Getting a mortgage is one of the most significant financial decisions people ever make in their lives so it’s incredibly important to do lots of research and comparisons before committing to a lender. While the mechanics of a mortgage are similar from lender to lender, the rates and terms can vary greatly depending on market conditions, credit score, down payment, property value and many other factors. Below we’ve provided an overview of the current best mortgage rates as well as our in-depth guide providing further info on how mortgages work and key questions.
An Overview of Mortgages
It is the rare individual who is capable of simply writing a check for the entire amount of a new home. For the rest of us, we are forced to go hat in hand in hopes of securing a loan for that new property. The resultant loan agreement is referred to as a mortgage.
A mortgage is a long term loan, typically offered by a bank or mortgage lender, to help cover the bulk of the purchase cost of the house. Indeed, it is not uncommon for many homebuyers to finance as much 80% of the cost of the purchase. Needless to say, this mortgage is likely to be the biggest loan you will ever make, so understanding the details, terms, and conditions of the loan is critically important.
Once you receive your loan and purchase your property, the lender will use that property as collateral to secure the loan. A major investment, you will need to consistently pay this loan back over an extended period of time. Indeed, most home loans are a 30-year term commitment.
That being said however, many view the long term commitment preferable to the never ending cash drain that is rent. Additionally, as a long term investment, property ownership is one of the most popular routes available to help build your personal wealth towards retirement.
With so much at stake, Canadians in search of information on mortgages are afforded numerous resources to better understand your rights and responsibilities when it comes to signing on the dotted line to get that mortgage. In this primer we will be looking at the important factors you will need to master to make an informed decision when you are hunting for the perfect loan for that new home.
In addition to tracing each of the steps involved with finding a loan, we will also define the terms you need to know to understand the process while discussing many of the frequently asked questions by Canadians looking to obtain a home mortgage.
When hunting for a home, it is important to realize that you are actually hunting for two items. First, obviously, you are looking for the perfect dream home. Secondly, you are hunting for a mortgage loan at a rate that you can live with for 30-years. In the same way that physical layout of your new home must meet your exacting standards in order to pass muster, so too must your mortgage search be equally demanding.
When it comes to the mortgage application process, it is important to remember that it is a process and not an event. Prior planning and homework are definitely critical factors in finding the perfect, dream loan.
Income and Credit Requirements
A number of considerations go into the approval process for a Canadian mortgage loan. In terms of income, the federal government mandates that the buyer’s total percentage of income that is used to pay off their monthly debt, also known as debt service, must be no higher than 44% of their incoming income.
When calculating this percentage, your potential lender will want to not only total your existing expenses, but will also factor in the cost of your new home payments, as well as the myriad of expenses related to homeownership.
Towards that end, you will need to be able to demonstrate that you have a stable income that will not only be able to meet your monthly payments, but also be able to consistently make those payments for years.
Since a lender will not even speak to you regarding a loan without this information, your first step is accumulating bank statements and tax records to confirm you have the wherewithal to meet your financial obligation. Those small business owners and self-employed potential homebuyers will probably have to scramble to find a lender who will accept this as the basis of a loan. For these people, patience is the key as you hunt for a lender willing to extend a loan.
Likewise, creditors will want to see that you have a demonstrated history of being fiscally responsible. This fiscal commitment is shown through your credit score. A low credit score will be needed to improve prior to going for a loan. Whether catching delinquent accounts up to date, or retiring old debts entirely, this will give you a leg up on receiving a loan. Towards that end, many buyers go through the process of getting pre-approved for their loan before even turning to the real estate listings. There is two reasons why this is an excellent idea.
First, sellers will take you far more serious when you go house hunting with a specific available loan. Not only will you be able to react much quicker to place a bid on a property you favour, but it will also serve to guide your house hunt knowing how much exactly you can spend in the first place.
Needless to say, there is a price to pay when you take out a loan, and that price is paid in the form of interest. When applying for a loan, one of the choices you will need to make will regard the rates and terms of the mortgage.
A mortgage term is the length of time of the loan. While you might need 30-years to pay off the loan, the loan term might be dramatically lower span of time. For instance, many Canadians might decide on entering into a five year mortgage term, which will give them the flexibility to shop around for a better deal five years into the loan.
Once that five year period elapses, you will need to shop around to renew the mortgage. This allows you to respond to changing economic situations years into your new loan. It should be noted that shorter mortgage terms result in lower interest payments, but homeowners might find themselves in an erratic and expensive market. A long term loan saves you from this volatility, but you pay a premium for the stability of a loan term.
Remember to choose a loan that will match your lifestyle, income, and saving patterns. As a homebuyer, you will have two options when it comes to choosing your rate: variable or fixed. Each option offers advantages and disadvantages that you should be aware of when making a decision.
- Fixed Rate – as the name suggests, a fixed rate remains the same over the course of the mortgage loan without fluctuating. This allows the homeowner to better budget as their payment will remain the same regardless of larger market forces.
- Variable Rate – by extension will change based on larger market forces. Indeed, homeowners can expect that over the life of the loan they will experience changes once or twice a year depending on circumstances outside of any individual’s control.
Understanding which type of rate is best for your circumstances means understanding these terms and their impact on your future finances.
When you make your monthly mortgage payment, you are actually paying a number of components of the loan off with each payment. As an example, not only are you paying down a portion of the principle, the amount of money you borrowed, but you are also making an interest payment.
Your lender has also rolled in a number of other costs into that payment such as property taxes and such, which includes a mortgage insurance component. Mortgage insurance is designed to protect the lender in the event you default on the loan and is required in Canada by-law for any mortgages with less than 20% down. Built in to your payment, mortgage insurance is an excellent way to avoid being saddled with a six-figure obligation in the event you are unable to meet your financial responsibility should the worst occur.
Why should you compare mortgage rates?
It is easy to get overly excited with the purchase of a new home. The rush to buy that house and move in might cause people to overlook a detailed comparison of mortgage rates, and this would be a mistake. As mentioned, you do not want to be locked into a loan that you will struggle to pay, because that new house will quickly lose its appeal if each payment is a crushing ordeal. Shopping and comparing rates will help save you money.
What’s the best term for a mortgage?
The best term for a mortgage is the mortgage that works for you. Whether fixed or variable, the mortgage terms you set up must be crafted with your spending and income requirements baked into the formula.
What are the Advantages of Prepayment Options?
Prepayment options, detailed in the terms of your loan agreement, afford you the opportunity to increase your monthly payment in such a way as to specifically target the principle of the loan above and beyond the amount allocated for that purpose in your payment. This provides the chance to pay the loan of quicker without suffering any penalties or fees.
How much do I need for a down payment?
Generally speaking, the more you put down as your down payment, the lower the monthly payment. Many homeowners shoot for a 20% down payment with the goal of financing the remainder so that they can avoid the mandatory CMHC insurance for down payments under 20%. Currently the lowest downpayment amount allowed in Canada is 5%, with many buyers putting somewhere from 5%-20% down when they apply for the mortgage.