Mortgages

More About Mortgages in Canada

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1. What are Mortgages and How Do they Work?
2. What to Look Out For
3. Qualifying for a Mortgage: What Lenders Look For
4. Mortgage Pre-Approval: Why It's Important and How to Get It
5. What's the difference between a mortgage broker and a major bank?
6. Closing Costs: Understanding the Additional Fees Involved
7. Mortgage Renewal and Refinancing: What You Need to Know
8. What Happens When Interest Rates Rise?
9. Mortgage Default and Foreclosure: What Happens If You Can't Pay?
10. Tips for Paying Off Your Mortgage Faster
11. Frequently Asked Questions About Mortgages

What are Mortgages and How Do they Work?

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Mortgages are a loan you can use to purchase real estate. When you take one out with a lender, you're entering into a legal agreement to borrow money in exchange for the lender taking title of your property.

In order for it to be approved, you'll need to satisfy various lender conditions. Common conditions include providing income documents (T4's, notices of assessment, job letters, etc.), down payment documents (bank and investment statements) and getting a satisfactory appraisal (often at your own expense). Once all the lender conditions have been signed off on, then your residential mortgages should be approved.

Before your mortgage funds, you'll need to choose your payment frequency. Every lender offers different payment frequencies, but the most common ones are weekly, biweekly, semi-monthly and monthly.

Most lenders provide competitive rates and give you the option of accelerated versus non-accelerated monthly payments. These accelerated payments, as the name suggests, means you're paying off your mortgage quicker. When you make these monthly payments, although you're making the same number of payments, you're saving interest because your payments are slightly higher versus non-accelerated. (You're paying the equivalent of 13 months of interest instead of only 12 months.)

To better understand how your payments are calculated, it helps to look at your amortization schedule (a table that your lender should provide you with that summarizes your closed mortgage payments). You pay the most interest when you initially take out your mortgage. Depending on the size of your mortgage and the interest rate, it's quite possible that over half of each payment will go towards interest at the beginning. As you pay it down, more of your money will go towards principal. The amount going towards principal will finally outweighs the amount going towards interest before you pay it off entirely.

Running into tough financial times? If you fail to repay the mortgages according to their terms, you could face penalties, such as fees, legal action and in a worst case scenario foreclosure or a power of sale. It's best to be proactive and contact your lender ahead of time and work out an arrangement to avoid an unpleasant situation like this.

By The Numbers:

Fixed rate mortgages are the most popular mortgage types with Canadians. For homes bought with a mortgage in 2018, 68% of homebuyers chose fixed mortgages, while 30% chose variable rate.

 

Source: Mortgage Professionals Canada

Pros:

Good debt: When you take out a mortgage, it's considered good debt. That's because you're investing in an asset that usually goes up in value. Since a home is typically the single biggest investment of your lifetime, it can have a big impact on improving your net worth over the long-run.Leverage: When you buy a home by way of a mortgage, you're doing it with the assistance of someone else's money. This is known as leverage. If you buy your home in a stable real estate market and pay down your mortgage, eventually you'll have a home that' s hopefully worth more.Home equity loans: When you pay down your mortgage, you can take out a home equity loan and borrow money from the equity that you've built up in your home at a low interest rate.

Forced savings: When you buy a home, it's considered forced savings. If you're like most people, you'll most likely put your mortgage ahead of everything else. (That's because if you stop paying, pretty soon you'll no longer have a roof over your head.) When you eventually pay it off your, you'll save yourself money by not paying interest anymore.

Cons:

Down payment: Lenders will only allow you to borrow so much. You'll need to save at least the minimum down payment in order to qualify. If you're buying a property with less than a 20% down payment, you'll be required to pay mortgage default insurance. Although this can help you get into the housing market sooner, it can be quite costly over the life of your mortgage.Mortgage stress test: Buying a house isn't as easy as it used to be. You'll need to pass the mortgage stress test in order to qualify. If you have too much debt or are buying in an expensive real estate market, you may have a tough time qualifying for a large enough amount to purchase the home you'd like to live in.

What to Look Out For

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There's a lot to a mortgage than simply finding the lowest interest rate. While the interest rate matters, here are three other important factors to consider.[bsf-info-box icon="Defaults-mail-forward share" icon_size="32" icon_style="circle" title="Prepayments:" title_font_size="desktop:16px;"]If your goal is to be mortgage - free sooner, prepayments come in handy. Prepayments are those extra payments that most lenders let you make above and beyond your regular payments. Common prepayments include lump sum payments, increasingly your payment and doubling up your payment.

While increasing your payment is helpful to get it paid down sooner, be careful about increasing it by too much. Some lenders tie you to the higher payment schedule. If you lose your job or fall on tough financial times, you might not be able to go back to your original lower mortgage payment amount without facing a penalty.[/bsf-info-box][bsf-info-box icon="Defaults-pencil" icon_size="32" icon_style="circle" title="Penalties:" title_font_size="desktop:16px;"]If you break your mortgage during its terms, you'll most likely face a penalty. Not all mortgage penalties are the same though. Some lenders calculate penalties differently than others. Sometimes in exchange for a lower mortgage rate, you'll face a higher penalty. That's why it's so important to read the fine print and make sure you know what you're signing up for.

The penalty for variable rate mortgages is typically three months of interest. However for fixed rate mortgage, it's a little more complicated. You'll typically pay the great of three months of interest or something called the interest rate differential (IRD). The IRD looks at the interest rate you're currently paying on your mortgage versus the rate your lender is charging to borrowers today. If rates are substantially lower today, that's when you can face a hefty penalty.[/bsf-info-box][bsf-info-box icon="Defaults-compress" icon_size="32" icon_style="circle" title="Portability:" title_font_size="desktop:16px;"]You can avoid a hefty mortgage penalty by "porting" your mortgage. When you port your mortgage, you take it with you to a new property that you're buying. If you're buying a more expensive property, you can "blend and extend" your mortgage by combining your existing mortgage with a new mortgage, all without paying a penalty.[/bsf-info-box]

Qualifying for a Mortgage: What Lenders Look For

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Qualifying for a mortgage is a crucial step when it comes to purchasing a home in Canada. Lenders want to ensure that they are lending to borrowers who are capable of repaying the loan. Here are some of the factors that lenders will take into consideration when approving a mortgage:

Credit Score:

Your credit score is one of the most important factors that lenders consider when determining whether to approve your mortgage application. It's a reflection of your creditworthiness and indicates how likely you are to repay the loan. The higher your credit score, the better your chances of being approved for a mortgage. Lenders typically look for a credit score of at least 650, although some lenders may require a higher score.

Income and Employment:

Lenders will also want to assess your income and employment status. They want to ensure that you have a stable source of income that can cover your mortgage payments. They'll look at your employment history, income level, and the type of job you have. If you're self-employed, they may require additional documentation to verify your income.

Debt-to-Income Ratio:

Lenders calculate your debt-to-income (DTI) ratio to determine whether you can afford the mortgage payments. Your DTI ratio is calculated by dividing your total debt payments by your gross income. Lenders typically look for a DTI ratio of no more than 43%, although some lenders may accept higher ratios under certain circumstances.

Down Payment:

The lenders will want to see that you have a down payment saved up. A down payment is the portion of the home's purchase price that you pay upfront. The minimum lump sum down payment required in Canada is 5% of the purchase price, although a larger down payment can result in lower monthly mortgage payments.

Property Appraisal:

Lenders will also want to appraise the property to ensure that it's worth the amount you're borrowing. This is to protect both you and the lender in case the property needs to be sold in the event of default.

Mortgage Pre-Approval: Why It's Important and How to Get It

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If you're looking to buy a home in the near future, it's crucial to understand the importance of mortgage pre-approval. This process can make all the difference when it comes to securing the home of your dreams.

A mortgage pre-approval provides you with an estimate of the mortgage loan amount you can expect to receive from a lender. This estimate is based on your credit score, income, and other financial factors. Knowing this amount can help you set a realistic budget for your home search and ensure that you're looking at properties that you can actually afford.

Additionally, a mortgage pre-approval can give you a better idea of the interest rate you'll be able to secure on your mortgage loan. This information can be incredibly helpful when it comes to calculating your monthly mortgage payment. By knowing your mortgage rate and mortgage loan amount, you can use helpful mortgage tools to estimate your monthly mortgage payments and determine if they fit within your budget.

It's important to note that mortgage pre-approval is not a guarantee that you'll be approved for a residential mortgage loan. However, it can give you a significant advantage when it comes to the home-buying process. By having a pre-approval letter in hand, you can show sellers that you're a serious buyer who is ready to make an offer.

What's the difference between a mortgage broker and a major bank?

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A mortgage broker and a bank are both options for obtaining a residential mortgage, but they differ in a few key ways. A mortgage broker acts as an intermediary between the borrower and various mortgage lenders. They have access to a wide range of mortgage loans and can shop around on behalf of the borrower to find the best deal possible. The borrower pays a fee to the mortgage broker for their services.

On the other hand, a bank is a financial institution that offers its own mortgage loans to borrowers. They have fixed rate mortgages options, among other types of mortgages. The borrower deals directly with the bank and makes monthly mortgage payments to the bank for the duration of the loan.

While both options have their pros and cons, choosing a mortgage broker can be beneficial for borrowers who want to shop around for the best deal possible. A mortgage broker can offer a wider range of mortgage loan options and may be able to negotiate better terms on behalf of the borrower. However, working with a bank can provide a simpler, more streamlined process and may be more suitable for borrowers who prefer a more traditional lending experience. Ultimately, it's important for borrowers to carefully consider their options and choose the option that best suits their financial needs and goals.

Closing Costs: Understanding the Additional Fees Involved

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Buying a new home is an exciting time, but it's important to understand the additional fees involved in the home-buying process, such as closing costs. These fees are often overlooked, but they can add up quickly, and it's essential to have a clear understanding of what they entail.

Closing costs typically include fees such as legal fees, title insurance, and appraisal fees, among others. These fees can vary based on the mortgage amount, the mortgage terms, and the type of property being purchased. For example, if you're purchasing a rental property, you may expect to pay higher closing costs than if you're buying a primary residence.

One way to potentially save on closing costs is by taking advantage of these privileges. These privileges allow you to pay off your mortgage quicker than the regular monthly mortgage payment schedule, which can lead to lower interest charges and overall savings. However, some lenders may charge a fee for these privileges, so it's important to consider the potential costs and benefits before making a decision.

It's also important to understand that new mortgages may be subject to interest rate changes, which can impact your regular payment and overall mortgage costs. It's a good idea to discuss potential mortgage rate changes with your lender and consider whether a fixed or variable interest rate is right for you.

Mortgage Renewal and Refinancing: What You Need to Know

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As a homeowner, you may find yourself faced with the decision to renew or refinance your mortgage. This can be an important financial decision, as it can impact your mortgage payments, interest rate, and overall financial well-being. Here's what you need to know about mortgage renewal and refinancing.

Renewing Your Mortgage

When your mortgage term is up, you'll need to renew your mortgage with your financial institution. During this process, you'll have the opportunity to negotiate your mortgage rate and terms of your mortgage. It's important to shop around and compare the variable and fixed rate from different lenders to ensure you're getting the best deal possible.

If you're considering renewing your mortgage, it's also a good time to review your mortgage life insurance. This insurance can provide financial protection and mortgage disability assurance to your family in the event of your passing, and it's important to ensure you have the right coverage in place.

Refinancing Your Mortgage

Refinancing your mortgage involves replacing your existing mortgage with a new one. This can be a good option if you're looking to access equity in your home or take advantage of lower mortgage rates. However, it's important to consider the potential costs involved in refinancing, such as legal fees and appraisal fees.

Variable Rate Mortgages

If you have a variable rate mortgage, it's important to be aware of the potential impact of interest rate rises. While a variable rate mortgage may offer lower interest rates initially, these mortgage rates can rise over time. It's important to have a plan in place to manage potential interest rate increases, such as making extra mortgage payments or locking in a fixed rate.

Mortgage renewal and refinancing can be important financial decisions for homeowners. By shopping around for the best variable or fixed rate, reviewing your mortgage life insurance, and considering the potential lifetime cost of refinancing, you can make an informed decision that fits your financial goals and needs.

What Happens When Interest Rates Rise?

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When competitive mortgage rates increase, it can have a significant impact on borrowers who have loans with variable interest rates. This is because the mortgage rate on these loans can fluctuate based on changes in the market, and an increase in the interest rate can lead to higher monthly payments.

For example, if you have a mortgage loan with a variable interest rate, an increase in the interest rate can lead to an increase in your monthly mortgage payments. This can put a strain on your budget and make it more difficult to keep up with your financial obligations.

Additionally, an increase in interest rates, above competitive mortgage rates, can impact the annual percentage rate (APR) on loans. The APR takes into account not only the interest rate but also other fees and charges associated with the loan. An increase in the interest rate can lead to a higher APR, which can make the loan more expensive overall.

The current lender may also tighten their lending criteria when mortgage rates increase, which can make it more difficult for borrowers to qualify for loans. This can be particularly challenging for borrowers who are already struggling to keep up with their financial obligations.

When mortgage rates rise, it can lead to higher monthly lump sum payments, higher APRs, and tighter lending criteria. It's important for borrowers to carefully consider their financial situation, their debt load, line of credit amounts, and plan accordingly to ensure they can manage any potential changes in the variable or fixed interest rate.

Mortgage Default and Foreclosure: What Happens If You Can't Pay?

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Buying a home is a significant financial investment, and it's crucial to understand the potential consequences of falling behind on your mortgage payments. Here's what you need to know about mortgage default and foreclosure.

What is Mortgage Default?

Mortgage default occurs when you fail to make your mortgage payment on time. This can happen for a variety of reasons, such as job loss or unexpected expenses. If you miss a mortgage payment, your lender may send you a notice of default, which outlines the amount you owe and the consequences of not paying.

What is Foreclosure?

If you continue to miss mortgage payments, your lender may initiate foreclosure proceedings. This process involves the sale of your home to pay off your outstanding mortgage debt. Foreclosure can have serious consequences for your credit score and overall financial well-being.

What Can You Do to Avoid Mortgage Default and Foreclosure?

If you're struggling to make your mortgage payments, it's important to communicate with your financial institution. They may be able to offer you a solution, such as a temporary deferral of payments or a modified payment plan.

It's also a good idea to review your mortgage terms and variable or fixed rate to ensure you're getting the best deal possible. Consider speaking with a qualified mortgage professional to discuss your options and potential solutions.

Protecting Your Mortgage Investment

In addition to making your monthly mortgage payments, it's important to consider other forms of financial protection. For example, critical illness insurance can provide financial support if you're unable to work due to a serious illness.

It's also important to understand your mortgage lender's policies regarding default and foreclosure. By reviewing these policies and understanding the potential consequences, you can make informed decisions that protect your financial investment.

Mortgage default and foreclosure can have serious consequences for homeowners. By communicating with your financial institution, reviewing your mortgage terms and variable or fixed rate, and considering other forms of financial protection, you can take steps to avoid default and foreclosure and protect your investment in your home.

Tips for Paying Off Your Mortgage Faster

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Paying off your mortgage early can be a great financial goal, as it can help you save money on interest and own your home outright sooner. Here are some tips to help you pay your mortgage quicker.

Make Extra Payments

One of the easiest ways to pay down your mortgage at a faster rate is by making extra lump sum payments whenever possible. This could include paying a little extra each month or making a lump sum payment when you have extra cash on hand. By making extra lump sum payments, you'll reduce the amount of interest you pay over time and pay your mortgage sooner.

For Canadian homeowners over 55 years old, there is an additional option, called a Reverse Mortgage, which allows them to eliminate their monthly mortgage payment, while staying in the home they love.

Consider a Bi-Weekly Payment Plan

Another way to pay down your mortgage quicker is by switching to a bi-weekly payment plan. Instead of making one monthly payment, you'll make half of your monthly payment every two weeks. This can help you save on interest and pay your mortgage more quickly.

Refinance to a Lower Mortgage Rate

Refinancing your mortgage rate to a lower interest rate can also help you pay down your mortgage at a faster rate. By refinancing to a lower mortgage rate, you'll reduce your monthly payment and potentially pay your mortgage off sooner.

Choose a Shorter Term Mortgage

If you're in the market for a new mortgage, consider choosing a shorter term mortgage. For example, a 15-year fixed rate mortgage may have a higher monthly payment, but it can help you save money on interest and pay down your mortgage more quickly.

Make Use of Mortgage Prepayment Privileges

Mortgage payment privileges allow you to make extra lump sum payments towards your mortgage without incurring any prepayment penalties. This can be a great way to pay off your mortgage and save money on interest charges.

Keep Your Credit History Strong

Maintaining a strong credit history can also help you pay off your mortgage sooner. By having a strong credit score, you may be able to qualify for lower interest rates on your mortgages.

Paying off your mortgage faster can be a great financial goal. By making extra payments, switching to a bi-weekly payment plan, refinancing to lower mortgage rates, choosing a shorter term mortgage, using mortgage prepayment allowances, and maintaining a strong credit history, you can take steps towards paying off your mortgage sooner and saving money on interest charges.Apply For A Mortgage Here

Frequently Asked Questions About Mortgages

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What kind of home can I purchase with a mortgage?

A residential mortgage can be used to purchase many different kinds of home, including newly constructed homes, heritage homes, single-family homes, multi-unit properties, townhouses, condominiums, vacation properties, land, and even mobile homes. Mortgages can also be used to finance home renovations and fees associated with the purchase of a property.

How do I qualify for a mortgage?

Qualifying for a mortgage means clearing some basic financial hurdles. First of all, your credit score will be analyzed. Most lenders have a minimum required credit score of around 600, although options are available for those with lower scores. The size of your down payment, your existing debts, your employment status and your income are all also important in assessing your eligibility. Although traditional mortgage lenders, like banks, have fairly uniform and stringent requirements, online lenders and other lenders have plenty of alternatives with more flexible prerequisites. You can request information from lenders in-person, or apply online.

How do I apply for a mortgage?

Applying for a mortgage requires some paperwork. Start by gathering together your supporting documents. This includes two forms of ID, proof of employment and pay stubs (if you are self-employed, you may need to speak to the lender to verify what income documentation is acceptable), proof of down payment and its source, and other financial documents showing your assets, savings and debts. You will need to combine these items with the mortgage applications form, and submit for review. Depending on your situation, the lender may ask for additional information.

I'm self-employed. Can I get a mortgage?

Getting a mortgage while self-employed can pose some challenges, as many lenders require proof of employment for the past two years and standard pay stubs. However, this does not mean that you can't get a mortgage if you lack these. Some lenders will accept tax returns for the past two or three years in lieu of pay stubs; others may require a higher credit score than standard, or a larger down payment; or you may be asked to show business income documents and more detailed bank statements. As long as you can show some form of income and that you can afford the mortgage, you will have some options.

What's the longest mortgage I can get?

There are two time periods of importance with a mortgage: the term (the length of time you are locked into mortgages with a specific lender), and the amortization period (the length of time it takes to pay off your entire mortgage). The average mortgage term in Canada is five years, and the range is from six months to ten years. In addition, most Canadian mortgages have an amortization period of 25 years. It is possible to go up to 40 years for amortization, but these longer mortgages have other complications, such as not being insured by the CMHC.

What's the average interest rate on a mortgage?

Mortgage interest rates can be fixed (set at a single prime rate for the length of the mortgages) or variable (fluctuating in accordance with a base index). Which of these you choose will affect the mortgage rate you qualify for. Average fixed rates in Canada are currently around 3%; variable rates are a little lower at 2%, but can go up (or down) at any point. A variable mortgage is a bet on the state of the economy, so be sure you know you can afford the changing prime rate before agreeing to this option.

How much do I need for a down payment?

The amount you need for a down payment depends primarily on the value of the home you're buying. The government stipulates lump sum down payment requirements in a tiered fashion: homes under $500,000 need at least a 5% down payment; homes worth between $500,000 and $1 million need 5% of the first $500,000 and 10% of the remainder of the cost of the home; and homes worth over $1 million need a 20% down payment. Different lenders may have their own, stricter guidelines, depending on your credit score, income level, and their policies.

What fees come with a mortgage?

There are a lot of costs to contend with when buying a house, and you need to account for them all when deciding what you can afford. Mortgages come with multiple fees: application fee, property appraisal fee, home inspection fee (if the lender requires one), title search fee, title insurance fee, and mortgages origination fee. You also have to contend with legal fees, broker fees, mortgage insurance fees, and potentially others. Generally, all of these together will come to somewhere between 2% and 5% of the loan amount.

What is mortgage insurance?

Mortgage loan insurance is provided by the Canada Mortgage and Housing Corporation (CMHC), an arm of the federal government. It's required by law for all borrowers with less than a 20% down payment to have this insurance on their mortgage, to provide mortgage help and protect lenders in case of default. The cost ranges from 0.5% to 7% of the mortgage, and for simplicity it can be added to the cost of the mortgage and administered by the lender.

What is mortgage pre-approval?

Mortgage pre-approval is where you submit your information to a mortgage lender for consideration, before you find a property to buy. The lender will be able to tell you whether you qualify for a mortgage with them, how much you can borrow, and what rate you qualify for. All of this information can then inform your home search, to ensure you stay within budget and can move quickly when you do find a home to buy. Pre-approval for a mortgage is not mandatory, and lenders still have to officially ensure you are pre approved, but it can be of significant help - especially as with some pre-approvals, you lock in a certain fixed interest rate for a set period of time while you househunt, protecting you against prime rate changes.

Can I get a joint mortgage?

It's possible to split a mortgage between up to three people in Canada. This can mean access to better discounted rates, as the combined financial situation of all parties is analyzed. For new buyers or those with eligibility difficulties, getting a mortgage with their partner can be a smart way to access financing. However a joint mortgage does not necessarily equal joint ownership of the property, and it means that the responsibility for paying the mortgage back falls on both partners equally, regardless of income disparity. So entering into this kind of agreement should be done with full understanding of its consequences.

I'm a first-time buyer. What extra help can I get?

The Canadian government has several programs to help first-time buyers get a foot on the property ladder. The First-Time Home Buyer Incentive allows eligible buyers to finance a portion of their purchase through the government. The Home Buyer's Plan allows you to withdraw up to $35,000 from an RRSP to assist with your purchase. There are also tax incentives: the Home Buyer's Amount provides up to $5000 in tax credits, and there are also GST and HST rebates available. Always check to see what help you're eligible for, as it may prove valuable.