November 21, 2019

Mortgages have changed over 300 years

Audrey Wamboldt Published on November 15, 2013
Canadian mortgage rules trace their origins to the feudal land system in England
Canadian mortgage rules trace their origins to the feudal land system in England. Our present day mortgage and common law basics started hundreds of years ago when wealthy landowners sold property to their serfs (modern day tenants), who in turn had to work the land and turn over a large portion of their profits to the landowner, who had all the rights under English law at the time.

The tenants never actually got to enjoy ownership of the land, as they usually never realized paying off their debt within their lifetimes. These early mortgages often were family debts, basically a mortgage that was passed down over the generations from one family member to another.

Unfair? You might say that.

Out of this early practice the courts noticed how unfair the whole deal actually was and looked for ways to improve the practice. From this thought we have today what is called “equity of redemption” — the ability to own the land while we pay for it and to enjoy whatever profit arises from this ownership. And, most importantly, that we must at some point in time actually get to own the land we’re paying for!

So, in present day society mortgage payments mostly come with two parts — the interest or the profit the lender earns for lending you the money, and the reduction of the principal debt owed. Most mortgages in Canada are amortized, so you will know how long it takes to repay the debt in full, provided you make all your payments on time!

But there are significant things you can do to repay that mortgage debt faster with less cost to you, the homeowner. One of the first ways to pay down your mortgage is through your pre-payment privileges. Using pre-payment privileges will help to reduce the interest payable and make the debt disappear more quickly.

Most lenders allow for dual privileges — balloon payments of a lump sum each year paid against the principal amount outstanding, and a percentage increase to your regular payment. Lenders often offer mortgage customers the ability to put down anywhere from 10 to 20 per cent of the original mortgage each year as a balloon payment.

In addition, mortgage borrowers may also accelerate their payments annually. The caution here is to be careful when putting extra monies against the mortgage. If you exceed your annual privilege, the lender will charge a penalty. Always confirm with your bank the amount available to repay each year.

According to industry statistics, only 32 per cent of all mortgage borrowers exercise their contractual right to make significant efforts to accelerate repayments, including taking one or more of the following actions in the past year:

• 16 per cent voluntarily increased their monthly payments;

• 15 per cent made a lump sum (balloon payment) contribution to their mortgage; and

• only six per cent increased their payment frequency.

Whenever possible, the first rule of thumb when choosing your mortgage payment frequency is to opt for accelerated bi-weekly or weekly payments over monthly or semi-monthly repayment terms. By choosing the accelerated weekly or bi-weekly frequency you will reduce the amortization, becoming mortgage free faster, saving you thousands in interest over time.

So, after 300 years of mortgage data, what’s the most common question for most people?

How do I own that home more quickly and pay less money doing so?

The old fashion way, by using your pennies to make dollars and sense of your mortgage. The more you increase your payments by, the less interest you’ll eventually pay. At the very least, you won’t leave a large mortgage behind for your loved ones.

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