What is a Mortgage?
A Mortgage is a loan that uses property as security for the loan. You can get a mortgage when purchasing a home, or a homeowner can put a mortgage on their property as a way of accessing their equity.
Mortgages can be granted by one of the major Canadian Banks, Credit Unions, or monoline lender. Subprime lenders and private lenders are also available for those with credit issues.
The banks, Credit Unions and monoline lenders will have the best rates. The subprime lenders (sometimes called ‘B’ lenders) will have higher rates. Subprime lenders and are for those who don’t qualify for ‘A’ lending (usually due to credit issues). Private lending still will have even higher rates but is much more flexible for qualifying.
Buying a home
Most people don’t have money to purchase a home free and clear. Mortgages allow you to buy a home. Along with a down payment from your own resources, the mortgage can make up the difference to have the full purchase price amount.
The minimum down payment when purchasing a home is 5%. Typically people will use somewhere between 5% and 20% for down payment. It is possible to get a “0% down” mortgage. However, this is actually referred to as a cash-back mortgage. Only some lenders offer this and it does come with a much higher rate.
The mortgage must be insured when the down payment amount is less than 20%.
Down Payment Sources
Down Payment Usually comes from one of these sources:
- Bank Accounts
- Sale of Current Property
- Secured line of credit
- Stocks, Bonds, Mutual Funds
Conventional Mortgages (20% down payment)
When you put 20% down or more the mortgage is considered conventional. It also allows you to avoid paying mortgage default insurance premium, and makes it possible to have an amortization higher than 25 years. 30 and 35 year amortizations are available.
Unconventional / High Ratio / Insured Mortgages (Less than 20% down payment)
When putting less than 20% down, the mortgage needs to be insured. There are 3 main insurers in Canada: Genworth, CMHC, and Canada Guarantee.
The cost of the insurance is a percentage based on the purchase price and that percentage also depends on how much you are putting down.
This insurance premium amount is added to your total mortgage amount. This insurance protects the lender in the event that you default on your mortgage.
Pre-approval & Rate Holds
Before you start looking for a home to buy, it’s wise to be pre-approved. This ensures you’re not wasting time looking at homes outside of your price range. We tell you what your maximum purchase price is and what your payments would be.
With a pre-approval we do collect some documents and submit them to the lender to sign off on that they are acceptable.
A pre-approval also helps you beat less prepared buyers when you do find your dream home rather than scrambling at the last minute to arrange mortgage financing. You can make an offer without the condition of financing in most cases.
With your pre-approval, your rate is held for 120 days while you search for a home. If rates go down in this time, you will still get the new lower rate.
Making an Offer
Once you find a home you like in your price range you can make an offer. When you make an offer sometimes one of the conditions you include with your offer is the condition of financing.
Since you’re pre-approved in most cases it safe to waive the condition of financing. This makes your offer stronger and could be the difference between winning and losing if there are other competitive offers. Your pre-approval is conditional on the property being acceptable, so it is best to check with before waiving financing conditions.
Once your offer is accepted you realtor will send us the accepted offer and the MLS listing of the property. At this time we submit for the final approval.
If you currently own, and plan to sell your home and purchasing another, often the proceeds from your sale will be used for towards your down payment.
Bridge financing is available if your closing date for your sale is after the closing date of your purchase.
Buying New Construction
Typically you give a $5000 deposit when you make your initial offer to purchase. Within the first 2-6 months, you will give further deposits. These deposits can come from savings, or a gift, or your line of credit etc. and will become part of your total down payment.
Learn more about buying new construction.
RefinancingWhen you refinance, it’s a way of making changes to your mortgage(s).
Most often it means increasing your mortgage in order to access some of your home equity. 20% equity must remain within the property the rest is accessible.
You can refinance just to get a better rate, and leave your mortgage amount as is. This can be worth it if the rate is significantly better and there is little or no penalty to break out of your current mortgage. Usually, it’s best to wait until your renewal date to refinance to avoid paying a penalty.
Here are some reasons someone may want to refinance:
If you are carrying high interest debt you should consider consolidating this debt into your mortgage. This goes especially for credit cards that are often anywhere between 14% and 28%. If you have the equity available it makes more sense and will be easier to pay it off, carrying that debt in your mortgage.
Consolidating debt will improve your cash flow. With the extra money, you can live life more comfortably. Or you can use the extra money to pay down your mortgage faster by using your prepayment privileges.
Some people access their home equity to do home improvements and renovations to their home.
Home improvements like new windows, roof, driveway, etc. or full renovations of your kitchen, bathrooms, finishing the basement, etc.
We can also put a secured line of credit in place behind your first mortgage. The rates are better than personal lines of credit and you’re only required to make interest payments on only the amount you use. Once the renovations are complete we can refinance to consolidate the secured line of credit into the mortgage. We can do it as soon as the renovations are done or wait until your next renewal date depending on what will save you the most money.
Investing can be another good use of your equity. If the return on your investment is greater than the interest rate your mortgage is at, then it can result in being a net gain. There are always risks when investing and you should understand your risk tolerance first.
One form of investing that we’re most familiar with is purchasing an investment property. A rental property can be a nice addition to your investment portfolio.
When to Refinance
When deciding if refinancing is right for you it’s best to consult us and tell us your goals. We’ll break down the numbers so you can make a more informed decision.
Most mortgages have penalties if you break out before the term is up. If we do refinance you and you need to pay a penalty, that amount can be added into the new mortgage. It’s not always worth it to do this and that is why we look at the cost and the savings and determine what makes the most financial sense for you.
Equity Take Outs & Secured Line of CreditA Secured line of credit (SLOC), also known as a home equity line of credit (HELOC), is a line of credit that is secured against your property. They come with much lower rates than a personal line of credit because it’s secured.
The rates on secured lines of credit are typically Prime + .50% and require interest-only payments.
A secured line of credit can go behind your first mortgage, or the secured line of credit can be the only mortgage on the property. When behind a first mortgage, the secured line of credit is considered a 2nd mortgage. Learn more about secured lines of credit here.
Qualifying for your MortgageWhen qualifying for a mortgage three things are looked at: credit, income, and liabilities.
Your credit must show a history of you paying credit cards and loans regularly and on time. If you have no credit you will need a cosigner or you will need to establish credit.
In addition to credit, there are two ratio calculations that determine how much of a mortgage amount you qualify for.
Documents Required to get a MortgageCertain documents are required to show proof of what is stated in the mortgage application. We will tell you exactly what documents we need from you depending on your scenario.
Mortgage RatesMortgage rates are based on various factors:
- Insured mortgage vs. conventional
- Principal residence vs. rental property vs. Second residence
- Your credit
- Purchase vs refinance
- Mortgage product features
- Fixed vs variable rates
- Penalty calculation type
CostsThere’s no cost to using a mortgage broker because mortgage brokers are paid by the lender after your mortgage funds.
With private and subprime lending, there is a brokerage fee that gets added to the mortgage when the lenders do not pay the broker. In these cases, everything is disclosed up front and there are no surprises.
There are closing costs (legal fees, appraisal, etc.) and these depend on the type of transaction.
Terms and AmortizationWe have written a detailed article about mortgage terms and amortization here.
Mortgage PenaltiesIf you break a closed mortgage before the maturity date you will pay a penalty.
Different lenders calculate penalties different ways. Some banks are notorious for having large penalties. Some mortgage products called “low-rate-basic” products can have especially low rates, but especially high penalties.
Knowing how your penalty is calculated should you need to break the mortgage is an important detail and is something that is considered when choosing a mortgage product with you and is fully disclosed.
Open vs Closed MortgagesMost mortgages, whether fixed or a variable, are closed. Secured lines of credit, however, are open mortgages.
An open mortgage can be paid off in full at any time without incurring a penalty. Private mortgages are also often open.
If a mortgage is closed it means there is a penalty to paying it off before the term is up.
However, you do have the ability to make extra payments towards your mortgage using your prepayment privileges.
Paying your Mortgage off FasterMost mortgage products do come with pre-payment privileges. This means you can make extra payments towards your mortgage. These extra payments go directly towards your mortgage principal and therefore lower your amortization.
Learn more about prepayment privileges here.