A house is probably the single biggest investment one will ever make and almost everyone who is buying a home will need some sort of financing. Most simply put, a mortgage is a loan that uses a property as security to ensure the debt is repaid. A mortgage is a fully secured form of financing where the interest you pay is often less than other forms of unsecured financing like a credit card.
So what does one look for in a mortgage? Seek out a mortgage that best suits your personal situation and strategize to pay the least amount of interest over the term of the mortgage. Before you can buy a home its best to do some research and follow these simple steps when seeking financing:
1. Get your finances in order.
2. Your credit rating is an intrinsic part of getting a mortgage. We advise you to engage a mortgage broker.
3. Know what you can afford.
Although it can be depressing when you compare your income to your expenses, it will be even more depressing if you can’t make the mortgage payments on your new home! When assessing the amount and type of mortgage you are eligible for, your lender will take into consideration only the debts you have to pay. Therefore, it’s up to you to create a realistic monthly budget for you to assess where and how you spend your money, and what you can actually afford, because the bank won’t.
Once you deduct your total monthly expenses from your total net monthly income, the remaining amount is what you can afford to pay each month toward your mortgage payments -- and in that amount you need to include a contingency buffer for taxes, emergency repairs and other costly items that could manifest.
Before you can even consider mortgage costs you need to determine how much of a down payment you have to purchase a property. Your down payment is your initial amount of equity that you are putting into the purchase. The balance of the purchase price is what will be financed through your mortgage.
Currently in Canada, a down payment of 5% is the minimum amount required for the purchase of a primary residence. However, a buyer must set aside more money for closing costs. Learn more about the costs associated with buying a home.
The Home Buyer’s Plan (HBP) and First Time Buyers
The Home Buyers' Plan (HBP) is a Federal Program in Canada that allows you to withdraw up to $25,000 from your registered retirement savings plan (RRSP) to buy or build a qualifying home for yourself or for a related person with a disability.
Your RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them under the HBP.
Generally, you have to repay all withdrawals to your RRSP within a period of no more than 15 years. You will have to repay an amount to your RRSP each year until your HBP balance is zero. If you do not repay the amount due for a year, it will be taxed with your income for that year.
Determine What Size of Mortgage You Can Carry
What can you comfortably afford? What amount can you financially stretch yourself to in order to buy your dream home? Often lenders will be more than happy to lend you more and give you a larger mortgage if you can afford the payments, but you need to decide whether or not you want to be saddled with a large mortgage. Will the larger monthly payments fit comfortably into your budget? Will it change your lifestyle? Is it worth being house-rich and pocket-poor?
Getting Ahead with a Pre-Approved Mortgage
The process to getting a pre-approved mortgage is quick, simple and it doesn’t cost you a thing! It can save you time and heartbreak and your offer will be taken more seriously by sellers. That being said, just because you are pre-approved, doesn’t mean you have secured a mortgage. You still need to be approved by your lender so any offer you make should be “subject to financing.”
And understand that in today’s climate of rapidly changing interest rates and qualification requirements you need to keep in touch with your lender. What was approved two months ago may not be applicable when you need it to be.
Know the Lingo
Mortgages break down into two types based on the amount of the down payment, and the amount of risk the lender is taking by providing you the loan.
Fixed Rate Mortgage This is a mortgage that has a fixed interest rate for the entire term of the loan. The distinguishing factor of a fixed-rate mortgage is that the interest rate over the time period of the mortgage is set at the time the mortgage is originated. The benefit of a fixed-rate mortgage is that the homeowner will not have to contend with varying loan payment amounts that fluctuate with interest rate movements.
High Ratio Mortgage If the down payment is less than 20% of the purchase price of the home you want to buy, you are also required to be insured by the Canadian Mortgage and Housing Corporation (CMHC) or by one of several other private insurers that operate in Canada. Talk to your mortgage broker, as the premium cost can be quite steep.
Variable Rate Mortgage A variable rate mortgage is a mortgage that has fixed payments, but the interest rate fluctuates with any changes in interest rates. If interest rates go down, more of the payment goes to principal and if interest rates go up, more of the payment goes towards the interest.
Amortization The repayment of a loan calculated so that the principal will be paid in full through monthly payments of principal and interest for a predetermined period of time. Many home mortgages are fully amortized in 15, 20 or 30 years. This is different from the mortgage “term.” For instance, you could have a fixed term mortgage with a five-year term, based on a 30-year amortization.
Open Mortgages Mortgages where you can pay it off in full or in part at any time without being penalized. By paying down your principal early, you can save a lot of money in interest. This is why the average fixed interest rate for an open mortgage is often 0.4-0.6% higher (or more) than a closed mortgage for the same term.
Closed Mortgages This is the opposite of an open mortgage -- you cannot pay off the mortgage before the maturity date, refinance, or re-negotiate the interest rate or term without being penalized. However, many closed mortgages allow you to double your payments or pay additional lump-sums at varying intervals -- depending on your lender's terms. Worth enquiring about.
The most important advice we can give is for you to always read the fine print and consult with your agent and lawyer before signing on the dotted line and accepting any mortgage seller’s offer.