or if the interest rate is much lower than the current rates.

Prepayment Penalty

A fee charged a borrower by the lender when the borrower prepays all or part of a mortgage over and above the amount agreed upon. Although there is no law as to how a lender can charge you the penalty, a usual charge is the greater of the Interest Rate Differential (IRD) or 3 months interest.

Prime

The lowest rate a financial institution charges its best customers.

Principal

The original amount of a loan, before interest.

Purchase Plus Improvements

A Purchase Plus Improvements mortgage is a specialized mortgage product that allows homebuyers to finance not only the purchase of a property but also the cost of renovations or improvements. This type of mortgage is particularly beneficial for those looking to buy a home that may need repairs or adaptations to meet their needs.

Key Features:

Combined Financing: This mortgage combines the money needed to purchase a home with additional funds for renovations. Borrowers can access up to 10% of the property's post-renovation value for improvements.

Assessment of Renovation Costs: Lenders typically require an appraisal or a detailed cost estimate of the renovations to determine the potential increase in value after the improvements are made.

Down Payment: The down payment is generally based on the purchase price of the home before renovations. However, the total mortgage amount can include the expected value added by the improvements.

Renovation Holdback: Funds for the renovations may be held in trust until the work is completed, ensuring that the renovations are done as planned before the borrower receives the full amount.

Types of Improvements: Qualifying renovations can range from aesthetic upgrades (like new flooring or kitchen remodels) to essential repairs (like roof replacements or plumbing upgrades).

Benefits:

Increased Home Value: Homebuyers can increase the value of their property with renovations right from the start.

Customized Space: Purchasers can tailor their new home to better fit their lifestyle and needs without needing to buy a fixer-upper outright.

Potentially Lower Interest Rates: Because this mortgage type typically uses the home's future value, it may offer better terms than a personal loan for renovations.
Considerations:

Documentation Requirements: Homebuyers will need to provide detailed plans and cost estimates for the improvements, along with contractor quotes.

Approval Process: The process may take longer than a standard mortgage because of the additional assessments and documentation required.

Budget for Overages: Homeowners should budget for potential overages or unexpected costs during renovations.

Conclusion:

The Purchase Plus Improvements mortgage can be an excellent choice for homebuyers who want to customize their new home while managing costs effectively. It is important to work with a mortgage broker like Michael Croitoru, to understand the specific terms, requirements, and potential benefits associated with this mortgage type.


Rate Commitment

The number of days the lender will guarantee the mortgage rate on a mortgage approval. This can vary from lender to lender anywhere from 30 to 120 days.

Refinance

Refinancing a mortgage in Cambridge, Ontario can be a beneficial financial strategy, depending on your goals and circumstances. Here are some of the best ways to utilize a mortgage refinance and things to consider during the process:

Lower Interest Rate: If current mortgage rates are lower than your existing rate, refinancing can reduce your monthly payments and overall interest paid over the life of the loan.

Change Loan Term: You can refinance to a shorter-term mortgage (like 15 years) to pay off your loan faster and save on interest, or to a longer-term mortgage (like 30 years) to decrease monthly payments if you need additional cash flow.

Convert Between Fixed and Adjustable Rates: If you currently have an adjustable-rate mortgage (ARM) and are concerned about rising interest rates, switching to a fixed-rate mortgage can provide stability. Conversely, if rates are low, switching to an ARM might offer lower initial payments.

Cash-Out Refinance: If you have significant equity in your home, you can refinance for more than you owe and take out the difference in cash. This can be used for home improvements, debt consolidation, or other financial needs. In the case of a cash-out refinance, your new mortgage amount will increase, which means a new amortization schedule. Understanding how this affects your monthly payments and total interest is essential. Calculate if the benefits of accessing cash outweigh the additional interest.

Remove Private Mortgage Insurance (PMI): If your home has appreciated in value and you've built enough equity, refinancing can eliminate PMI, reducing your monthly payment.

Consolidate Debt: If you have high-interest debt, using a cash-out refinance to pay off those debts can result in lower overall interest costs.

Improve Loan Features: Refinancing can provide an opportunity to adjust loan features, or obtaining better terms.

Before deciding to refinance, it's essential to:

Calculate Costs: Consider the closing costs and fees associated with refinancing and ensure you'll save money in the long run.

Evaluate Your Credit Score: A higher credit score can lead to better rates.
Review Your Financial Goals: Determine how refinancing aligns with your long-term financial objectives.

Consider consulting with a financial advisor or mortgage broker to explore options specifically suited to your situation.

When refinancing a mortgage, considering your amortization schedule is crucial. Here’s how to integrate it effectively:

Understanding Amortization: An amortization schedule outlines the breakdown of each monthly payment into principal and interest. Knowing how your payments are structured can help you assess potential savings and impacts on your overall loan.

Evaluate Remaining Loan Term: Check how much time is left on your current mortgage. Refinancing to a new mortgage resets this clock, which can affect the total interest paid over time. For example, extending your term might lower monthly payments but increase total interest.

Shortening the Term: If you choose to refinance into a shorter loan term (e.g., switching from a 30-year to a 15-year mortgage), your monthly payments will increase, but you’ll pay significantly less interest over the life of the loan. Use the amortization schedule to see how quickly you can build equity with higher principal payments.

Impact of Interest Rates: If you’re refinancing to take advantage of lower interest rates, analyze how much you save each month versus the total interest saved over the life of the loan. Your amortization schedule will show how less interest impacts your principal repayment over time.

Potential to Pay Extra: If refinancing provides you with a better interest rate or a lower monthly payment, consider whether you can afford to pay extra towards the principal. This can significantly reduce the amount of interest paid over time, which can be illustrated in your new amortization schedule.

Use Online Calculators: There are many online mortgage calculators that allow you to input different loan amounts, terms, and interest rates to generate new amortization schedules. This can help you visually compare your current mortgage against potential refinance scenarios.

By closely examining your amortization schedule during the refinancing process, you’ll gain greater insight into how different options can fit your financial goals and lead to better long-term outcomes. It's advisable to consult with a financial advisor or mortgage broker who can help analyze these factors in detail.




Renewal

When the mortgage term has concluded, your mortgage is up for renewal. It is open at this time for prepayment in part or in full, then renew with same lender or transfer to another lender at no cost (we can arrange).

When renewing your mortgage, the banks often only offer the posted rates. You have to push a little harder for them to give you a break. They know that most homeowners don't want to have to shop around, so, they offer you a higher rate and hope that you will take it.

Second Mortgage

A second mortgage in Cambridge, Ontario, refers to a loan that an individual takes out against their home after securing the primary mortgage. Here are key points to understand about second mortgages specifically in this context:

Position in Lending: The first mortgage is the primary loan used to purchase the home, while the second mortgage is subordinate to the first. In the event of a foreclosure, the first mortgage lender is paid off before the second mortgage lender.

Purpose: Homeowners in Cambridge typically take out a second mortgage to access additional funds without selling their home. Common uses include home renovations, debt consolidation, education expenses, or financing significant purchases.

Loan Amount: The amount you can borrow through a second mortgage in Cambridge depends on the equity in your home. Home equity is calculated as the difference between the home's current market value and the remaining balance on the first mortgage. Lenders usually allow you to borrow up to a certain percentage of your home’s equity.

Interest Rates: Second mortgages typically have higher interest rates than first mortgages because they are considered riskier for lenders. If you default, the first mortgage lender is paid off first, so second mortgage lenders may charge more to offset that risk.

Types of Second Mortgages: In Cambridge, Ontario, there are generally two types:

Home Equity Line of Credit (HELOC): A revolving line of credit secured by your home equity, allowing you to withdraw funds as needed up to a predetermined limit.
Fixed-Rate Second Mortgage: A lump sum loan with fixed monthly payments and a set repayment term.

Repayment Terms: Second mortgages can have different repayment structures. Some may require monthly payments of principal and interest, while others may allow interest-only payments for a certain period, with the principal due at the end.

Risks: While a second mortgage can provide quick access to funds, it can also increase your overall debt load and the risk of foreclosure. It’s crucial to ensure that you can manage the additional payment obligations.

Before pursuing a second mortgage in Cambridge, Ontario, it’s essential to evaluate your financial situation, understand the terms, and consider consulting with a financial advisor or mortgage broker like Michael Croitoru to explore the best options for your needs.



Switch

To transfer an existing mortgage from one financial institution to another. This is most often done at renewal time. Lenders will reach out and offer their clients today's posted rate, which is not always their best rate. This means that the renewal rate offered can usually be beat by another lender in the broker channel.

It's a good idea to reach out to a local mortgage professional four months prior to your mortgage coming up for renewal, as we can secure you a rate hold for 120 days. If rates increase, you are locked into that lower rate, and if rates come down, we can still amend the commitment to reflect the lower rate right up to ten days before closing.

Term

The period of time the financing agreement covers. The terms available are: 6 month, 1,2,3,4,5,6,7,10 year terms, and the interest rates will be fixed for whatever term once chooses.

Total Debt Service (TDS) Ratio

It is the other mathematical calculations used by lenders to determine a borrower's capacity to repay a mortgage. It takes into account the mortgage payments, property taxes, approximate heating costs, and 50% of any maintenance fees, and any other monthly obligations (i.e. personal loans, car payments, lines of credit, credit card debts, other mortgages, etc.), and this sum is then divided by the gross income of the applicants. Ratios up to 40 % are acceptable.

Variable Rate Mortgage

A mortgage for which the interest rate fluctuates based on changes in prime.

Vendor Take Back (VTB) Mortgage

A vendor take-back mortgage is provided by the vendor (seller) to the buyer. This is not a run-of-the-mill type of mortgage, but this type of loan can certainly benefit both the buyer and the seller. The buyer may be able to purchase property above his or her approval amount determined by a bank or lending institution, and the seller can get his property sold. Most often, buyers will have a main source of financing lined up for the purchase, so a VTB mortgage will often take second position.

The seller keeps some equity in the property and continues to own a percentage, which is equal to the amount of the loan. This will continue until the loan amount, plus interest is paid in full. The second lien will serve as a guarantee for the repayment of the loan. If the obligations of the contract are not met, the seller can then seize the property.

Example of a vendor take-back mortgage - Tim is purchasing his first home for $600,000. He needs to make a down payment on a variable-rate mortgage of 20%, or $120,000, but he decides to go for a vendor take-back mortgage instead of paying this amount himself. The seller agrees.

The seller lends Tim $60,000 toward the mortgage down payment and agrees to pay $60,000 himself. This single property now has two separate loans. One is the mortgage with the financial institution for $480,000. The second is the vendor take-back mortgage for $120,000.

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