the best mortgage solution for you
I’m new to mortgages. I’m researching.
The money you put towards the purchase of your house. The down payment together with your mortgage equals the purchase price of your home.
The larger the down payment, the smaller your mortgage and monthly payment. With a smaller mortgage, interest costs will be less, adding up to significant savings over time – and leaving you with more ‘play’ money.
Minimum 5% of the purchase price.
With a down payment less than 20%, the mortgage needs to be insured by CMHC. You will pay a one-time CMHC premium based on your mortgage amount.
For example, a 5% down payment and a 25 year mortgage would result in a 3.6% CMHC premium being added to your mortgage balance. You do not have to pay for this up front.
With a down payment of 20% or greater, CMHC typically goes away.
Therefore, a larger down payment has a double advantage. First, you avoid CMHC and second you have smaller monthly payments or can shorten the amortization – both of which saves you money.
5% of the purchase price unless the house is priced above $500k in which case the down payment increases slightly. This can come from a family gift or your own savings.et.
Yes, most lenders accept down payments that are gifted from immediate family. A gift letter signed is required to confirm that the funds are true gift and not a loan.
Under the federal government’s Home Buyers’ Plan, you can use up to $25,000 in RRSP savings ($50,000 for a couple) to help pay for your down payment on your first home. You then have 15 years to repay your RRSP, at least 1/15th per year. Note that any additional contributions will first go to pay back the RRSP funds withdrawn – so you will get tax credits on RRSP contributions until these funds are repaid.
To qualify, the RRSP funds you are using must be on deposit for at least 90 days. You will also need a signed agreement to buy a qualifying home.
This is a personal budget question more than a policy question. The next question/answer describes how lenders determine how much they are prepared to lend you – for some, it makes you house poor – for others, it works with their lifestyle.
We will tell you what policy says you can qualify to borrow – and you will need to determine at what point the combination of mortgage payment, property taxes and utilities goes outside your comfort zone. Make sure you don’t leave yourself house poor. Structure your payments so that you can still afford to live.
Lenders use ratios to determine how much mortgage to provide.
Your mortgage payment, property tax payment and heat (and half the condo fee) can not be greater than 32% of your before tax monthly income. (Gross Debt Service Ratio or GDS)
All debt including mortgage payments, property taxes, loan and credit card payments can not be greater than 40-42% of your before tax monthly income.
This is all about what lenders will provide – you have to decide how much to take on.
Different lenders treat bankruptcy/consumer proposals different ways. In general, lenders want the bankruptcy to be discharged for a minimum 2 years and for you to have re-established credit.
Re-established credit is defined as 2 types of credit, in place for minimum 2 years, with combined limit great than $5,000.
Plan on having a minimum 10% down payment post bankruptcy.
Any late debt payments after discharge will prevent you from getting a mortgage without a major down payment.
I know of no lender who will provide a mortgage after a second bankruptcy.
Note that bankruptcy and consumer proposals are viewed the same way for mortgage lenders.
If you are paying child or spousal support, it is like any other debt payment and will reduce the amount of mortgage you will qualify for.
If you get child/spousal support, it can be added to your before tax income increasing the amount of mortgage you qualify for. Lenders require your separation agreement and bank statements showing support being received.
Insurance for the mortgage lender that is required by the federal government when you have less than 20% down payment. It is provided by CMHC, Canada Mortgage and Housing Corporation or one of its private market competitors.
A one time premium is charged to you and added to your mortgage balance.
This is not the same as mortgage life insurance.
A residential/commercial mortgage specialist with access to many mortgage lenders and banks. With expertise and access to hundreds of mortgage products, an agent can find the most suitable mortgage for you. In Ontario, a Mortgage Agent is licensed by the Financial Services Commission of Ontario.
A Mortgage Broker is the same as a Mortgage Agent but with more training. A Mortgage Broker can operate a licensed mortgage brokerage whereas a Mortgage Agent must work for a mortgage brokerage.
A licensed mortgage professional who has met the experience and education requirements to obtain the AMP designation from Mortgage Professionals Canada. An AMP agrees an ethics and professionalism code and commits to continuing education in the field of mortgages.
A commitment from a lender to guarantee an interest rate for 90-120 days and the intent to provide a mortgage on a suitable property in the future.
This is not a guarantee of financing, as it is dependent on the actual property you intend to purchase, on CMHC where required and on you confirming things like your employment and down payment.
Most successful realtors want you to have a pre-approval in place before looking at houses.
One of the key things a broker-arranged pre-approval involves is a review of your credit history. Occasionally things show up that no one knew were there and they can take time to resolve. Branches don’t always do this.
It is always better to know this up front – saves you time and embarrassment.
In summary, a pre-approved mortgage is one of the first steps a homebuyer should take before negotiating a purchase.
A mortgage where the interest rate is set for a certain period of time – usually 5 years. This is a common mortgage as the mortgage payment doesn’t change should market interest rates go up. It makes budgeting easier.
A mortgage where the interest rate changes as the Bank’s prime rate changes – and therefore your mortgage payment can change as well. Bank prime rates can fluctuate several times a year. Variable rate mortgages often offer lower rates but bring with them the risk that your mortgage payment could increase quickly with little notice.
Closing costs is a term used to describe your legal fees, land transfer tax, survey or title insurance costs and other costs associated with purchasing a home. Budget 1.5% of the purchase price as an estimate of Closing costs.
Note – if you are a PWU member, there is a one-time benefit where they will pay your title insurance cost when purchasing a home. Ask your rep for details.
In some cases your real estate transaction may be subject to HST as well – check with your real estate agent for this.
A pre-qualification means that a mortgage person has taken your application and provided you with their opinion on what you would qualify for in a mortgage. Note that it does not mean that you have been approved for a loan, but it is first step so you know what you can qualify for before a pre-approval is completed.
A pre-approval means a lender has reviewed your application and credit history and advised that they are prepared to work with you. A pre-approval is mostly an interest rate commitment (90-120 days).
While this is stronger than a pre-qualification, it is still conditional on the home that you decide to purchase, on verification of the information you have submitted and, where required, conditional on CMHC’s willingness to insure. Therefore, even with a pre-approval, any offer you make to purchase will be conditional on financing.
If the seller knows that you are approved for the loan, already you may have more leverage. In fact, it is a good idea to plan to get pre-approved. Some real estate agents will not waste their time showing homes to potential buyers who do not have a pre-approval, especially in a hot market.
A Mortgage Commitment is a letter from your lender approving a mortgage on a specific property. This letter includes your interest rate, mortgage amount and payments. It will be conditional on providing documents such as employment letters and paystubs.
An insurance policy protecting you and the lender against title or ownership issues – including many types of homeowner fraud affecting title.
It is a one time expense between $250 and $500 and remains in place for as long as you own your home.
An inspection of the structure and systems: heating and air conditioning, plumbing and electrical, roof, attic, insulation, walls, floors, ceilings, windows, doors, foundation, and basement by a qualified home inspector. This is like a physical for the home and gives you an idea of what kind of shape it is in.
An independent third party who provides an assessment of market value and marketability of your home. They visit a house, take pictures and compare the property to others that have sold recently to arrive at an objective assessment of market value. An appraisal will be a lender’s condition when you are putting 20% or more as a down payment.
A mortgage of no more than 80% of the purchase price.
he amortization of the mortgage refers to the entire length of time to pay back the mortgage.
The term is the period you have the current interest rate.
In other words, you may choose a five-year term and a 25-year amortization. This would mean that your interest rate, your payments, and your pre-payment options would be the same for the next five years. At the end of these five years, you would re-negotiate the term, and the amortization would now be 20 years.
- choosing an accelerated biweekly payment schedule over a monthly schedule
- increasing your regular payment
- making lump sum prepayments
- making Double-Up Payments
- selecting a shorter amortization at renewal
Mortgage terms vary widely – from six months to 10 years. As a rule of thumb, the shorter the term, the lower the interest rate – and the longer the term, the higher the rate.
While four or five year mortgages are what most home buyers typically choose, you may consider a shorter-term mortgage if you have a higher tolerance for risk, if you have time to watch rates or are not prepared to make a long-term commitment right now.
Before selecting your mortgage term, we suggest you answer the following questions:
1. Do you plan to sell your house in the short-term without buying another? If so, a short mortgage term may be the best option.
2. Do you believe that interest rates have bottomed out and are not likely to drop more? If that is the case, a long mortgage term may be the right choice for you. Similarly, if you think rates are currently high, you may want to opt for a short to medium length mortgage term hoping that rates drop by the time your term expires.
3. Are you looking for security as a first-time homebuyer? Then you may prefer a longer mortgage term, so that you can budget for and manage your monthly expenses.
4. Are you willing to follow interest rates closely and risk their being increased mortgage payments following a renewal? If that is the case, a short mortgage term may best suit your needs.
You save interest costs by reducing the mortgage balance as quickly as you can.
Increase Payment Frequency – Instead of paying monthly, consider paying bi-weekly. This simple step is very feasible for most working Canadians who are paid bi-weekly. It can cut your mortgage amortization by up to five years, and can save you tens of thousands of dollars.
Prepay – Use every advantage that the term of your mortgage offers you to prepay your mortgage. One way to do this would be to use your RRSP tax refund to make a yearly pre-payment.
Increase Payments – Round up your bi-weekly payment. For example, if you have a bi-weekly payment of $531.59, round your payment to an even $550.00.
For most residential mortgages, the lender pays the broker a commission. With private lenders or commercial mortgages, you would pay a fee to the broker.