History of the Mortgage Industry
The “mortgage” has been around for quite some time. However, almost every aspect of the mortgage has changed over time. The history can be divided into two categories: legal and financial.
The legal history of the mortgage in Canada has its roots in England. As land ownership became more common, people lacked the necessary funds to make the acquisition. Initially, the seller provided the financing (similar to today’s vendor take back mortgage). The title was not released until the loan was fully repaid, meaning that the purchaser had no access to the property. This gave rise to the term “mortgage”, which means dead (mort) pledge (gage) in French. Gradually, the distinction between the title and physical possession became more visible. Eventually, the system changed to allow the purchaser to have physical possession while the seller kept the title as the debt was being repaid.
Initially, mortgage payments consisted of interest only payments of a constant amount until the original debt was repaid. Eventually, the risk increased for the lender as the great depression arrived. As the property served as security for the principal and as borrowers lost their income, the lenders were left with lower property values and outstanding principal balances. As the borrower refused to pay the principal amount, the lender regained the property which decreased in value. Lenders thus lost some of the money initially given to the borrower. This gave rise to the mortgage payment we see today. The payments now feature a portion of principal and interest, which reduce the lender’s risk. Both parties benefit from this change. The borrower slowly gains equity in the property rather than having to wait until they have a large lump sum ready for repayment. For investors, this means that they can see more profits as they repay the loan and have access to the amount by refinancing.
Initially, mortgages were fully amortized. This meant that the payment and interest remained the same for the entire amortization period, for example 25 years. This was great initially, but as interest rates climbed the lenders were losing money. Vice versa, as interest rates declined borrowers were locked into ridiculously high rates. This gave rise to the partially amortized mortgage we see today, where you can lock-in a term within the amortization.
For a more detailed and thorough explanation of mortgage features, such as amortization, please visit our Mortgage Features› page.
For a more in-depth and professional review of your individual and personalized situation please give Harpreet Singh a call at (416) 795-1919.
The information on this page has been provided by CAAMP’s “Introduction to the Canadian Mortgage Industry”