If you're planning to buy a home, you'll probably need a mortgage. In the simplest terms, a mortgage is a type of loan that you take out to purchase a home. It's a long-term commitment, usually lasting 25 to 30 years, so it's important to understand how it works before you sign on the dotted line.
Check out our quick video on the mistakes many first time home buyers make in Canada!
Here's a few things you'll learn more about in this blog.
To get a mortgage, you'll need to meet the requirements set by the lender. Typically, these include having a good credit score, a stable income, and a down payment.
Working with a mortgage broker allows you to evaluate mortgages from a variety of lenders without filling out multiple mortgage applications.
There are different types of mortgages to choose from, including fixed-rate and variable-rate mortgages.
If you’re a first-time home buyer, you might be eligible for certain incentives to help you buy your home.
Steps to Get Pre-Approved for a Mortgage
Getting pre-approved for a mortgage is the first step in the home-buying process. It can give you a better idea of how much you can afford to spend on a home. Having a mortgage pre-approval letter when you’re presenting offers can make you a more attractive buyer to sellers. Here are the steps you need to take to get pre-approved for a mortgage in Canada:
Gather your financial information: You will need to provide your mortgage broker with information about your income, assets, and debts. This may include a letter of employment, pay stubs, tax returns, bank statements, and other financial documents.
Fill out an application: Your mortgage broker will have an “application intake” process that might involve a phone call, a paper application or an online form. Most brokers will schedule a 30 minute discovery call and then ask you to fill out their form to make sure they’ve got information like your address and employment history, your birthdate and SIN number. This application will also involve a hard credit check.
Discover options: After your mortgage broker has collected your financial information and received your application they will connect with you to “share and compare” mortgage rate and product options that best match your lifestyle.
Provide additional information: Sometimes, during the discovery process, additional information comes to light and additional dcumetnation is required. To provide the best options, make sure to get your broker what they need to secure solid options for you at this stage.
Hold your mortgage Rate: If you’re eligible, secure a mortgage rate hold. A mortgage rate hold is a fixed rate mortgage rate that is held between 60-120 days, securing the rate that you have been pre-approved at. Securing a rate hold is very important in volatile interest rate environments.
It's important to note that pre-approval is not a guarantee that you will obtain a mortgage. Once you have found a home and made an offer, your lender will need to review the property and your financial information before approving your mortgage. The lender may like your financial picture, but they may no like the property or community in which you would like to purchase. That being said, getting pre-approved can give you a better idea of what you can afford and can make the home-buying process smoother and less stressful.
Different Types of Mortgages
When it comes to mortgages in Canada, there are two main types: fixed-rate mortgages and variable-rate mortgages. Each type has its own pros and cons, and it's important to understand the differences between them before deciding which one is right for you.
A fixed-rate mortgage is a type of mortgage where the interest rate stays the same for the entire mortgage term. This means that your monthly mortgage payments will also stay the same, making it easier to budget and plan for the future.
Fixed-rate mortgages are a popular choice for many Canadians because they offer stability and predictability. With a fixed-rate mortgage, you know exactly what your mortgage payments will be for the entire mortgage term, which is usually 5 years.
One potential downside to fixed-rate mortgages is that they often come with higher payout penalties. If you decide that you want to break your mortgage and move, or break your mortgage to obtain a lower rate in the future, you may be subject to a large payout penalty.
Variable Rate Mortgages
A variable rate mortgage is a type of mortgage where the interest rate fluctuates over time. As “Bank Prime” moves up and down, your mortgage rate moves with it. This means that your monthly mortgage payments can also change. In a decreasing rate environment, your payments might decrease and in an increasing rate environment, your payments might increase.
Variable-rate mortgages are often seen as riskier than fixed-rate mortgages because the interest rate can go up or down, depending on market conditions. However, they can also be a good choice for those who are willing to take on a bit more risk in exchange for potentially lower interest rates.
The big advantage of a variable-rate mortgage is that the payout penalties are typically lower than with fixed-rate mortgages. Variable-rate mortgages always default to a payout penalty equal to 3 months of interest.
Banks vs Mortgage Brokers
Banks are financial institutions that offer a variety of financial products and services, including mortgages. When you work with a bank, you are limited to the mortgage products that the bank offers. This means that you may not be able to find the best mortgage rate or term for your unique financial situation.
However, working with a bank can be convenient if you already have an existing relationship with the bank. You may also be able to take advantage of special promotions or discounts that the bank offers to its customers.
In my experience, a cautionary tale when using your bank is to ensure you're working with someone who ONLY works or primarily works in mortgages. Remember, some may be able to represent the bank, but only work bankers hours and have limited knowledge on how to work deals.
Mortgage brokers are licensed professionals who work as intermediaries between home buyers and lenders. They have access to a variety of mortgage products from multiple lenders, including banks, credit unions, monoline lenders and other financial institutions. This means that they can shop around to find the best mortgage rate and terms for you.
The diversity in lending options available in the mortgage world allows brokers to help in almost every solution. If your bank is not satisfied with your income or down payment, or you’ve had credit difficulties in the past that make you ineliegibel for a mortgage, a mortgage broker has access to multiple lending options from AAA to Alternative to Private.
Mortgage brokers can also help you navigate the mortgage application process, which can be complicated and time-consuming. They can provide guidance on the documentation you need to provide, and help you understand the terms of your mortgage product.
Importance of Credit Scores in Securing a Mortgage
When it comes to securing a mortgage, your credit score plays a crucial role. Lenders use your credit score to determine your creditworthiness and the interest rate they will offer you. Generally, the higher your credit score, the better interest rate you will receive.
Credit scores can range from 300 to 900.
660 to 724 is considered good
725 to 759 is considered very good
760 and up is considered excellent.
Individuals with scores under 600 will have more difficulty getting a mortgage as they fall into the poor credit range. Having a good credit score shows lenders that you are responsible with your finances and are more likely to make your mortgage payments on time.
If you have a lower credit score, it may still be possible to secure a mortgage, but you may face higher interest rates and stricter lending requirements. Lenders will require a larger down payment and charge a premium for the risk associated with your mortgage file.
It's important to regularly check your credit score and take steps to improve it if necessary. This can include paying your bills on time, reducing your debts, and avoiding applying for new credit too frequently.
Tips and mistakes to avoid for first time home buyers
Not Getting Pre-Approved for a Mortgage
Before you start looking for a home, it's important to get pre-approved for a mortgage. This will give you an idea of how much you can afford to spend on a home and will also make you a more attractive buyer to sellers.
Not Considering All the Costs of Homeownership
Buying a home is a big financial commitment, and there are many costs associated with homeownership that you need to consider. In addition to your mortgage payments, you will also need to pay property taxes, home insurance, and maintenance costs. Make sure you factor in all of these costs when you are deciding how much you can afford to spend on a home.
Choosing the Wrong Type of Mortgage
There are many different types of mortgages available in Canada, and it's important to choose the one that is right for you. Some mortgages have fixed interest rates, while others have variable rates. Some mortgages allow more flexibility with payments, while others are very strict. Many low cost mortgages come with red tape or fine print; make sure that you ask your mortgage broker about any of the special terms and conditions in your mortgage that could cause you problems in the future.
Not Working with a Mortgage Broker
Working with a mortgage broker can be very helpful when you are buying a home, especially if you are a first-time homebuyer. A good broker will guide you through the mortgage process, including which documents you need & which rates, products and lenders are right for you.
Not Taking Advantage of Frist-Time Home Buyers Incentives
In Canada, the government offers a number of programs to help Canadians get their first home. These include:
Tax-free savings accounts like the First Home Savings Account (FHSA)
Down payment assistance through Canada's First-Time Home Buyers Incentive, which provides a 5-10% down payment
Tax write-offs like the First-Time Home Buyers' Tax Credit (HBTC)
Read more about the programs available HERE
When you decide to buy a home, you will need to make a down payment. A down payment is a lump sum of money that you put towards the purchase price of a home. Your mortgage covers the rest of the price of the home.
The minimum down payment required is 5% of the purchase price of the home, but the exact amount depends on the purchase price of your home.
$500,000 or less: 5% of the purchase price
$500,000 to $999,999: 5% for the portion under $500,000 and 10% for the portion above $500,000
$1 million or more: 20% of the purchase price
If you’re self-employed and claiming little income on your tax returns, or have a poor credit history, you may need a larger down payment.
Here are some key points to keep in mind when it comes to down payments:
The more money you put down, the lower your mortgage payments will be.
You can use funds from your FHSA, TFSA, or RRSP (up to a maximum of $35,000) and they will be tax-free.
You can also receive a gift from a family member to help with your down payment, but you will need to provide documentation to show that it is a gift and not a loan.
How Much Should You Put Down on a House?
The minimum down payment required is 5% of the purchase price of the home. A down payment of only 5% might allow you more financial flexibility month to month as you’re able to leave some money in your bank account. However, putting down less than 20% will require you to pay for mortgage default insurance, which can add to your monthly costs.
When deciding how much to put down on a house, it's important to consider your personal financial situation. No one really wants to pay the “default mortgage insurance fees,” but at the same time, no one wants to be “house poor” either! Make sure you have enough savings left over for emergencies and other expenses, and don't stretch yourself too thin.
Strategies to Save for a Down Payment
Saving for a down payment can be a daunting task, but it's an essential step in the home-buying process. Here are some strategies to help you save for a down payment:
1. Set a Savings Goal
The first step in saving for a down payment is setting a savings goal. Determine how much you need to save based on the price of the home you want to buy and the minimum down payment required. For homes that cost less than $500,000, the minimum down payment is 5% of the purchase price. For homes between $500,000 and $999,999, you'll pay at least 5% of the first $500,000 of the purchase price, then 10% of the remaining balance. For homes priced at $1 million or more, the minimum down payment is 20%.
2. Cut Expenses
Assuming homeownership is your top priority, you should try to cut any unnecessary expenses. Take a look at your budget and see if there are any expenses you can reduce in an effort to save more.
3. Pay Off and Avoid New Loans
One of the things lenders look at when approving you is your debt-to-income ratio. This is how much money you make compared to the total amount you owe. To increase the ratio, you want to reduce loans as much as possible before buying a home. You also want to avoid taking out new loans, like a car loan, until after you buy your home.
4. Increase Your Income
Another way to save for a down payment is to increase your income. Consider taking on additional work, or pursuing a side hustle.
5. Use one of the Savings programs available
A First Home Savings Account is a great way to save for a down payment. A tax-free account means that you receive a tax refund the following year and won’t have to pay income tax on the amount you withdraw for your down payment in the future. We love the First Home Savings Account, but another option might be an RRSP.
6. Take Advantage of Government Programs
The Canadian government offers programs to help first-time homebuyers save for a down payment. In addition to tax-free savings accounts, you can also get assistance with your down payment via the First time Home Buyer Incentive and tax write-offs via the First Home Tax Credit, once you buy your home.
Costs in the Mortgage Process
When you're buying a home, it's important to understand all the costs involved in the mortgage process so that you can budget accordingly. Here are some of the costs you can expect to encounter:
The down payment is the amount of money you pay upfront toward the purchase of your home. In Canada, you're typically required to put down at least 5% of the purchase price. However, if you put down less than 20%, you'll also need to pay for mortgage default insurance, which can add to your costs.
Closing costs are the fees associated with finalizing the purchase of your home. These can include:
Home inspection fees
Land survey fees
Closing costs can vary depending on the location of your home and the specific services you require.
Once you've purchased your home, you'll also need to budget for ongoing costs such as:
Maintenance and repairs
It's important to factor in these ongoing costs when determining how much you can afford to spend on your home.
Frequently Asked Questions
What are the different types of mortgages available?
There are several types of mortgages available in Canada, including fixed-rate mortgages, variable-rate mortgages, open mortgages, and closed mortgages. Fixed-rate mortgages have a set interest rate that does not change for the term of the mortgage. Variable-rate mortgages have an interest rate that fluctuates with Bank Prime. Open mortgages allow you to pay off your mortgage in full at any time without penalty, while closed mortgages have prepayment restrictions.
How do lenders determine mortgage interest rates?
Mortgage interest rates are based on a variety of factors, including the Bank of Canada's overnight rate, the lender's cost of funds, and the borrower's credit history and risk profile. Generally, borrowers with a higher credit score and lower risk profile will qualify for lower interest rates.
What is the minimum down payment required for a mortgage?
The minimum down payment required for a mortgage in Canada depends on the purchase price of the home. For homes priced under $500,000, the minimum down payment is 5% of the purchase price. For homes priced between $500,000 and $999,999, the minimum down payment is 5% of the first $500,000 plus 10% of the remaining purchase price. For homes priced over $1 million, a minimum down payment of 20% is required.
What can I do to qualify for a higher mortgage amount?
If you are not being approved for the home that you’re looking for, you have 2 options: Increase your down payment or increase your income. Most Canadian’s can’t just add $100,000 to their down payment or walk into the bosses office and immediately ask for a raise, so we often see borrows consider adding a co-signer. Adding a co-signer on the file increases the income and allows the borrower to qualify for a larger mortgage but it can be risky.
What is the maximum mortgage amount I can qualify for?
The maximum mortgage amount you can qualify for depends on your income, credit score, and other factors. Generally, lenders will use a debt-to-income ratio to determine how much you can afford to borrow. The maximum debt-to-income ratio allowed in Canada is 44%. To estimate your mortgage affordability, download our APP or give us a call anytime!
What are the mortgage pre-approval requirements?
To get pre-approved for a mortgage in Canada, you will need to provide proof of income, down payment, and credit history. You will also need to disclose any outstanding debts or financial obligations. The lender will use this information to determine how much you can afford to borrow and what interest rate you will qualify for.
How are mortgage payments calculated?
Mortgage payments in Canada are calculated based on the principal amount borrowed, the interest rate, and the amortization period. The amortization period is the length of time it will take to pay off the mortgage in full. Mortgage payments can be made monthly, bi-weekly, or weekly, which will also affect how much each payment is.
Posted by Cody Tritter