Learn about choosing a Mortgage!
Choosing a mortgage can be intimidating, but this post will help you understand what you may qualify for, learn about your options, and help you move forward with confidence.
Understanding the basics of a mortgage:
Down Payment: A saved amount of money that you can comfortably apply to the property price. As a guideline, most lending institutions require a down payment between five and 10 per cent of the property price.
Mortgage Insurance: If you down payment is less than 20 per cent, your mortgage will need to be insured by the Canadian Mortgage Housing Corporation (CMHC). These high-ratio mortgages add fees between 2.8 to 4.0 per cent of the purchase price. Mortgages over $1,000,000 do not qualify for CMHC Insurance and legally require a minimum 20 per cent down payment.
Home Buyer’s Plan: The Home Buyer’s Plan allows first-time home buyers to withdraw up to $25,000 from their RRSPs to purchase a residential property, without incurring taxes on the withdrawal. The amount must be repaid over the following 15 years.
Mortgage Term: The length of time you are committed to a mortgage rate, the lender, and the conditions. Terms range from six months up to 10 years. At the end of the term, you will refinance the remaining balance on your loan.
Mortgage Penalties: If you pay off your mortgage before the term expires you will likely incur penalties to offset the loss of interest that the lender would have earned over the entire term. It is worth noting that if you plan to pay back your loan at a faster pace, you can get a mortgage with prepayment privileges, which will allow for more flexibility.
Mortgage Amortization Period: The amount of time it takes to pay off your entire mortgage. Canadian amortization periods extend up to 40 years, but CMHC-insured mortgages are limited to 25 years. Lower monthly payments mean you have more time to pay your mortgage, but results in more interest.
Shopping for Interest Rates. Interest rates are competitive between lenders, so it is best to look at your options. Types of mortgages:
Fixed-rate mortgages: Ensure consistent monthly payments that protect you from interest rate hikes. Due to stability, they are offered at a higher interest rate.
Variable-rate mortgages: Vary in cost over time, as they are based on market rates. Although they are lower than a fixed rate mortgage, they come with a degree of risk because payments may go up due to rising interest rates.
Are you eligible for a mortgage? Lending institutions typically use two debt-service ratios to determine if you qualify:
Gross Debt Service (GDS) ratio: Examines the basic costs of a home, including the mortgage payment, taxes, and heating costs, relative to your income.
Total Debt Service (TDS) ratio: Includes the basic costs of the home, as well as all other debt payments relative to your income.
Lending institutions offer pre-approval for a mortgage, which outlines the maximum amount of money you can borrow to purchase a home. Benefits of choosing to get pre-approval:
Protects you from interest rate increases while you look for your ideal property.
demonstrates to the seller that you are a serious buyer, helping you move more efficiently toward home ownership.
Understanding how much you can afford comes down to a simple formula. Add your savings to your pre-approved mortgage amount, and then subtract closing costs. You can expect closing costs to fall between 1.5 per cent and 4 per cent of the property's value.
What qualifies under closing costs:
Home Inspection: A property inspection by a qualified professional will ensure that you understand the condition of the home, and potential costs that may arise in the future.
Appraisal Fee: The lender will usually request an appraisal of the property confirming it is in fact worth the amount you will pay.
Property Taxes: If the annual property taxes have been paid by the previous owner, you will be required to reimburse them for your portion of the taxes.
Property Transfer Tax: Paid to the BC Government when a home is transferred to a new owner. Some buyers may be exempt.
Legal Fees: A lawyer or notary public executes the real estate contract and legally transfers ownership.
Now that you know the specifics of getting a mortgage you are ready to start property hunting! A mortgage calculator can also help you determine your maximum purchase price. When you’re ready to make an investment, it is best to consult with a financial institution or mortgage broker. Get out there and find the home that’s right for you!