STEP 5. ARRANGING YOUR MORTGAGE
BUYING a home USUALLY MEANS taking out A MORTGAGE.
THAT MEANS YOU borrow MONEY TO buy A HOME, using THAT
HOME AS collateral FOR THE LOAN.
Make sure you have a mortgage you can live with. There are lots of
options available that let you customize your mortgage to suit your
financial goals and needs.
Mortgage Basics
Mortgage payments are made up of a principal sum (the amount
borrowed) and interest (the cost to you of borrowing money).
The best plan for any type of mortgage is to minimize the amount of
interest you pay - and lenders offer several ways to help do this:
- A larger down payment means your home ultimately costs less
because a smaller mortgage means less interest.
- A shorter amortization, the period over which a loan is repaid.
- A weekly or biweekly payment schedule, instead of monthly.
- Additional lump sum payments.
You don’t have to get your mortgage from the same place you have
your savings or chequing accounts. Also, at the end of each term, you
may be able to change the options of your mortgage, such as the payment
schedule, the term, the rate, even who holds the mortgage.
Mortgage Features
Prepayment
Ensure that you have some form of prepayment clause in your mortgage
that will allow you to pay down your mortgage with a lump sum, or an
extra payment, without penalty.
Portability
Consider all the
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to help customize a
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This means you can transfer the terms and conditions of your mortgage
to your next home. For example, this may allow you to keep a low
interest rate if you sell one house and buy another.
Assumability
This means you may be able to assume (take over) the existing
mortgage on the property. It may have attractive features, such as a
lower interest rate than the prevailing market.
In turn, an assumable mortgage may be a selling feature for you when
you decide to move on in the housing market.
Expandability
This lets you expand the principal on a first mortgage at the
lender’s agreed-upon rate of interest. This can be a cost-effective
way to finance a home renovation.
Types of Mortgages
Conventional Mortgage
This mortgage is for an amount which does not exceed 75% of either
the appraised value of the property or the purchase price, whichever is
lower. Your down payment is a minimum 25% of the purchase price.
High-ratio Mortgage
With this type of mortgage, you contribute less than 25% of the cost
of the home as a down payment and as little as 5%.
A high-ratio mortgage requires mortgage loan insurance. CMHC offers
it for a premium of between 0.5% and 3.75% of the mortgage amount
(additional charges may apply). This premium can be added to your
mortgage payments or paid in full on closing.
Second Mortgage
This usually has a higher interest rate and shorter amortization than
a first mortgage. Secondary financing is often used to make renovations
to a home.
You can achieve mortgage freedom sooner by increasing the
frequency of your payments.
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By making payments every two weeks, instead of monthly, a
25-year mortgage can be reduced to 20 years.
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OTHER IMPORTANT options AND choices THAT YOU’LL
WANT TO consider TO HELP customize YOUR MORTGAGE.
Mortgage Options
Assuming an Existing Mortgage
You take over the vendor’s mortgage as part of the price you pay
for the house. Assuming an existing mortgage is quick and saves you
money on the usual mortgage arrangement fees, such as appraisals and
legal fees.
When you assume a mortgage, you don’t have to arrange financing
from another lender and the rate on an existing mortgage may be lower
than the prevailing market rate.
Sometimes, if it is specified in the original mortgage agreement, a
mortgage can be assumed automatically. If not, you may have to qualify
with a lender first.
Vendor Take Back (VTB) Mortgage
This means the vendor lends you the money to purchase the home.
It’s basically a second mortgage.
For example, on a home that costs $150,000, if the vendor has an
existing mortgage of $70,000 that you can assume and you have $40,000
for a down payment, the vendor may lend you the outstanding $40,000,
which you pay back monthly.
The vendor may be able to offer this loan at less than bank rates.
Some vendors will sell this mortgage to a mortgage broker instead of
holding it themselves.
Interest Rate Buy Down
A vendor - usually a new-home builder - pays the lender a lump sum to
lower the mortgage interest rate by up to 3% over a fixed term, usually
one to two years.
A payment of $2,000–$3,000 reduces your mortgage rate by about 2%,
increasing the mortgage amount for which you qualify.
New-home builders may offer buy downs or discounts on the mortgage
rate to encourage sales. But vendor financing is usually not renewable,
so you have to be prepared to pay the going market rate when the
mortgage is renewed.
However, the builder may add the amount into the price of the home
and you may end up paying a higher mortgage principal.
Rate of Interest
Interest is the cost of borrowing money and is paid to the lender.
Mortgage interest rates are affected by the prevailing market interest
rates. Mortgage rates are either fixed or variable.
A fixed rate is locked in so that it will not rise for the
term of the mortgage.
A variable rate will fluctuate. The rate is set each month by
the lender, based on the prevailing market rates. Your monthly payment
is fixed to be the same each month for the term of the loan, but the
percentage of each payment that goes toward the interest, and the
percentage that pays down the principal, changes.
A variable rate can be a good choice if rates are high when you
arrange your mortgage and then fall afterward. But if rates rise, you
may want to convert to a fixed rate. Bear in mind that this can cost you
a cash payment penalty.
If you select a variable rate, your lender may restrict the mortgage
amount to 70% of the purchase price of the home and require a higher
down payment on either a conventional or a high-ratio mortgage.
Also, some lenders offer a protected or “capped”
variable rate. This means your interest rate will not rise above a
predetermined limit. However, you usually pay a premium for this
protection.
Term
The term of a mortgage is the length of time that certain factors,
such as the interest rate you pay, are set at a negotiated level.
Terms usually last anywhere from six months to 10 years. At the end
of the term you either pay off your mortgage or renew it, possibly
renegotiating its terms and conditions.
Generally, the longer the term the higher the interest rate. Many
experts suggest you select a long term if interest rates are rising. If
rates are falling, you may want to select a short term and then lock in
the rate when you think rates won’t go any lower.
Note that the term is not the amortization period.
Corrado and Maria were pre-approved by their lender for a
mortgage of $100,000 and had saved $30,000 for a down payment.
They found a “fixer-upper” and made an Offer to Purchase
of $110,000, conditional on a home inspection.
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The inspection showed that the home needed a new furnace,
updated wiring and plumbing, and other substantial interior and
exterior repairs that would cost $60,000. Corrado and Maria
withdrew their offer and kept on looking.
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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.
 
Schedule of Payments
A mortgage loan is repaid in regular payments, either monthly,
biweekly or weekly. The more frequent payment schedules can save you
money by increasing the amount paid toward the total mortgage each year.
The more frequent your payments in a year, the lower the overall
interest you pay on your mortgage.
Open Mortgage
This means you can repay the loan, in part or in full, at any time
without penalty. Interest rates are usually higher on this type of loan.
An open mortgage can be a good choice if you plan to sell your home
in the near future. Most lenders will allow you to convert to a closed
mortgage at any time.
Many experts suggest taking an open mortgage for a short term in
times of high rates and converting to a longer term when rates fall.
Closed Mortgage
A closed mortgage usually offers the lowest interest rate available.
It’s a good choice if you’d like to have a fixed rate to work your
budget around for a few years. However, closed mortgages are not
flexible and there are often penalties or restrictive conditions
attached to prepayments or additional lump sum payments. It may not be
the best choice if you might move before the end of the term.
Split or Multiple-rate Mortgage
With this mortgage, you negotiate a portion of your total mortgage
loan at one rate and term, and another portion at a different rate and
term. In this way you can split your mortgage into two, three or more
terms.
There are many more mortgage options available, such as a convertible
mortgage. To find out more, talk to your lender.
Rohinton and Rosemary are careful spenders and careful savers
with stable jobs, though they don’t have large incomes. With a
total mortgage of $100,000, the couple decided to “split”
their mortgage. They locked in $75,000 of it for seven years at
10%, assuring them of no increase in payments for that period of
time.
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For the remaining $25,000 of their mortgage, they negotiated
a one-year term at a rate of 7% - expecting that rates would
remain the same or possibly drop. This split mortgage means they
can anticipate paying off $25,000 of their mortgage as soon as
possible - and celebrate a mini-mortgage goal all the sooner.
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Where to get a mortgage
Many institutions and individuals lend money for mortgages
These include insurance companies, banks, trust companies, caisse
populaires, credit unions, finance companies and pension funds. You can
also check your local newspaper classified advertisements for a listing
of private lenders. If you have a Self-directed RRSP, you may wish to
investigate with your lender the possibility of borrowing some or all of
your mortgage from your Self-directed RRSP.
Mortgage brokers don’t usually lend money but can find a lender for
you.
New-house and new-condominium builders may offer lower-than-current
market rates by buying down the interest rate charged by the lenders so
that they can sell their homes faster.
A buy down is usually only for a short term, and is usually not
renewable at the end of the term.
What a lender wants from you
Lenders want plenty of financial information about you and your
co-buyers to assess your ability to repay the loan. This ability is
based on your GDS and TDS ratios and also on your assets, liabilities,
earnings, employment history and your past record of repaying loans.
Specifically, your lender may want the following:
- personal information - age, marital status, dependents
- details of employment, including proof of income (T-4 slips,
personal income tax returns or a letter from your employer stating
your position)
- other sources of income, for instance, pensions or rental income
- current banking information
- verification of your down payment
- consent to run a credit investigation
- a list of assets, including property and vehicles
- a list of liabilities, for example, credit card balances, car
loans - the total amount you owe and your monthly payment amounts
- fees for an appraisal or for a copy of a valid appraisal report if
one was recently done
- mortgage insurance fees if a high-ratio mortgage is required
- a copy of the property listing
- a copy of the Agreement of Purchase and Sale on a resale home
- plans and cost estimates on a new home
- the condominium financial statements, if applicable
- a certificate for well and septic, if applicable
Financing Checklist
Approval Process
A mortgage approval should take only a few days, but it’s probably
best to allow up to two weeks. During this process, the lender will do a
credit check and spot check other information you have provided. In
addition, an appraisal of the value of your home may be obtained.
If required, a request for mortgage loan insurance is submitted to
CMHC or a private insurer. The lender then approves or rejects your
mortgage loan.
Pre-approval
A pre-approved mortgage is very common. With pre-approval, your
lender approves the amount of your mortgage and gives you a written
confirmation or certificate for a fixed time period before you start
looking for a home. The pre-approval term, usually lasting from 60 to 90
days, also sets the mortgage rate the lender will offer to you. If rates
go down in that period, the lender should offer you the new lower rate.
Pre-approval gives you a head start on house hunting, but your final
approval is still subject to an appraisal of the value of the home and a
credit review of your finances.
CMHC Mortgage Rate Protection Program
This program is designed to protect you from dramatic increases in
mortgage interest rates. Basically, you pay a premium to buy protection.
If interest rates have risen by at least 2% when you renew your
mortgage, CMHC reimburses you for a portion of the resulting increase in
your monthly mortgage payments. For terms and conditions, please call 1
800 668-2642.
With
the right mortgage - one that’s flexible and tailored to your
financial situation - you have the luxury of owning your home.
You also have the luxury of being able to relax.. |
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