Articles and advice about getting a home mortgage
Before your start house hunting, it's a good idea to know your housing budget beforehand. The last thing you want to do is to find your dream home, only to discover that it's way outside your budget. Not only can a mortgage pre-approval help you avoid home heartbreak, it can secure you a mortgage rate in case rates creep up during your home search. Just because you're pre-approved, doesn't mean you're tied to a particular mortgage lender – you still have the freedom to go with another lender who offers a lower mortgage rate when your offer has been accepted.
Pre-Approval vs. Pre-Qualified
There's a lot of confusion among homebuyers when it comes to obtaining a mortgage. As a homebuyer it's important to understand the difference between a mortgage pre-approval and pre-qualification. Getting pre-qualified for a mortgage is very simple – it helps give you a ballpark figure about the maximum home price you can afford. Typically, the lender will provide you will the maximum purchase price and mortgage amount you qualify for. You'll only need to provide limited documentation regarding your income, assets and liabilities. The lender usually won't do any fact-checking at this point – it's used as a starting point in your search for a home. It's important to understand that there is no commitment from the lender. There's also no rate hold to protect you if rates increase.
On the other hand, a pre-approval is a written commitment from a mortgage lender about their willingness to offer you a mortgage. Unlike getting pre-qualified, you'll need to provide full documentation to verify your income, employment history, assets, liabilities and credit score. A pre-approval can still be turned down by a lender (for example if you lose your job), but it's one step closer to being approved for a mortgage. Not only will you need to show proof of down payment, you'll also need to obtain approval for mortgage insurance and pay for an appraisal once the deal is finalized to confirm your home's value. The biggest advantage of a mortgage pre-approval is the rate hold – lenders will often guarantee rates up to 120 days on fixed rates mortgages. For first-time homebuyers on a tight budget, this can provide some much-needed peace of mind to help you plan your household budget in advance.
Purchasing a Home
It's important to have all your ducks in a row when you're ready to make an offer on a house. In a seller's market, multiple offer situations are fairly common – if you aren't pre-approved, including a condition of financing in the offer you could lose your dream home. When you're ready to put in an offer, you'll need to prepare the offer to purchase with your real estate agent. This document will include important details, including the purchase price, chattels, the deposit amount, desired closing date and any conditions, such as home inspection or financing.
A mortgage approval happens once your offer has been accepted by the seller. The mortgage approval will include all the important details vital to your lender, including address, purchase price, closing date, and condo fees (if applicable). After your mortgage lender has reviewed these details, they will provide you with a notice in written if they approve of the purchase. Mortgage approvals typically happen within a matter of days. Once you receive the go ahead from your lender, you can waive the condition of financing on your offer.
It's difficult to go house hunting if you don't know how much the bank will lend you. Being pre-approved for a mortgage means you're one step closer to homeownership. There are many advantages to being pre-approved. Let's run through the pre-approval process so you're ready to make an offer when you find your dream home.
Why Get Pre-Approved?
Getting pre-approved for a mortgage means you have a realistic budget before you start looking at homes. Your lender will provide you with a letter confirming the total mortgage amount they'll lend you and interest rate you're approved for. In a seller's market when multiple offers are the norm, a pre-approval means you don't need to waste time going back to your lender and risk losing your dream home.
Pre-approval is the next step after pre-qualification – the lender will take a close look at your income, assets, debt and credit history to make sure everything is in order. Most pre-approvals for fixed rate mortgages are good for 120 days – that means if mortgage rates increase, your lender will still honour the pre-approved rate, as long as you close the deal in time. Being pre-approved doesn't mean you're tied to a specific lender – you can still go with another lender later on when you decide to buy.
Although you may be pre-approved for a mortgage, there's still a chance the lender could turn down your final mortgage approval. These instances are rare, but it's important to be aware of; for example, if you lose your job after putting in an offer. That's why it's always a good idea to include a condition of financing with your offer.
Although submitting your documents to the lender can be a pain, it actually saves time when your mortgage is waiting for final approval. Your lender will already have most of the documents they need, so they'll be a lot less paperwork to fill out.
The Pre-Approval Process
Getting pre-approved requires a lot more work than pre-qualification. You'll need to provide documents to your lender to prove your income and assets. Here are some of the documents you'll need:
- Photo ID, such as driver's license
- Your notice of assessment, letter of employment and/or T4 slips from the previous two years to verify your income
- Your total outstanding debt (what you owe)
- Financial and bank statements for your assets (what you own)
Getting Final Approval
Once you've made an offer and it's been accepted, it's time to get the ball rolling and finalize your mortgage approval. Your lender will ask you to verify your finances again to ensure they are still in good order. You may also have to provide further documentation.
Your lender will require you to get your new home appraised (you'll probably have to pay this out of pocket) to confirm its appraisal value is in line with the purchase price. You'll also need to ensure your new home is insured when you take possession and you have title insurance or a land survey.
If everything checks out, your lender will send the mortgage papers to your real estate lawyer for you to sign right before closing. At that time you'll be able to choose your mortgage amortization period, payment frequency, and term. Congrats, your hard work has paid off, you're finally a homeowner!
Minimum Credit Score Required For a Mortgage
When it comes to getting approved for a mortgage, your credit score is an important fact that will be taken into consideration. In Canada, credit scores range from 300 to 900, with higher scores meaning you have better credit and are more likely to keep up with your payments. While All lenders and creditors have their own criteria for assessing a credit score, you can determine what your credit score means by comparing it to this general scale.
- Excellent (Scores 760+)
- Very Good (Scores 759 – 725)
- Good (Scores 724 – 660)
- Fair (Scored 659 – 560)
- Poor (Scores 559 – 300)
What Credit Score is Need to Get Approved For a Mortgage?
Generally speaking, the minimum credit score most consumers need to get approved for a mortgage is 640. But, given the fact that all lenders have their own credit assessment rules and guidelines, it would be more accurate to say a score between 620 and 680 is the minimum.
While your credit score is an important factor used during the mortgage application process, it is not the only factor taken into account. How much debt you carry, what your monthly take-home income is, how large of a down payment you have, and whether or not you can pass the stress test. These are all very important factors that play a significant role in whether or not you will get approved for a mortgage.
Can You Get a Morgage With Bad Credit?
Yes, there are lenders that offer alternative mortgage options for consumers with bad credit. When we discuss the minimum credit score needed to get approved for a mortgage in Canada, we’re referring to traditional financial institutions. It’s not a secret that getting approved for a mortgage from a bank isn’t always easy and may not even be an option for many potential borrowers.
Bad Credit Mortgage OptionsThere are many options for borrowers with bad credit looking to buy a house. Alternative lenders, trust companies, and even some credit unions are all potential options for bad credit individuals as these lenders often have lower and more flexible requirements. But, the most important thing to keep in mind is that subprime mortgages are more expensive. You will pay a higher interest rate and may not get approved for as much money as you were hoping for. This is why it’s always a good idea to first consider improving your credit before choosing a bad credit mortgage solution.
When it comes to securing a mortgage, homeowners have more options than ever before. Your local bank branch can be a good starting point for your mortgage search, but it shouldn't be your own stop. Buying your house is a very busy time – you most likely won't have time to visit all the big banks. Not only is time of the essence, applying at too many mortgage lenders can hurt your credit score, the last thing you want to do when you're about to take on most likely the largest debt in your lifetime. This is where a mortgage broker can lend a helping hand – by shopping the market for you , not only will they save you time, but chances are you'll obtain a lower mortgage rate.
If your mortgage search goes as far as your local bank branch, chances are you're overpaying for your mortgage. You wouldn't buy the first house you see without first seeing comparable properties, so why do so many homebuyers do the same thing when it comes to their mortgage? Typically brokers are able to obtain very competitive mortgage rates – quite often lower than your bank branch – by shopping the mortgage market with a variety of lenders. Not only do they go to the big banks, but they often have relationships with smaller lenders, such as credit unions and trust companies, you'd probably never think of going to.
As you should already know, too many requests for your credit report can lower your credit score. Besides your income and net worth, your credit score plays a crucial role when it comes to lenders deciding to offer you a mortgage. You could end up paying a higher mortgage rate or worse, your mortgage application could be denied. The good news is with a mortgage broker your credit report is only requested once, so your good credit history stays intact.
How would you like unbiased advice without paying a dime? It must be too good to be true, right? Wrong! Mortgage brokers offer expert knowledge to help you find the mortgage product that works best for you. Brokers are typically compensated through a finder's fee directly from lenders, so there's no direct expense to homeowners. While a bank manager is usually a jack-of-all-trades, brokers deal exclusively in mortgages and follow the market closely.
Despite the disadvantages listed above, it can still make sense to obtain your mortgage through your local bank branch. If you're willing to do the legwork, your bank will often match mortgage rates offered by competing lenders. If you like the convenience of having all your services through one bank, it's worth the effort to negotiate with your bank to offer a lower rate. Just because your bank offers you the posted rate the first time, doesn't mean that's their final offer. Banks often have a lower discounted rate offered to mortgage brokers – by showing your bank you obtained a lower rate through a broker, they may be willing to match it to keep you as a client.
Although the overhead of a brick and mortar bank can be a con, it can also be a pro. Banks are able to offer a wealth of information for potential homebuyers. If you're a first-time homebuyer, it's a good idea to take advantage of all the resources offered. Banks often hold home-buying seminars and can ensure your mortgage fits into your financial picture. With mortgage rates as low as they are, it can make sense to continue to contribute to your RRSP while you still have a mortgage – your local bank contact can help you out with that.
Most people don't enjoy negotiating with their bank. Although haggling most likely isn't your cup of tea, your bank can throw in some perks to sweeten the pot. Banks are big on bundling – although your bank may not be able to match a lower rate, they might be able to include extras like free chequing. Again, you'll never know if you don't ask.
If you learn anything from this article, it's to not take your bank's mortgage letter as face value – even if you end up going with your local bank in the end, you could very well end up with a lower rate thanks to the assistance of a mortgage broker.
For most homeowners a mortgage represents the largest debt of their lifetime. That's why it crucial to do your homework and ensure your mortgage fits within your budget. There are many helpful calculators out there that can help you figure out everything from your mortgage payments to CMHC insurance premiums. If your goal is to pay down your mortgage sooner rather than later and become mortgage-free, it's essential that you understand how to use a mortgage calculator.
Mortgage Payment Calculator
A mortgage payment calculator is the most basic calculator for homeowners. It answers the basic and important question of whether your mortgage will fit within your household budget. Have you ever wondered whether you'd be better off putting five per cent or 10 per cent down? Mortgage payment calculators are so powerful because they allow you to run various scenarios and analyze their results. If you have a variable rate mortgage, you can see how a 50 basis point increase in prime rate will affect the amount that goes towards principle and interest and how much longer your amortization period may be extended.
To start using the calculator, you have to enter basic information about your home. Start by entering the asking price of your home – the calculator will display your mortgage with different down payments – five per cent, 10 per cent, 15 per cent, and 20 per cent, as well as what your mortgage insurance would be under each scenario. Next you'll need to enter your amortization period – unless you plan to pay off your mortgage early, for most homeowners it will be 25 years. Next you'll need to select your mortgage rate – you can select mortgage rates based on what's currently being offered in the marketplace or a custom rate. Your mortgage rate is essential, as it affects how much of your mortgage payment goes towards principle and interest. You can also find out helpful information, including closing costs, monthly expenses, interest rate risk, and your amortization schedule.
CMHC Mortgage Calculator
For homeowners with less than a 20 per cent down payment, you'll need to purchase mortgage insurance. Commonly referred to as CMHC insurance, homebuyers with less than a 20 per cent down payment (called high ratio mortgages) are considered a higher risk of default to lenders. To allow lenders to still offer competitive mortgage rates to homebuyers with a down payment between five per cent and below 20 per cent, mortgage insurance compensates the lender if you default on your lender. It's a win-win situation for lenders and homebuyers – lenders are protected from default and homeowners are able to purchase a home with as little as five per cent down and still get an attractive mortgage rate.
Similar to the mortgage payment calculator, you start by entering the asking price of your home. You can then choose your down payment under various scenarios – five per cent, 10 per cent, 15 per cent and 20 per cent – along with your amortization period. The calculator will then display the total amount of mortgage insurance you'll need, along with your new total mortgage including mortgage insurance. This helps give you the full pictures by showing how much mortgage insurance can increase the total cost of homeownership. Mortgage insurance is added onto your total mortgage and amortized over the life of your mortgage, so you can end up paying a lot more interest because of it.
In between house hunting, getting pre-approved for a mortgage and saving up towards your down payment, it's easy to forget about your closing costs. Closing costs are not just a drop a drop in the bucket, they represent a major cash expenditure – they can add up to anywhere between 1.5% and 4% of your home's purchase price. Let's run through basics of closing costs so you're well-prepared come closing day.
What Are Closing Costs?
As the name suggests, closing costs are expenses you'll pay up to your closing day. Closing costs can vary in timing (when they're amount), location and amount. Closing costs are your responsibility as the homebuyer – your lender will not cover them. You'll need to pay your closing costs before you can take possession of your new property. It's a good idea to put enough money aside, as it's often difficult to budget for certain closing costs, such as prepaid expenses by the seller.
Here's a rundown of the most common closing costs:
Home Inspection – If you're buying a resale home, a home inspection is highly recommended. The going rate for a home inspection is approximately $500. It's usually a good idea to include a home inspection as a condition of sale, although if you're in a multiple offer situation, you may opt for a pre-inspection – an inspection done before you make an offer.
Deposit – Sellers require a deposit to ensure you're serious about buying their home. The deposit is paid in trust to the seller's real estate lawyer. A healthy deposit of 5 per cent (which may be as much as your down payment) will show the buyer you're interested in their property.
Home Appraisal Fee - Your mortgage lender will require you to obtain an appraisal to confirm the value of your property is in line with the purchase price. If you paid way above asking, you could be left scrambling for the extra funds if your lender doesn't agree.
Land Transfer Tax – Depending on the purchase price of your home, the Land Transfer Tax (LTT) is quite often your most expensive closing cost. LTT varies by province; some cities such as Toronto have even introduced municipal LTT. LTT is calculated as a percentage of the selling price of your home. First-time homebuyers often receive a full or partial refund on LTT.
Real Estate Lawyer Fees – Buying a home is most likely the biggest purchase of your lifetime, so it's crucial that you have an experienced real estate lawyer on your team. You can expect to spend at least $500 on legal fees and disbursements (office supplies, postage, general correspondence, etc.). Your real estate lawyer will prepare the Statement of Adjustments, which includes any prepaid expenses, such as utilities and property taxes, owed to the seller.
Title Insurance – If the home you're buying doesn't have a survey, title insurance is a must. In fact, most lenders require it. Title insurance protects you against financial loss from defects in title. Title insurance can be obtained through your real estate lawyer for a fee of $100 to $300.
Estoppel Certificate Fee – If you're purchase a condo, it's very important to obtain an Estoppel Certificate. For a fee of $100, this certificate will outline the amount of condo fees you'll pay, how often, if there are any fees in arrear, and if the current owner is in default.
CMHC Insurance – If you're a homebuyer making a down payment between 5 per cent (the minimum) and 19.99 per cent, your mortgage is considered high-ratio and you'll need to obtain mortgage insurance. Although mortgage insurance isn't a closing cost per se, you'll need to pay the PST portion of your mortgage insurance on closing.
Although mortgage lenders prefer homebuyers with pristine credit ratings, you can still get a mortgage if your credit rating is less than perfect. A mortgage is very large sum of money, so lenders want to ensure you'll be able to pay it back before approving your loan.
A co-signer provides that assurance by guaranteeing repayment of the loan should the borrower be unable to repay the loan in full. Whether your credit score or debt service ratios are too low, a co-signer is fully responsible for the loan if you default on your mortgage. Rather than just having one source of income and assets, a co-signer means a lender has a backup source of funds should the borrower fail to repay.
Co-Signer vs. Guarantor
The terms co-signer and guarantor are often used interchangeably. Although they're similar, there are distinct differences. A co-signer and guarantor both fill the same basic role – they act as a second source of funds should the primary borrower default on repayment. If your income is insufficient or your credit score it too low, a co-signer or guarantor can help you obtain a mortgage. The key difference is while a co-signer's name appears on the property title, a guarantor's does not and therefore does not have any legal right to the property.
Who can act as a co-signer?
Similar to the beneficiary on your life insurance policy, a co-signer can be almost anyone willing to vouch for you financially. Being a co-signer is a big responsibility, since you could find yourself on the hook for a second mortgage, so finding someone to take on this role isn't always easy. If you're purchasing a home with your spouse, he or she can act as the co-signer. If you don't have a spouse, a parent, grandparent, aunt, until, sister or even brother can be your co-signer. The only criteria are for the co-signer to have a decent credit score and steady income.
Advantages and Disadvantage of a Co-Signer
Before you ask someone to be your co-signer, it's important to be aware of the advantages and disadvantages.
The borrower is able to obtain a mortgage that he or she would normally not qualify for
It will be in the interest of the co-signer to lend you a helping hand with your finances to ensure you have a budget and improve your credit score going forward
A co-signer acts as a safety net if you run into financial trouble and are unable to meet your regular mortgage payments
A co-signer has his or her name of the property and therefore has equal say in decisions made regarding the property
If you're unable to repay your loan, it can cause animosity with the co-signer who will be responsible for repaying the mortgage in full
It can be difficult to remove a co-signer's name from the title of your property
A co-signer loses his or her status a first-time homebuyer and all the rebates and tax credits that come with it
How do I apply with a co-signer?
Applying with a co-signer is similar a regular mortgage application. The co-signer will need to provide all the normal documents you'd include when applying for a mortgage – tax returns, notice of assessment, T4 slips, etc. A credit report will also be requested for the co-signer. Once the loan has closed, a co-signer can be removed from title, provided your income or credit score has improved, freeing him or her from any financial responsibility.
For homeowners making a down payment of less than 20 per cent, your mortgage is considered high ratio, so you'll need to purchase mortgage default insurance. Mortgage default insurance is required if you're making a down payment of 5 per cent to 19.99 per cent. Typically, the smaller the down payment of a homebuyer, the higher the risk of default, all things considered equal. Mortgage insurance is designed to compensate your lender if you fail to pay back your mortgage in full. Although your lender can foreclose on your property, they may not be able to get the full amount owed, especially if the real estate market is a buyer's market; mortgage insurance will compensate them for any losses.
The Benefits of Mortgage Insurance
Many homebuyers see mortgage insurance as a bad ting – money out of their pocket – when they should really see it as a positive. Even though mortgage insurance adds between 1.75 per cent and 2.75 per cent to your total mortgage, it allows buyers to qualify for a competitive mortgage rate, often as low as homebuyers with conventional mortgage (a down payment of 20 per cent or greater). Similar to home insurance and auto insurance, by spreading the risk of default across many homebuyers, homebuyers with mortgage insurance are able to obtain a competitive interest rate on their mortgage.
Changes to Mortgage Insurance
The Federal Minister of Finance introduced tougher rules for homebuyers with mortgage insurance. Effective July 9, 2012, mortgage insurance will be no longer be available for homes with purchase prices at $1 million or greater. Homeowners will need to have at least a 20 per cent down payment. Furthermore, the maximum amortization period for homeowners with mortgage insurance was reduced from 30 years to 25 years. Not only does this make it tougher to qualify for a mortgage, it also increases your mortgage payment, since you'll have five less years to pay off it off.
Mortgage insurance is primarily provided by the government through CMHC, although private mortgage insurers like Genworth also protect lenders against default. Mortgage insurance is as a percentage based on size of your down payment; the closer your down payment is to 20 per cent, the less mortgage insurance you'll pay.
Homebuyers have enough expenses to worry about when purchasing a home; instead of having to pay mortgage insurance up front, it's added as a lump sum to your mortgage principal. The premiums are then paid along with your regular mortgage payments over the duration of your mortgage.
Avoiding Mortgage Insurance
The easiest way to avoid paying mortgage insurance is to save a down payment greater than 20 per cent. Your Tax-Free Savings Account (TFSA) is a great place to start saving towards a down payment. Your parents might also be kind enough to offer you a gift in the form of money towards to your down payment to meet the 20 per cent threshold.
In Canada's most expensive housing markets like Toronto, Vancouver and Calgary, it's not uncommon to see double-digit price appreciation year over year. If you're not able to keep up with house prices, it may be wise to purchase a home with a five per cent minimum down payment or you could be priced out of the market.
A mortgage is a very large sum of money – not only does it represent a significant loan for lenders, it's typically represents the largest debt on a family's balance sheet. It should come as no surprise that mortgage lenders want to do their due diligence before handing over the funds. This is accomplished through their the mortgage approval process – how much documentation you'll need to provide depends on whether you're getting pre-qualified, pre-approved or approved for a mortgage. Regardless, you'll need to supply a lot of documentation to your lender and be prepared to sign a lot of paperwork.
What are Mortgage Documents?
Obtaining a mortgage is a lot more difficult than opening a chequing account and your local bank branch. It all comes down to risk for the lender – with a mortgage the lender is very often letting you borrow hundreds of thousands of dollars at a time, so you shouldn't be shocked to learn that they want to protect themselves from default. By supplying your lender with documents, they'll be able to better assess your risk and decide whether to approve your mortgage. If you're house hunting it's a good idea to get pre-approved for a mortgage, as you wouldn't want your lender to deny your mortgage application after you've already purchased a home.
You will need to provide your lender with a variety of documents to ensure the mortgage approval process goes smoothly. Documents are mostly financial, relating to your assets, debts, income, and employment history, to give mortgage lenders your full financial picture. You may want to apply at more than one lender, so it's a good idea to have your paperwork organized and ready, as most lenders will request the same documents. Being organized helps get your mortgage approved sooner, which is important when you put in an offer conditional on financing and only have a few days to get your financing approved. While pre-approval gives you an idea about your housing budget and protects you with a rate hold in case mortgage rates increase, a mortgage approval lets you breathe easier, as it means you're guaranteed to get a mortgage from the lender.
Which Mortgage Documents do Mortgage Lenders Require?
As mentioned above, lenders will require documents to verify your assets, debt, income, and employment history before approving your mortgage. It's essential that you provide them in a timely manner to ensure your mortgage gets approved. Here is a list of documents you'll need:
• Offer to Purchase — Includes important details about the home, including selling price and conditions, such as financing, that need to be met.
• Letter of Employment — Lenders will require a letter of employment from your employer, stating how much long you've been employment, whether you're full-time, and your annual salary rate. Lenders want to ensure your employment is stable and you'll be able to pay your mortgage on an ongoing basis.
• Current Pay Stub — Some lenders will also ask for the two most recent copies of your pay stub to verify your income.
• Notice of Assessment — You'll need to provide your lender with your two most recent notice of assessments received from Canada Revenue Agency. This verifies your income taxes are paid in full and you're reliable when it comes to debt repayment.
• T1 General Income Tax Form — Some lenders will also ask for your income tax return to verify your income for the previous two years.
• Financial Statements — Lenders will need you to list your assets and liabilities and provide proof in the form of financial statements. This confirms with lenders you are being honest with your finances and you can afford your mortgage.
Not to be confused with your deposit, your down payment plays a crucial role in your journey towards home ownership. Your down payment is the amount of savings you've set aside to pay directly towards the purchase price of your house. It directly influences how much home you can afford – the larger down payment you have, the higher purchase price you can afford.
While your deposit is paid at the time of offer, your down payment is payment on closing day. Your down payment, along with closing costs, should be spelled out in your statement of adjustments prepared by your real estate lawyer. Your down payment is paid in trust to your real estate lawyer, who transfers the funds to the seller once all conditions have been met. The down payment is usually expressed as a percentage of the purchase price. For example, if the purchase price of your home is $350,000 and you're making a $70,000 down payment, that amounts to 20 per cent of the purchase price (20% = $70,000 / $350,000).
Minimum Down Payment
When qualifying for a mortgage, one of the most important factors is the size of your down payment. Have you ever wondered why some families rent a home or apartment when they could purchase? That's because there's a minimum down payment you must come up with. The minimum down payment in Canada is currently 5 per cent of the purchase price.
Not only does the size of your down payment affect your housing budget, it also determines if you have to pay mortgage insurance. If you have a down payment of 5 to 20 per cent, your mortgage is considered high ratio and you'll need to purchase mortgage insurance. Since you're putting down less money, you're considered a higher risk of default; mortgage insurance is meant to protect lenders if you aren't able to pay back your mortgage in full.
Mortgage insurance is provided by CMHC and private mortgage insurers such as Genworth. The amount of mortgage insurance required is based on the size of your down payment. Mortgage insurance is added as a lump sum to your total mortgage amount and the premiums are paid over the life of your mortgage with your regular mortgage payments. If you're fortunate enough to have a down payment greater than 20 per cent, your mortgage is considered conventional and you'll avoid purchasing mortgage insurance. If you're buying a home with a purchase price of $1 million or greater, effective July 9, 2012, you'll have to come up with a down payment of at least 20 per cent; CMHC will no longer insure these mortgages.
Saving for Your Down Payment
Affording a home can be tough, especially for first-time homebuyers; luckily the government lends a helping hand. First-time homebuyers qualify for the Home Buyers' Plan (HBP), which lets you withdraw up to $25,000 tax-free from your RRSP. It does have some terms – you'll have to begin repayment starting in your second year and you'll have 15 years to repayment the amount in full, otherwise it will be considered taxable income when you file your income taxes the following year. Your Tax-Free Savings Account (TFSA) is also a great way to save towards your down payment. By investing after-tax dollars, the funds will grow tax-free inside until you're ready to withdraw them and use them towards the down payment of your home.
Mortgage Down Payment
One of the biggest barriers to going from being a renter to a homeowner is your down payment. Your down payment helps you get your foot in the door and purchase the home you've always dreamed of. Your down payment together with your income influences the maximum purchase price you can afford. Most people know they need to save money towards a home, but do you know how much? Let's take a look at the minimum down payment and the best ways to save up.
Conventional vs. High Ratio Mortgage
There are two important down payment thresholds to be aware of: minimum down payment and high ratio mortgage. If you have a down payment between 5% and 19.99% your mortgage is considered high ratio and you'll need to purchase mortgage insurance. You're considered a higher risk, so mortgage insurance protects your lender if you default. CMHC insures the lion's share of mortgage, while private insurers like Genworth insure the remainder. Although you'll have to pay insurance premiums along with your regular mortgage payments, it's not a bad thing – you'll qualify for the same mortgage rate as someone with a conventional mortgage (a down payment of 20% or more).
How much should I put as a down payment?
Typically, it's a good idea to put down as much as possible (just don't forget to budget between 1.5% and 4% for closing costs). A larger down payment will mean a lower mortgage payment and less interest over the life of your mortgage. If you have a high-ratio mortgage a larger down payment also means lower mortgage insurance premiums.
What sources can I use for my down payment?
With home price skyrocketing, it's harder than ever to scrap together enough funds to meet the minimum 5% down payment in expensive markets like Toronto and Vancouver. Personal savings is usually the first source for homebuyers. A high interest savings account or TFSA (tax-free savings account) are great places to sock away your hard-earned money to reach your goal of homeownership. You can also cash in your mutual funds, stocks and bond, although those aren't the safest place to store your money since they can be volatile.
A lot of boomer parents of gifting their children a portion of their down payment to meet the 20% threshold and avoid mortgage insurance. If you have an RRSP, you can borrow up to $25,000 towards your down payment under the Home Buyers' Plan (HBP), although you'll need to start paying it back in year two or it will be added to your income and taxed at your marginal tax rate.
When you sign up for a mortgage, chances are the idea of breaking it before your term is up is the furthest thing from your mind. Although you're probably most concerned about your mortgage rate, it's important to ask about mortgage penalties when signing up for with a lender. There are a lot reasons you may want to break your mortgage early – divorce, job loss, taking advantage of lower mortgage rates, and debt consolidation. The last thing you want to do is be at the mercy of your bank if one of these happens.
If you have a variable rate mortgage, the mortgage penalty is pretty straightforward – you'll pay three months' interest. If you have a fixed rate mortgage, it's a bit more complicated – you'll pay the greater of three months' interest or the IRD (interest rate differential). Have you ever heard those horror stories of homeowners owing thousands of dollars in mortgage penalties? That was most likely due to the IRD. The IRD is designed to compensate lenders for lost interest when you break your mortgage early. Although the way lenders calculator the IRD is the same, the comparison rate used differs – it's important to know ahead of time what the comparison rate is.
Here are some important questions to ask your lender about mortgage penalties before signing up for a mortgage:
What rate do you use for your comparison rate?
It's a good idea to find out up front if your lender bases your penalty on the posted or discount rate. You may have gotten the discount rate when you signed up for your mortgage, but a lot of lenders base their penalties on the inflated posted rate. With a lot of lenders with posted rates above five per cent today, it's easy to see how your mortgage penalty can run in the thousands. The comparison rate is used when calculating the IRD; the higher your comparison rate, the higher your mortgage penalty.
Will your mortgage lender be more lenient if you break your mortgage and stay with them?
If you've ever received a mortgage renewal letter in the mail at the posted rate, you should know how much lenders value loyalty. Although mortgage lenders may give you a break on your mortgage penalty out of the goodness of their heart, it's their prerogative. Mortgage lenders may do this to keep you from going to the competition, whether you receive a break on your penalty will be their call.
Can I refinance my mortgage without paying a penalty?
Whether you're looking to refinance to consolidate debt, pay for renovations, or use as a down payment for an investment property, it's important to have financial flexibility. Your home is most likely your most valuable asset; through a HELOC (home equity line of credit) you can tap in and withdraw up to 80 per cent of your equity. When you refinance, you break your existing mortgage to get a new, larger mortgage. If your HELOC is with your existing lender, your lender may only charge you the admin fees of setting up your HELOC, but you can still face hefty mortgage penalties if your lender isn't as lenient as you'd like.
Your mortgage doesn't have to be a life sentence. Just because your mortgage has an amortization period of 25 years, doesn't mean you can't pay it off sooner. Here are our best tips to pay down your mortgage faster so you can start enjoying mortgage freedom sooner.
Don't Stretch Your Housing Budget
One of the biggest mistakes homebuyers make is purchasing at home at their maximum housing budget. Just because the bank says you can afford a $550,000 home, it doesn't mean you should spend that much. It's important to budget for other expenses, such as closing costs, regular maintenance and repairs and have an emergency fund for job loss or unexpected expenses. You'll also probably want to buy new furniture if you're moving from an apartment to a house. You'd be surprised how quickly monthly expenses like electricity, heat and hydro can eat into your take-home pay, so be sure to put some money aside.
Get the Assistance of a Mortgage Broker
Whether you're getting a mortgage for the first time or renewing your existing mortgage, you're doing yourself a disservice if you only visit your local bank branch. You wouldn't buy the first home you see, so why do so many homebuyers not bother to shop around when it comes to their largest debt, their mortgage? A mortgage broker can save you time and money by shopping the market – even if you end up going with your bank, you can use the rates from a broker to get a lower rate.
Don't Get Pre-Approved at Too Many Lenders
Although it's a good idea to shop around, it's not a wise move to get pre-approved at too many lenders. Each lender will request a copy of your credit report, which could lower your credit score. The last thing you want is for your credit score to take a hit right before you take on the biggest debt of your lifetime. Instead shop the market with a mortgage broker who will only need to request your credit score once.
They'll Always Be Another Home
You may think you've found your dream home, but you're probably not alone. Five other potential buyers may feel the same way. This is especially common in a seller's market, where multiple offers are the norm. Even though your lender may have approved you for $550,000, if you overbid and your lender doesn't agree with how much you paid you could have to come up with the extra funds yourself. Look at comparable properties and make your best offer first. If the seller rejects it walk away – they'll always be another home.
Reduce Your Amortization Period
Do you really want to still be paying your mortgage when you're in your 60's right before retirement? Although it can be a good idea to choose an amortization period of 25 years for monthly cash flow purposes, don't get caught in the trap of just paying the minimum. Take advantage of your lender's prepayment privileges. Many lenders of closed mortgages allow you to make prepayments. Typically you can increase your regular mortgage payment and make lump sum payments up to a certain percentage of your mortgage principle annually. By taking advantage you can reduce your amortization period dramatically and save thousands in interest.
You've made the wise decision to search for the ideal mortgage product with the assistance of a mortgage broker. Your next step is finding a mortgage worker who you feel comfortable with and will work hard to get you the lowest mortgage rate. Similar to real estate agents, you don't want to simply choose the first broker you meet. By treating your meeting with prospective brokers like a job interview, you'll be more likely to find a broker who will do their utmost to find the right mortgage. Here are some questions you should ask brokers.
How long have you been a broker?
As you probably already know, dealing with banks can be anything except straightforward. You'll want an experienced broker who is willing to read the fine print to find the mortgage that is the best fit. There certainly isn't any problem with a broker just starting out, but experience is definitely an asset. Not only should you ask how many years they've been in business, you find out how many mortgage they close on average in a month. If a broker closes less than two mortgages a month, chances are they're just starting out or aren't very successful.
What kind of educational requirements and licenses do you possess?
You can't just wake up one day and decide to be a mortgage broker. Similar to real estate agents and lawyers, brokers need licenses, too. Find out which associates the broker belongs to. Your broker at a bare minimum should have their AMP designation. Be sure to do your own due diligence and visit the Canadian Association of Accredited Mortgage Professionals website to verify they are a member.
Can you discuss your compensation from lenders?
Although generally there is no direct fee paid by the buyer to a broker, it's a good idea to discuss compensation ahead of time. You'll want to make sure your broker is truly working in your best interest and not simply showing you the mortgage products that pay the highest commission.
Is this the best mortgage product?
It's important to remember the lowest mortgage rate and the best mortgage product don't always go hand and hand. Often products with low rates have limited prepayment privileges. That may be fine if you aren't planning to pay down your mortgage quickly, but if you'd like to be mortgage-free early, it might not be the best product for you.
Are you any hidden fees?
As mentioned above, lenders sometimes offer “teaser” rates laced with all sorts of extra fees. Surcharges can range from credit reports to appraisals. Some lenders will cover your appraisal, while others won't, so it's a good idea to ask upfront.
Can I obtain a copy of the mortgage lender's letter of commitment?
As they say in the law, it's always a good idea to get something in writing. Just because your broker says they've obtained an ultra-low rate, doesn't mean it's for real. Be sure to ask for it in writing to ensure you have the rate hold you think you do.
Do you specialize in residential mortgages?
It's a good idea to find a broker whose expertise lies in residential mortgages. Commercial and residential mortgages have a lot of differences, so you should probably stay clear of a broker whose primary business is in commercial mortgages. Just like how it's a good idea to find a lawyer that specializes in real estate, the same holds true for brokers and the mortgage type they deal with.
What is your availability?
If you're planning to purchase a home in the next month, you don't want to find out your broker is going to be away on vacation in Europe for the next two months. Brokers are typically more available than banks, but there's no guarantee. By asking up front, you'll know when and how (phone or email) is the best way to reach your broker.
Unless you win the lottery, chances are you'll have to renew your mortgage at least once during your lifetime. Let's face it, everyone is busy – when you receive your mortgage renewal letter in the mail, the easiest thing to do is to sign on the dotted line and renew with your existing lender. Unfortunately, your lender most likely isn't offering you its best deal the first time – it's not uncommon today to see letters with the inflated posted rate. That's no way to thank you for your years of loyalty to your lender!
That's why even if you're happy with your current lender, it's a good idea to shop the market to see if you're getting the best deal. It used to be that homeowners would simply renew their mortgage without giving it a second though, but today more homeowners are getting the message. Only just over one in four homeowners – 27 per cent – will automatically renew their mortgage without shopping the market for a better deal. Shopping the market doesn't necessarily mean switching lenders – you can still stay with your lender, often while getting a lower mortgage rate, you just have to be willing to do your homework. Here are our best tips when renewing your mortgage.
Be Proactive: If your mortgage term is up in a couple weeks, chances are you won't be bothered to shop the market. Instead of waiting until the last minute, it's a good idea to start looking early – six months before your mortgage renews will give you plenty of time to find lenders offering the best mortgage products. Why six months? Lenders will often offer rate holds of up to six months – if mortgage rates go up before you renew, you're guaranteed the lower mortgage rate; if rates go down you'll simply get the lower rate, no questions asked. It's a win-win situation for homeowners.
Do Your Homework: The days of setting up appointments with individual lenders and visiting them in person is over. Today it's easier than ever to shop the market. Mortgage rate comparison websites like RateSupermarket.ca and RateHub.ca let you compare mortgage rates at dozens of lenders with a few clicks of the mouse. Knowledge is power – simply by printing off the mortgage rates offered by other lenders, you may get a lower mortgage rate with your current lender.
Don't Accept the Posted Rate: They say only a fool accepts the posted rate. While you can get five-year fixed rate mortgages for just over three per cent, the big banks still have posted rates over five per cent. What gives? If your lender is offering you the posted rate, threaten to go elsewhere. Your lender should have some wiggle room when it comes to mortgage rates, you just have to ask.
A Mortgage Is More than Just an Interest Rate: For a lot of homeowners, the best mortgage and the lowest mortgage rate are synonymous. While the mortgage rate is an important feature, it's not the only thing to look for in a mortgage. If you plan to pay down your mortgage early, prepayment privileges can be just as important. It's not uncommon for homeowners to sell their home before their mortgage is up – you'll want to know if your mortgage is portable, as it can cost you an arm and a leg to break your mortgage early.
Believe it or not, but being a first-time homebuyer actually has some perks. As a first-time homebuyer you don't have to deal with the pressure of selling your existing home and buying a new property. Buying and selling at the same time can be stressful – do you buy a home first and sell your existing home after, or do you do the opposite and sell first and buy a new home later?
In an ideal world you'd sell your home first and buy a home after, but things don't always work out that way. Not being flexible with your closing date could cost you your dream home. Unless you have thousands of dollars in savings you can use as a down payment, you'll most likely need bridge financing.
What is Bridge Financing?
As its name suggests, bridge financing helps you “bridge the gap” when you're buying and selling at the same time. It comes in handy when your closing date on your new home is sooner than your existing home. Most homebuyers will need the funds from their existing home to use as a down payment on their new property. Bridge financing comes to the rescue by providing short-term financing for homebuyers.
How much does Bridge Financing Cost?
When it comes to loans, typically the lower the risk, the lower the interest rate you'll pay. With bridge financing when the agreements of purchase and sale have already been signed on the properties you're buying and selling, it's just a matter of the funds changing hands before it's a done deal.
With such a low risk, you'd expect bridge financing to be comparable to mortgage rates, but unfortunately that isn't the case. In fact, bridge loans usually have a lot higher interest rate than mortgages. Bridge loans usually have an interest rate comparable to a line of credit, usually two per cent above prime rate. While nowhere near the interest you'll pay on your credit card, it's still more expensive a HELOC (home equity line of credit).
Although the interest rate isn't the lowest on the market, it's important to remember that you'll only need a bridge loan for 30 to 90 days until your deal closes, so the interest payments will end up being measly. Similar to a HELOC, typically you'll have to pay an administrative fee to your lender to set it up.
Is a Bridge Loan Secured?
As you may know, there are two types of loans, secured and unsecured. Secured loans are low risk for lenders and therefore carry a lower interest rate; they are backed by solid assets like your home that can be sold if you default on your loan. An unsecured loan does not have an asset backing it and therefore carries a higher interest rate. A bridge loan is considered secured since the lender the home you're selling to fall back on if you default on your loan.
Ask Your Lender
If you're in need of a bridge loan, be sure to let your lender know as soon as possible. Not only will you need to fill out the paperwork for your mortgage approval, you'll need to complete additional paperwork for your bridge loan. Not all lenders offer bridge financing – you don't want to be left scrambling if your lender isn't willing to help you out. Your real estate agent may have a close relationship with a lender who offers bridge financing, so it doesn't hurt to ask.
Even if you're just a first-time homebuyer, chances are you've heard of a mortgage, but do you truly understand what it is? Let's run down the basics of residential mortgages, including some of the most common questions homebuyers have, so you'll be well-prepared when you make an offer on your dream home.
What is a Mortgage?
A mortgage is a secured loan issued to the borrower (the homebuyer). The property protects the lender in the event you default (fail to repay) your mortgage. With home prices at record highs, the vast majority of homeowners will need a mortgage to purchase a property. A mortgage lets you enjoy the luxury of being a homeowner today without having to save up for many years.
What is a Mortgage Rate?
A mortgage rate is the interest rate charged by your lender on your outstanding mortgage principle. There are two types of mortgage rates: fixed and variable. With fixed rates your rate and payment will stay the same for the term of your mortgage. With variable rates, the spread (the difference between your rate and prime rate) will remain unchanged, but your rate and payment may change based on prime rate, which is typically reviewed monthly by lenders.
What is the difference between an Open and Closed Mortgage?
Closed mortgages have repayment restrictions. Although they often come with prepayment privileges, you'll incur costly mortgage penalties if you exceed them. You'll also pay a penalty if you renegotiate or refinance your mortgage before the end of its term. A closed mortgage with the same term length as an open mortgage will almost always have a lower mortgage rate.
Open mortgages allow you to pay off your mortgage in full at any time without incurring a mortgage penalty. When it comes mortgage terms, open mortgages have slightly fewer options – fixed rates range from 6 months to 1 year and variable rates range from 3 years to 5 years. An open mortgage makes the most sense if you expect a huge financial windfall or you're renewing your mortgage and expect to remain in your home short-term.
What is a HELOC?
A HELOC (Home Equity Line of Credit) is a secured loan that lets you tap into the equity of your house. Lenders will allow you to borrow up to 80 per cent of your home equity. The interest rate is typically lower than an unsecured line of credit since you're using your house to secure the loan.
What are Prepayment Privileges?
Prepayment privileges let homeowners with closed mortgages make extra payments towards their principle on an annual basis without paying a penalty. The prepayment amount is typically based on a percentage of your outstanding mortgage. Prepayment privileges let you to accelerate your mortgage repayment to be mortgage-free years sooner. There are several types of prepayment privileges. Payment increase allows you to increase the amount of your regular mortgage payment, with the excess going straight to principle. Lump sum allows you to make large payments throughout the year directly towards principle to reduce the size of your mortgage.
What is the difference between Mortgage Amortization and Term?
Your mortgage term is the amount of time you are bound by the agreed-upon rates and conditions spelled out in your mortgage documents with your lender. Mortgage terms typically vary in length from six months to five years. At the end of mortgage term your mortgage becomes payable, unless you choose to renew.
Your mortgage amortization period is how long it will take you to have your outstanding mortgage balance paid off in full based on your current regular mortgage payments and interest rate. A longer amortization period will mean lower mortgage payments, but it will mean more interest paid over the life of your mortgage.