A Growing Equity Mortgage is a good option for those people who do not have the capacity to make large payments now but can do so in future. Youngsters who have just started out on their career and want to buy a house find this kind of mortgage very useful. This mortgage is different from conventional ones and the basics need to be understood well before you opt for it so that you avoid any unpleasant surprises when future payments become due.

How Does it Work?

A growing equity mortgage starts out with low repayments in the initial years. The monthly payments increase over the years. The degree of increase may be based on a pre-determined schedule that both lender and borrower agree to when the loan is made. In some cases the Growing Equity Mortgages (GEM) are linked to certain kinds of indices. Whatever be the arrangement, the GEM borrower can start with a smaller monthly outgo at the beginning of the loan.

Here are two key Features of a GEM:

Fixed Interest Rate

This kind of mortgage comes with a fixed interest rate throughout its term. Even if interest rates rise in future, you, the borrower, are insulated when you opt for this kind of equity mortgage.

With the GEM, the borrower is already bound to pay more and more money to fulfill his obligations as the years go by. It is essential for the lender to at least offer insulation from the risk of rising rates to make the loan an attractive option to borrowers. That is why they offer fixed interest rates with kind of mortgage.

No Negative Amortization

There is no negative amortization with a GEM. Negative amortization comes into play when repayment amounts are too small to even cover the periodic interest dues fully. Each period’s unpaid interest adds to the total outstanding on the loan so that the amount owed by the borrower progressively increases with time. This situation typically arises when repayments are low but interest rate charged is high.

However, this is not the case with a GEM. In this kind of mortgage, the increasing payments go towards paying off larger and larger portions of the principal. The interest remains fixed at a reasonable level. Because of this a GEM is a good way to pay off a larger loan over a shorter period.

The first repayment made by the borrower is taken as a fully amortizing payment. When future repayments are done, the amounts are larger than this first payment. The difference between these succeeding payments and the first one are taken as repayments of the loan balance. As the loan balance steadily reduces, the total interest payable on this diminishing sum also drops.

These reasons are why a growing equity mortgage is preferred by many people who have a small income now but hope to start earning more in coming years. It is very important for a borrower to understand the degree of increase in succeeding payments. This will help him assess whether a GEM is affordable for him, given his earning capacity and current income.

Author Bio: For more information on a equity mortgage in Ontario or a mortgage in Canada contact a mortgage broker at Canadian Mortgages Inc.

Category: Finances
Keywords: home equity, equity mortgage, mortgage, finance, credit, finance,