Mortgage / Home Loan
Mortgage and Home Loans
What is a Mortgage?
A mortgage is made up of two parts: principal and interest. Principal is the actual amount borrowed. Interest is the lender's fee you are charged for borrowing.
You'll have to decide on an amortization period (the length of time it will take to completely pay off the mortgage) and the term, or length of time each mortgage agreement guarantees the interest rate.
Before you go to a financial institution or mortgage broker, keep in mind that there are many mortgage options available. Shop around for the best rates and the best terms. Negotiate. Everyone wants your business, but it's up to you to look after your interests. Of course, the key thing to remember is to negotiate a mortgage that fits into your lifestyle, and doesn't take over your life! Your mortgage broker can help guide you through this process and supply you with information.
Amount of the Mortgage
With lower interest rates, you may qualify for a larger mortgage because your monthly payments will be lower. But always keep in mind that the larger your mortgage, the more interest you'll pay in the long run. That simply means your house will cost more. Also, what if interest rates rise? Will you still be able to carry the payments comfortably?
Down Payments
Before considering any mortgage, consider your down payment. If you're a qualified home buyer, you can purchase a house with a minimum 5% down payment. On a $160,000 home that would be an $8,000 down payment, leaving you with a $152,000 mortgage. Assuming you negotiate an interest rate of 8% for your mortgage, you're monthly payment for principal's interest would be $1160. Now let's say you decide o wait until you save another $10,000 before you buy because you think the bigger down payment will lower your monthly payments. Well, at 8%, putting $10,000 more down on your house will only save you $76.32 per month, you might be better off saving $10,000 for a rainy day or a vacation or that hot tub you've been dreaming about. With today's interest rates, it just doesn't make sense to tie up your cash to save $76.32. You might be better off putting your extra money to work for you in another investment with a higher rate of return.
Conventional and High Ratio Mortgages
To qualify for a conventional mortgage, you simply have to have a 25% down payment of the purchase price, with the mortgage not exceeding 75% of the appraised value.
If your down payment is less than 25%, then you qualify for a high-ratio mortgage. This type of mortgage requires loan insurance, which can cost an additional 0.5% to 3.75% of the mortgage amount. With this type of mortgage you could also be limited to a maximum house price.
Pre-Approved Loans
Obtaining a Pre-Approved Mortgage
Why go house hunting only to find that you don't qualify for a mortgage on the dream home you've found? Having a pre-approved mortgage will give you the confidence of knowing exactly what you can spend on a home before you start looking. You will also be protected against interest-rate increases while you look for your new home.
Once you've done your homework and shopped for the best rate, meet with the loans officer to arrange a pre-approved mortgage and discuss the features you're looking for to tailor payments to your needs. It could take a few days, but give your lending institution about two weeks. It will eliminate potential headaches down the road.
Pre-Approved Mortgage Features to Look For
- Competitive interest rates. You may be willing to pay a little more to get the flexible features you desire.
- A 90-day rate guarantee. This will protect you against rising interest rates while allowing you to take advantage of falling rates.
- Flexible payment options. These enable you to tailor the mortgage to your lifestyle. Discuss payment frequency and lump-sum payment options. Find out if your lending institution will allow you to skip a payment in special circumstances or double-up on your payments.
- Closing Costs: ask about the lender's policy with respect to realty tax holdbacks on closing.
Types of Mortgages
Conventional and High Ratio Mortgages
To qualify for a conventional mortgage, you simply have to have a 25% down payment of the purchase price, with the mortgage not exceeding 75% of the appraised value.
If your down payment is less than 25%, then you qualify for a high-ratio mortgage. This type of mortgage requires loan insurance, which can cost an additional 0.5% to 3.75% of the mortgage amount. With this type of mortgage you could also be limited to a maximum house price.
Second Mortgage
Of course, if you cannot add on to your mortgage, you may consider a second mortgage. Each mortgage uses your home as security and gives the mortgagee the right to take your home if you default on your loan. The first mortgagee gets paid first in cases of default and has the best chance of recovering all of its money. So it only goes to figure that subsequent mortgages usually come with a higher interest rate.
Mortgage Features
Here are some mortgage options you should know about:
Every lending institution is different, and each will have their own customizable mortgage options. When you're hunting for a lender and a home, see how the following features could be beneficial to you.
Prepayment
This is a wonderful option if you receive regular bonuses or if your income fluctuates throughout the year. With a pre-payment privilege, you have the right to make payments toward the principal portion of your mortgage over and above the monthly payments. A mortgage with a pre-payment option is closed. An open mortgage means you can pay the entire principal sum without notice of bonus.
Portability
If you still have time remaining on that fantastic loan you negotiated, portability is one option you'll want to discuss with your lender. Quite simply, it means transferring the balance of your current mortgage at the existing rates and with the existing terms and conditions, to your new home.
Assumability
Let's say that the vendor has negotiated a dynamite mortgage. With an assumable mortgage you, the purchaser, simply assume the obligations of the mortgage. This is a wonderful feature especially if the terms are more favourable than the existing market conditions would allow. Remember, when it is time for you to sell, you may still be liable for any mortgage you allow the buyer to assume. This means if the buyer stops making payments, you could be accountable for the payments. Be sure to have the subsequent buyer approved for the assumption of the payments, thereby avoiding this potential land mine.
Expandability
If you need additional funds down the road, will your mortgage terms allow you to increase the principal amount? Usually, your new rate will be a blended amount of the initial mortgage rate and the prevailing rates. It's a great option to discuss with your lender if you foresee large expenses in your future like renovation or education costs.
You Should Know
Assuming an Existing Mortgage
By assuming the existing mortgage, you may be able to save on the usual mortgage fees such as appraisal and legal fees. You'll save time, since you don't have to negotiate to arrange financing from another lender and the existing mortgage on the home may be less than the current market rates. Unless otherwise specified, you'll still have to qualify with the lender first!
Vendor Take Back
With a VTB, the vendor also becomes a lender, holding all or some of the mortgage. Sometimes the vendor will offer this loan at lower than bank rates.
Rate of Interest
Quite simply, interest is the cost of borrowing money. There are two types of rate structures: fixed and variable.
A fixed-rate mortgage will remain the same for the length of the negotiated term. Your payment schedule is established in advance. You can choose either an open or closed mortgage, depending on the term.
If you are going to need a high-ratio mortgage, the mortgage broker may require that you take a longer term mortgage (usually, at least 3 years) so you don't get into trouble if rates rise in the short term. The mortgage will always be closed but with privileges. Often mortgages only come in two terms; 6 months and one year. Both are generally at higher rates than a closed contract for the same time period.
A variable-rate mortgage fluctuates with the prevailing market cycles. Your monthly payment will remain constant (usually for a year or two), but the amount allocated to your principal will vary. If the market trend is toward lower rates, this may be a good option. If rates are rising, you may choose to convert to a fixed-rate mortgage. But if you're on a tight budget, you may not like the feeling of uncertainty. You may be willing to pay more for peace of mind.
Terms
Mortgage Term
Over the course of your amortization period, you may have many different mortgages. The term is simply the length of time that interest rates, payment schedules and obligations to the lender exist. When the term comes to a close, you will have the option to renew your mortgage (taking into account current market conditions) at your current or new lending institution. You can also put a lump sum toward the principal without restriction, or pay off your entire mortgage without penalty. If you wish to change the structure of your agreement during the term you may have to pay a substantial fee to the lender.
Choosing Security or Flexibility
Mortgages are available with closed, open and convertible options, with fixed or variable rates. The options you choose will reflect your beliefs about the market -- is it going up or down? -- and your short-term goals and desire for long-term security.
Amortization
This is the amount of time over which the entire debt will be repaid. Most mortgages are amortized over 15-, 20-, or 25-year periods. The longer the amortization, the lower your scheduled mortgage payments, but the more interest you pay in the long run.
For payment comparison over various amortization periods, refer to the schedule of payments.
Schedule of Payments
There Are Ways to Reduce Your Interest Payments
1. Negotiate a shorter amortization period. (That's the number of years over which you'll pay off the total amount of the mortgage. Don't confuse this with the term of the mortgage, which can run from 6 months to 10 years and must be renegotiated.) A shorter amortization period will mean higher monthly payments, but you'll be paying more principal with each payment. Consider this:
Let's say you borrowed $100,000 at 10% interest. (I'm using round numbers for ease of illustration and assuming a constant bank rate. You know that today, you'll certainly be able to get a lower rate.)
| Amortization Period | Monthly Payment | Total Payments | Total Interest Paid |
| 25 years | $895 | $268,500 | $168,500 |
| 20 years | $952 | $228,480 | $128,480 |
| 15 years | $1,063 | $191,340 | $ 91,340 |
| 10 years | $1,311 | $157,320 | $ 57,320 |
| 5 years | $2,148 | $128,880 | $ 28,880 |
2. Accelerating your payments. Opt for a weekly
or biweekly payment schedule. More payments per month mean less overall
interest.
Let's go back to our $100,000 loan at 10% for
25 years.
| Payment Schedule | Amount | Total Interest | Mortgage-Free |
| Monthly payment (12) | $895.00 | $168,500 | 25 years |
| Biweekly payments (26) | $447.50 | $118,927 | 18 years, 10 months |
| Weekly payments (52) | $223.75 | $118,111 | 18 years, 9 months |
3. Put lump sum payments toward your principal.
When negotiating your mortgage, ask how frequently you can make a lump sum contribution. Most financial institutions allow a percentage of your overall mortgage to be contributed on your annual mortgage anniversary date. Depending on the type of mortgage you select, you may also be able to negotiate additional monthly, or even weekly, payments. These payments will rocket you toward mortgage freedom.
OK, here's another illustration assuming you have an $80,000 mortgage at 8% with a 25-year amortization, and you're able to put an additional $2,000 lump-sum payment toward it every year.
| No Lump-Sum Payments | $2,000 Annual Payments | |
| Mortgage-Free | 25 years | 14.8 years |
| Total Interest Paid | $103,165 | $55,549 |
Open Mortgage
This type of mortgage offers a great deal of flexibility, as it can be repaid in part or full at any time without penalty. This is a great mortgage if you believe interest rates are moving down or if you plan to move in the near future. The term may be limited to six months or one year.
Closed Mortgage
Here the interest rate is fixed for the full term of the mortgage, and you will have to pay a penalty to change the agreement conditions. This type of mortgage is ideal for buyers who suspect that interest rates will rise and who are not planning to move in the near future. This type of mortgage is usually available in a wide variety of terms.
Convertible Mortgage
With this mortgage, you'll enjoy the same peace of mind as a closed mortgage, plus the flexibility to convert to a longer closed mortgage at any time without penalty. If you think rates will drop, this will allow you to wait until you feel they have hit bottom, or if rates rise, you can lock in.
Additional Costs
Before you calculate the amount of your down payment and determine what you can afford, it's a good idea to set aside a few thousand dollars to cover the extra costs that seem to spring out of nowhere. Here is an overview of costs you could encounter. The good news is that not all of them will apply.
Property Taxes
If the Vendor has paid a portion of the taxes in advance, you will be responsible for reimbursing the Vendor on closing. Plus, if you have a high-ratio mortgage, your lender may require that you have your property taxes added to your mortgage payments.
Utility Fees
Utility fees are calculated through a meter so you will be responsible for paying what you have used up on the meter.
Land Transfer Tax
This applies in most provinces and ranges from 1% to 4%. For instance, in Ontario, you'll pay 1% of the first $55,000 - $250,000 and up to 2% of any amount over $400,000.
Survey Fee
Your lender will require an up-to-date survey. You can make it a condition of the Offer to Purchase that the Vendor provide a survey, or you will have to have one done. If there is no survey available, you may purchase "Title Insurance" in lieu of a survey which saves you about $500 - 700.
Appraisal Fee
A basic appraisal usually costs under $250.
Property Insurance
Your lender will insist that you have insurance on your property because your home is used as security for the mortgage.
Service Charges
You'll be charged for telephone, cable and a variety of other services that you hook up at your new home.
Lawyer (Notary) Fees
Each real estate transaction requires the assistance of a legal professional to review the Offer to Purchase, search the title, draw up the mortgage documents and take care of the details on the day of closing. Lawyers fees range widely depending on the complexity of the transaction. Ask your RE/MAX agent to recommend a lawyer. And remember, fees can be negotiated.
Mortgage Loan Insurance Premium and Application Fee
Mortgage loan insurance will be necessary if you have a high-ratio mortgage (less that 25% down payment). The application usually costs $75 with a valid appraisal, otherwise it's $235. The actual insurance premium will range from .5% to 3.75% of the purchase price and is added onto the mortgage.
Mortgage Broker Fee
Some brokers may charge as much as 2% of the total mortgage to find you a lender. In most cases though, the broker is paid by the lender. Buyers with good credit should not have to pay a fee.
Moving Costs
Whether you've decided to do it yourself or hire a moving company, now is the time to budget for the costs involved.
Estoppel Certificate
If you're moving into a condominium (complex not necessarily a high-rise) this certificate outlines the condominium corporation's financial and legal state. It will cost you up to $50.
Condominium Fees
These monthly fees vary from complex to complex. The fees are applied to everything from grounds keeping and carpet cleaning to security personnel and health club maintenance. Depending on the type of structure, these fees will usually be a few hundred dollars.
Home Inspection Fee
For around $300, depending on the size of your home, you'll receive a complete written report about the condition of the structure. Do your research and hire a reputable firm.
Renovation and Repairs
Your home inspection may indicate the need for some general repairs or a major project. Have some money set aside, particularly if you are purchasing an older home.
Redecoration
Your taste will be different from the previous owner. Set aside money to paint and wallpaper. Prepare a list of things you can live with, for now, and decorating faux pas that need immediate alteration.
Water Quality Certification
If you are purchasing a home with a well, you'll want to ensure the quality of the water. This will cost approximately $50 to $100.
Securing a Mortgage
Applying
When applying for a mortgage, provide prospective lenders with enough information about your work history, debts and assets. They're looking at the state of your personal finances. They will look at your gross income and potential mortgage payments and property tax expenses to come up with a Gross Debt Service ratio (GDS). This is usually limited to 30-35% of your gross income. To that lenders will add all other debts to come up with a Total Debt Service ratio (TDS), which can't exceed more than 40 percent of your gross earnings.
What Lenders Look For
Lenders are looking at the risk factors from two points. First, will you be able to make your scheduled monthly payments? Second, if you default (don't make your payments) can the financial institution get enough money from the sale of the house to repay the loan?
Approval Process
You'll be asked about your net worth, the difference between the value of everything you own and the amount you owe. Lenders take into account your bank balance, any types of investments, other real estate, cars and boats, other loans, credit card balances and many other things. Remember to be as specific as possible. So if you have a coin, significant stamp or art collection, have it appraised!
Your credit rating is your history of loan repayment and will be used by lenders as an indicator of your ability to repay your mortgage. It covers how you've managed past debts or if you've filed for bankruptcy. You'll be asked to sign a form allowing your financial institution to gather information from your employer, creditors and credit rating agencies.
If you've had credit problems, it may be a good idea to check and clean them up before you apply for a mortgage. You can check your own credit rating by contacting a company that compiles the information. One source is the Trans Union Customer Relations Department, P.O. Box 338-LCD1, Hamilton, Ontario L8L 7W2. Simply send a note asking for your credit rating along with photocopies of two pieces of ID with your current address, plus a photocopy of a utility bill or credit card invoice. The process takes about two weeks and you'll get a good idea of how you'll be evaluated by the banks.)
If there is an outstanding debt, contact the creditor and resolve it. If you notice an error, report it immediately in writing and get it resolved.
Although your credit may not be perfect, it does not mean you are unable to purchase a home. Make sure you talk to a mortgage broker about your situation before you give up on your dream. Even if you can't buy now, your mortgage broker can help you re-establish your credit so that one day you will be able to live your dream of owning a home.
Insurance
Mortgage Loan Insurance
As a first-time home buyer, chances are, you're not walking into your deal with a huge down payment. As you may have already discovered in other areas of the site, you can purchase a home with as little as 10% down, or even a 5% down payment if you qualify with CMHC's First Home Loan Insurance.
Bottom line, if your down payment is less than 25% of the value of the home, you must purchase mortgage loan insurance. In Canada, most lenders are legally required to insure these high risk mortgages. This insurance means that if you default on your mortgage, your lender receives their money from the Canadian Mortgage and Housing Corporation (CMHC) or other insurer. And it's coverage like this that gives most lenders the confidence to finance up to 90% of your purchase.
What Does it Cost?
The actual premium of the loan ranges between 0.5% and 3%, and is based on the size of the loan and value of your home. You can make your premium in two ways: as a lump sum when you make your purchase or as part of your monthly mortgage payments. But keep in mind, if you're paying it monthly, you're also paying interest on the premium!
Of course, there are always additional fees:
(If you provide your own appraisal, the fee drops to $75, but neither cost covers the actual inspection or appraisal service.)
Application Fee $25
Appraisal Fee $235
First Home Loan Insurance
This is a special product for first-time purchasers. It allows you to mortgage up to 95% of the value of your home. Any type of home is eligible, as long as it meets the following criteria:
- The home must be occupied by you and be in Canada.
- You can't have owned a home in Canada during the past five years. (If there is more than one owner, only one has to meet this criterion.)
- All housing payments - mortgage principal and interest, property taxes, heating (and if applicable, 50% of your condominium fees) can't total to more than 32% of your gross household income, or be more than 40% of your entire debt load.