Mortgage

Mortgage

A Mortgageis a legal paper in which borrowers agree to surrender their property to a lender if they do not pay back the money they owe, with interest. If the property is easily movable, eg, a car or a boat, the deal is called a chattel mortgage, but most mortgages involve real estate and are called collateral mortgages. The ordinary way to buy a house in Canada is to raise most of the money by a mortgage loan on the house itself because if the borrowers fail to make their mortgage payments the lender can foreclose the mortgage and take the house and sell it (see banking). Lenders try not to write a mortgage for more than the property will bring when sold.

Sometimes there is more than one mortgage on the same property, in which case, if the borrower fails to repay, the holder of the first mortgage recovers all his money before the holder of a second mortgage recovers any. As a result, interest rates on second and third mortgages are high. Under the National Housing Act, first passed in 1938 and much amended since, the federal government insures mortgages on moderately priced new houses, cutting the risk and so lowering the interest rate. Mortgages not guaranteed under the NHA - which includes most mortgages on the resale of older homes - are called conventional mortgages.

In the 1950s and 1960s, most mortgages lasted 20 or 30 years. Lenders ceased offering such long-term mortgages in the 1970s when interest rates rose rapidly. Most mortgages are now due in 1, 3 or 5 years, although even the 5-year mortgages were rare in the early 1980s when interest rates climbed to more than 21%. By 1998 the 5-year mortgage rate had fallen to an average of 6.99% and the 1-year rate to 6.5%. Banks, forbidden to lend mortgage money before 1954, had written about 63.6% of the more than $381 billion worth of mortgages that were outstanding in the third quarter of 1998.