Mortgage Financing: What Are Our Options?

Date
6 November 2019

Your co-op is seen as a business by private lenders, including credit unions, banks and others. So, when you start looking for a mortgage loan, your co-op will be eligible for a commercial mortgage, rather than a residential mortgage. Often lenders post residential mortgage rates on their website; however, to find out the commercial mortgage rate, you would have to contact the lender directly. This is the time to shop around for the best rate.

Mortgage Term? Amortization Period? What Do They Mean?

An important part of getting a mortgage is understanding the difference between a mortgage term and an amortization period.

The mortgage term is the length of time-specific conditions apply to the mortgage—like the interest rate, payment frequency and the amount of each payment. The most popular mortgage term in Canada is five years. However, lenders offer mortgage terms of one year, two years or even ten years.

The amortization period is the length of time it will take you to pay off your mortgage in full. The most popular amortization period in Canada is 25 years, but shorter and longer periods are available. Your choice of mortgage term and amortization period can save your co-op thousands of dollars in interest over the life of the mortgage.

The right mortgage term can mean lower interest costs. Usually, interest rates on longer-term mortgages are higher than those on shorter-term mortgages. For instance, a $1,000,000 mortgage with a five-year term at four percent costs $21,734 more in interest, compared to a three-year term at a 3.25 percent interest rate, assuming a 25-year amortization period. Also, you pay down the principal amount faster, because less money goes towards interest payments.

Some co-ops prefer a longer-term mortgage because the payments stay the same for the entire term of the mortgage, providing more financial stability.

Note: However, if you have a fixed term, most likely you are not allowed to pay off the principal amount of the mortgage until the term is over without being charged a penalty.

When you are making your decisions about term and amortization period, you can ask the lender to calculate the mortgage payments for different terms and give you the amount of interest that you would pay annually over the term of the mortgage, as well as the balance outstanding at the end of each year. Just make sure you are looking at the same period when comparing the options from different lenders. For instance, if you are deciding between a three-year term and a five -year term, compare the three-year term mortgage with the first three years of the five-year term.

Once your current mortgage term reaches its maturity date (the last day of a mortgage term), you'll need to renew the outstanding balance for another term. This is called the mortgage renewal and is a process you will likely do a number of times until you pay off your mortgage in full. At mortgage renewal, you will have to settle on a new mortgage term, which will have a new interest rate. Your co-op will also have the option of changing the mortgage amortization period.

The right amortization period can also save your co-op lots of money. A shorter amortization lets you pay off the mortgage quicker, which means less interest but higher monthly payments to the lender. A longer amortization period reduces your payments, resulting in lower monthly costs for your co-op—but you’ll pay more in interest over time.

Here are a few scenarios that show the difference in costs and savings according to which option you choose. Don’t assume that every lender will offer the full range of choices.

Details

Scenario 1

Scenario 2

Scenario 3

Scenario 4

Mortgage amount

1,000,000

1,000,000

1,000,000

1,000,000

Amortization period

25 Years

25 Years

15 Years

15 Years

Term

5 Years

3 Years

5 Years

3 Years

Interest rate

4.00%

3.25%

4.00%

3.25%

Monthly payment

$5,260

$4,861

$7,380

$7,016

First three years’ interest cost

$114,785

$93,051

$110,199

$89,286

Comparing interest savings between Scenario 1 and the other three

0

$21,734

$4,586

$25,499

Mortgage balance owing at the end of three years

$925,417

$918,031

$844,505

$836,706

Many co-ops choose Scenario 1, which combines a five-year term and a 25-year amortization period. Scenario 2 is very similar to Scenario 1, except for the three-year term. Scenario 3 shows a mortgage with a five-year term and a 15-year amortization period. Scenario 4 presents a mortgage with a three-year term and a 15-year amortization period. As you can see, Scenario 4 has the highest savings of the other three options.

With a little research and planning before your next mortgage renewal, you can save your co‑op some money. If you are getting a new mortgage, you can start saving right from the get-go.

Arrears Cost

Half the Agency's clients have member arrears and bad debts below $43 a unit, and half above. In 2007, the midpoint was $83. Great work, boards and managers! Members too!