All You Need to Know About Mortgages in Canada
You undoubtedly understand the basic notion of acquiring a loan to become a homeowner. In actuality, a mortgage is a marathon of financial computations, offer comparisons, and approval stages.
In this article, we’ll walk you through the mortgage process from start to end, including the terminology you’ll need.
What Is a Loan?
A mortgage is a loan used to buy property, which serves as collateral for the lender. A mortgage is generally for a considerable sum and paid back over 25 or 30 years.
With a mortgage, you commit to making monthly payments. This payment includes both principal and interest. Payment covers the interest first, then the principal. If you default on your mortgage payments, the mortgage lender has the right to repossess the home.
The Loan Process
After deciding to buy a house, the next step is figuring out how to pay for it. Sadly, most of us do not have enough money to buy a property entirely. A mortgage can help.
Get pre-approved for a mortgage before looking for a home. Pre-approval lets you know how much you can afford to spend on a property. You also limit your risk by not making an offer on a property you can’t afford. (I’ll elaborate on the pre-approval procedure later.)
Once pre-approved, you may begin house hunting. Make a list of requirements and desires. So you may evaluate each home objectively.
When you locate a home you like, make an offer. Your lender or mortgage broker will help you secure a mortgage if your offer is approved. You must submit papers and information. If everything is good, the lender will sign everything and you may eliminate the loan constraint (if applicable).
When Is It Time?
When is a good time to purchase and mortgage? When you’re emotionally and financially ready. That suggests you have stable employment, a stable personal life, and are dedicated to remaining put for the next five or ten years.
If not, you might rent until you’re ready to buy.
When applying for a mortgage, the lender needs to know your monthly budget. The lender achieves this with two debt ratios: GDS and TDS.
The proportion of your total monthly income required to cover house expenditures such as your mortgage, property taxes, heating, and upkeep (if applicable). Most lenders want a GDS Ratio below 39%.
TDS Ratio is like GDS Ratio. It looks at the same items as the GDS Ratio, but adds any additional debt you may have. Revolving debt, like credit card debt or a line of credit, is normally serviced at 3% of the outstanding sum. The payment on an installment loan (auto loan, car lease, or personal loan) is used to service the debt. Most lenders want a TDS Ratio below 44%.
Notably, the mortgage payments utilized in these computations are larger than yours. Because the payouts are inflated by the stress test rate (currently at 4.79 percent ).
It’s crucial to take in any other major costs, such as daycare, in addition to the GDS and TDS Ratios.
Getting a Mortgage
When looking for a mortgage, you can go to a bank or credit union or deal with a mortgage broker. Whatever lender you select, we offer suggestions for the best locations to acquire a mortgage if you’re just starting out.
Your first inclination when looking for a mortgage is to go to the bank where you have a chequing account. A bank’s range of products may be helpful for you to keep all your finances in one location. A mortgage can be bundled with additional products at some institutions.
However, if you merely acquire a mortgage with your current bank, you may lose out on a better deal elsewhere. The mortgage market is changing, so shop around. It is also recommended to check out virtual banks (sometimes known as ‘direct banks’) like Tangerine Mortgage for mortgage rates. Virtual banks don’t have physical branches, therefore they can provide better mortgage rates than traditional banks, especially on long-term fixed-rate loans.
A mortgage broker can also help you look around. An independent mortgage broker can give unbiased advice and access to hundreds of lenders. Even if you wind up going with your local bank, you’ll be happy knowing you received a decent bargain.
An internet mortgage broker has access to many more lenders than a local broker. Greater alternatives mean more freedom. With more lenders, you’re more likely to get a better rate. Also, if your bank has previously rejected you for a mortgage, you can still look for one through online mortgage brokers.
What to Look for in a Mortgage
While interest rates are important when looking for a mortgage, they shouldn’t be the only factor.
Here are some questions to consider when exploring mortgage options:
Will You Breach Your Mortgage?
Getting a mortgage is probably the last thing on your mind. But a five-year mortgage is a long time. If you think you might need to break your mortgage during your term, choose a lender and mortgage type with a lesser penalty. Variable rate mortgages usually offer lesser penalties.
How Will Mortgage Breaking Be Punished?
To avoid mortgage penalties if you break your mortgage to buy a new property, consider transferring your loan. Porting your mortgage implies taking it with you to your new home. Some lenders provide greater mobility than others. Some lenders offer you 30 days to move your mortgage, while others give you 90. If portability is crucial to you, ask a lender about its policies.
What About Deposits?
Prepayments are essential for aggressive mortgage payoff. These include monthly payment increases, double payments, and lump-sum payments. Not all lenders allow prepayments. As an example, one lender may only allow 10% lump-sum payments and boost your annual mortgage payment by 10%. You may pay off your mortgage at your own speed if you choose the proper lender with the right prepayments.
Types of Mortgages
Mortgages can be insured, insurable, or uninsurable.
An insured or high-ratio mortgage requires you to pay lender-backed mortgage default insurance. Most lenders provide their lowest mortgage rates on these products (however the mortgage default insurance you pay offsets this).
An insurable or conventional mortgage requires a 20% down payment. No mortgage insurance is necessary in this situation. This saves you money, but because it is riskier for lenders, you usually pay a higher mortgage rate.
Uninsured mortgages are mortgages that do not fulfill the government’s criteria for mortgage insurance. Examples are $1 million property purchases and 30-year amortizations. As a result, uninsurable mortgages have the highest interest rates.
Term vs. Amortis
A mortgage term is the length of time your mortgage terms are guaranteed. If you have a fixed-rate mortgage, your rate will remain constant.
Mortgage amortization is the time it takes to pay off your mortgage. The normal length in Canada is 25 years, but you can choose a shorter or longer period (as long as you can pass the stress test).
Open vs. closed
An open mortgage allows you to pay off the loan in full at any time. As a result, mortgage rates tend to be higher. Open mortgages are usually only viable if you predict a large cash windfall or want to sell your house soon.
The extra money you can put towards a closed mortgage is limited. As a result, it has a cheaper mortgage rate than an open mortgage.
Variable vs. Fixed-Rate
A fixed-rate mortgage has a set interest rate and payment for the life of the loan. Variable mortgage rates and payments fluctuate based on changes in a lender’s prime rate.
Fixed mortgage rates are higher than variable mortgage rates since you are paying for the security of knowing your mortgage rate and payment.
What Do Mortgage Lenders Look For?
When considering whether to accept your mortgage application, lenders weigh numerous variables. You’re assessed based on your net worth and your ability to pay.
Lenders prefer borrowers that have a steady income. You must show that your salary is sufficient to make regular mortgage payments. Most lenders will be pleased if you are a full-time salary employee. Lenders also favour hourly employees who have assured hours. If you work full-time or part-time hourly and your hours aren’t fixed or you’re on contract, a lender will normally want two years of income (lenders will do a two-year average). You’ll need to produce a letter of employment, recent paystubs, T4s, and assessment notices for the previous two years.
Self-employed people may typically secure a mortgage, but they must produce extra documents. Because self-employment income is less predictable than full-time paid work, lenders normally want two years of business history and two years of Personal T1 Generals, Notices of Assessment, and Corporate Financial Statements (if applicable).
Lenders often want a 90-day transaction history for bank accounts used for down payments. Generally, funds from investments or RRSPs require three monthly statements. If it’s from another property transaction, you’ll need to produce a signed purchase agreement and a current mortgage statement (if the sold home had one). If you receive cash as a gift, the lender will normally ask for a signed gift letter and evidence of deposit.
To get started, give the lender a list of your assets, including chequing, savings and non-registered accounts. Although assets aren’t factored into your debt ratios, they show the lender that you’re a responsible borrower. Imagine earning $200,000 each year for ten years but having no investments. Lenders would be wary. Is the borrower spending every penny?
Debt and credit are connected. When considering you as a borrower, a lender looks at your credit history, your credit score, and your payment history. This information is in a borrower’s credit report, which a lender must request in writing.
Lenders prefer borrowers with credit scores of 670 or 680 and no late or missed payments. You may still be able to secure a mortgage if you have late payments or have filed for bankruptcy or a consumer proposal. A lender will normally inquire about the cause of a credit blemish. If you fell behind on obligations due to circumstances beyond your control (like illness or job loss), and you can show you’re a good borrower otherwise, you may still qualify for a mortgage.
Lenders look past the property itself. An appraisal is used for this. Depending on the property and its location, certain lenders may utilize an automated valuation model (AVM). (A lender doesn’t need to see your property to appraise it.) Difficult to get a comprehensive appraisal? The appraisal validates the property’s value. It also tells the lender the property’s condition.
Pre-qualification: Ideal for first-time homebuyers. A lender will ask for basic financial information before estimating how much they could be prepared to offer you to buy a home.
Pre-approval is more official than pre-qualification. A lender will verify your financial details and do a credit check at this point. Pre-approval means the lender is committed to providing you with a loan, while the final amount and terms are subject to vary based on the actual property appraisal and market movements.
The Mortgage Stress Test determines if you can still afford your mortgage if rates rise. This stress test is required for all house purchasers, including those who put down 20%.
Buying real estate requires a down payment. A larger down payment means a lesser mortgage. This depends on the buying price of your house. For example, if you buy a property for less than $500,000, you just need to put down 5%.
Mortgage Rate: The mortgage interest rate. This determines how much interest you pay over the mortgage’s life. Your mortgage rate (fixed or variable) may fluctuate (more on that below).
Closing costs are expenses you must pay in advance of your closing date. Closing costs include real estate lawyer fees, transfer taxes, movers, and house inspections. Budget between 1.5 and 4% of the purchase price for closing costs.