What is a Mortgage?

Let’s start from the very beginning.  What is a Mortgage?  Some people may feel that this is a silly, easy question – a mortgage is a big sum of money that the bank gives you so that you can buy a house, right?  Wrong.  In order to understand why a bank would help you buy a house (what's in it for them?), one must first understand the real definition of a mortgage.

Mortgage: a (written) promise that is given by the borrower (you) TO the lender (the bank) stating that you owe the bank money.

(From here on in, for ease of explanation, I will assume that you=borrower and the bank=lender)

When you buy a house, your mortgage is registered in the Land Title Office (an office that keeps track of who owns all the properties in the area).  This registration transfers “ownership” of your house to the bank so that the bank has security for the money that you owe them.

What does this all mean?  When you buy a house using money obtained from a bank, you do not actually “own” this house – the house is actually the property of the bank.  So to answer the question above about why a bank would want to help you buy a house (apart from the money that they will make off of interest) – the banks feel secure in lending you this money because if you ever break your promise to pay back the debt, the house is already registered in their name and is theirs to sell in order to gain back the money owed.

A somewhat comparable example: 

Your little sister asks to borrow your video camera worth $500. 

You’re not sure how reliable and responsible she will be because there’s a chance she will be partying. 

You ask her to give you a promise and collateral (ie. a mortgage). 

She lets you hold onto her diamond engagement ring worth $1000 until she brings back the video camera in good condition.

If she ruins your video camera, you can keep the diamond engagement ring.  If you wish to sell the engagement ring, you can, and this money can be used to buy a new video camera.

Easy stuff, right?