Answers to the Most Common Mortgage Questions
Purchasing a home may be the largest and most complex transaction you'll make during your lifetime. It's not an easy process, with many things to take into consideration, the most notable of which is the mortgage.
Mortgages come in all shapes and sizes, and the one that's the most ideal will vary from person to person. Therefore, gaining an understanding of the basics of mortgages is something you should devote some time to.
How much do I need for a down payment?
In Canada, buyers are required to have a minimum of a 5% down payment in order to be approved for a mortgage. A mortgage where the buyer puts down 20% or more is called a conventional mortgage and doesn't require the buyer to take out mortgage insurance. A mortgage where the buyer puts down less than 20% is called a non-conventional mortgage and requires the buyer to take our mortgage insurance, usually through the CMHC (Canada Mortgage Housing Corporation).
Should I get pre-approved?
Getting pre-approved for a mortgage is recommended because you'll be given a clear picture of how much house you can afford, allowing you to focus on shopping only for houses that work within your budget. A pre-approval means that the lender has specified to you in writing the amount they are willing to lend to you. In addition to giving you a budget work with, it can also provide you with leverage when negotiating with home sellers, as they have assurances that you have the funds to afford the home.
How much can I borrow?
The size of the mortgage you can get approved for is based on a variety of factors. The most vital ones include the size of your down payment, credit score, amortization period, and your income.
Lenders prefer to lend to those who can demonstrate they have the means to service mortgage payments and that their risk of defaulting on the mortgage is low. In general, lenders will examine your income and debt levels to determine how comfortable you'll be making mortgage payments.
Should I obtain a mortgage from my bank or shop around?
While most buyers value familiarity and will seek approval for a mortgage from their bank, it's wise to shop around and see what is available at other financial institutions. In some cases, it might work in your favour to hire a mortgage broker, in order to gain access to some of the non-traditional lenders.
A tip: make all your inquiries within a two-week time period. The reason for this is because every time a lender requests your credit report, your score can drop. If all the lenders you have met with check your credit report within two weeks, all the searches will be registered as only one search.
What information do I need to provide to lenders?
Lenders will need to review your credit history over the last 2 years and examine your bank statements. They will also require you to provide proof of income. In addition, they will need to verify that the down payment has been made.
What's the difference between fixed-rate, adjustable-rate and variable-rate mortgages?
The three main types of mortgages are fixed-rate, variable-rate, and adjustable-rate.
Fixed-rate mortgages lock in the interest you'll be paying over the term of the mortgage, so your mortgage payments will always stay the same each month.
Variable-rate mortgages don't lock in the interest rate you'll be paying - your mortgage payment will change in relation to the market rate. If interest rates rise, so too will your monthly payments. Conversely, if interest rates drop, your payments will decrease.
Adjustable-rate mortgages function in a similar way to variable-rate mortgages in that the interest rate you pay fluctuates based on the market rate. However, your monthly mortgage payments will remain fixed. Instead, more or less of the payment will go towards paying down the principal, depending on which way rates go. For example, if interest rates rise, more of the fixed payment will go towards the interest and less towards paying down the principle.
Can I get a mortgage if I have a poor credit score and unstable income?
If your credit score is less than stellar and your income stream is unstable, it may be tough to get approved for a mortgage from a traditional lender. However, it may still be possible to obtain a mortgage from an alternative lender, one who specializes in arranging mortgage products for individuals who don't qualify under traditional lenders' standards. Your best bet is to talk to a mortgage broker - they can put you in touch with lenders who specialize in this area of mortgages products.
How long does a mortgage last?
Amortization periods (the length of time it will take to pay off your mortgage in full) vary widely, with some lasting a few months to some lasting many years. The maximum amortization period allowed for CMHC insured mortgages is 25 years. For non-insured mortgages, it's 40 years.
Can I pay off my mortgage early?
Yes, but it could cost you. Each lender has different rules regarding lump sum payments used to pay off the mortgage faster. You may incur penalties if you decide to pay off your mortgage early, and these penalties vary depending on the terms of your mortgage contract. Ensure you review your mortgage contract to fully understand the financial implications of making additional payments on your mortgage.
Can I break my mortgage to go with a new lender?
Yes. But as with making additional payments to pay off your mortgage early, there may be costs attached. If you wish to break your mortgage and obtain a new one from a different lender, you may have to pay a penalty.
What are closing costs, and how much should I expect to pay?
Closing costs include things like title insurance, prepaid escrows, and legal costs. A good rule of thumb is to put away 2-3% of the home's price in anticipation of these outlays.