ALL ABOUT MORTGAGES
This section of our website explains mortgage terminology and how a mortgage
works. A mortgage is in simple terms, a loan that you take to buy a home.
The loan is secured by the property value and your ability to repay the
loan. The amount borrowed is called principal, and the cost of borrowing
the money is called interest. The borrower is the mortgagor, and the lender
is the mortgagee.
Where to go for a mortgage - Mortgage brokers versus your bank
Getting a Pre-Approved mortgage
Different types
of mortgages-High Ratio vs Conventional
Your
Down Payment
Choosing an Amortization
Period
Deciding on a Term and type of interest rate
Payment Options
Property Taxes and Mortgage Payments
Property Taxes
Prepayment privileges
Mortgage application checklist
Compare
current mortgage rates
Where
to go get a mortgage
The two most common places for you to go for a mortgage is to talk to a
mortgage officer for a bank or other lender or use a mortgage broker.
A mortgage broker is most times not connected directly to one lender so
they can search several lenders for the best mortgage rate and terms for
you. They are paid a fee by the lender for placing the mortgage with them.
You usually don`t pay anything to use a mortgage broker. Mortgage brokers
are different from banks because they don`t have the funds themselves. They
go to an outside source for your mortgage where a bank lends their own money.
Their sources of mortgages are usually most banks (possibly your own bank),
trust companies and several other sources. There are advantages to using
your own bank and mortgage brokers. You need to decide what it right for
you.
There is no need to physically go into a bank to talk to someone about mortgages.
Almost all lenders, including all the banks, have representatives that will
come to your home or work, talk to you on the phone or communicate with
you by email. Mortgage brokers will do the same thing. It may be a good
plan to talk to your own bank and see what they can offer you and also talk
to a mortgage broker so you know you are getting the best deal you can get.
It is important to know that even if one lender turns you down it still
may be possible to get a mortgage from another source. So before you give
up, talk to several sources. It is very common for buyers to be turned down
by their own bank and get approved by another lender.
Getting a pre-approved mortgage
It is a great idea to have a pre approved mortgage in place before
you start looking for a home. A pre approved mortgage is a commitment
from a lender to give you a mortgage up to a certain amount at a specific
interest rate, subject to certain conditions. All lenders offer a pre
approval. They will not only pre approve the mortgage but they will
lock the interest rate in for up to 90 -120 days. If the mortgage interest
rate goes up while you're house hunting it doesn't affect you but if
it goes down you can still get the lower rate. So getting a pre approved
moorage is a smart thing to do. You will know exactly how much house
you can afford to buy, you will find out any credit problems that have
to be addressed if any and the interest rate is locked in. There is
usually no cost to do this so there is no downside, just benefits. We
highly recommend doing this and also having the lender include a credit
check in the pre-approval. A credit check is usually not part of a pre-approval
because there is a cost to do a credit check. The lender may charge
you the small fee but it's worth it to know if there are any problems
that might come up such as a bill you forgot to pay or something else.
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Different types of Mortgages - High Ratio versus
Conventional
There are many different types of mortgages on the market today. The
one thing they all have in common is whether they will need high ratio
insurance or not. What determines whether you need this insurance
is the amount of down payment you have.
High Ratio or Insured Mortgage: A high ratio
mortgage is a mortgage that is between 80% and 95% of the appraised
value or purchase price of the property, whichever is less. (Note: in
some cases 100% mortgages can be obtained). This means that you have
less than 20% down payment. This type of mortgage, by law, must be insured
against non-payment by either the Canada Mortgage and Housing Corporation
(CMHC) or another insurer such as GE Capital. Mortgage insurance protects
the lender against loss if the borrower fails to meet the repayment
terms. The high ratio insurance premium ( listed below ) are paid by
you, the borrower. The higher the ratio of mortgage to property value,
the higher the cost of insurance. The fee is added to your mortgage
so you don`t have to pay this fee up front.
CMHC rates are shown below. These are subject to change. Check with
your lender for current rates. Note: some of the rates refer to values
of less than 80% of value. This is for specialty properties such as
commercial or rental properties that still might require CMHC insurance.
| Loan-to-Value |
Premium on Total
Loan |
Premium on Increase
to Loan Amount for Portability and Refinance |
| Standard Premium |
Self-Employed without
3rd Party Income Validation |
Standard Premium |
Self-Employed without
3rd Party Income Validation** |
| Up to and including 65% |
0.50% |
0.80% |
0.50% |
1.50% |
| Up to and including 75% |
0.65% |
1.00% |
2.25% |
2.60% |
| Up to and including 80% |
1.00% |
1.64% |
2.75% |
3.85% |
| Up to and including 85% |
1.75% |
2.90% |
3.50% |
5.50% |
| Up to and including 90% |
2.00% |
4.75% |
4.25%* |
7.00%* |
| Up to and including 95% |
2.75% |
N/A |
4.25%* |
* |
90.01% to 95% —
Non-Traditional Down Payment*** |
2.90% |
N/A |
* |
N/A |
Extended Amortization
Surcharges
Add 0.20% for every 5 years of amortization beyond the 25 year mortgage
amortization period.† |
Example: Say you were buying a $300,000 property and had a 5% down payment
saved. This is what the financing would look like.
| Purchase Price: |
$300,000 |
| Down Payment: 5%: |
$15,000 |
| Amount of Mortgage before high ratio fee ( 95% of purchase
price): |
$285,000 |
| Mortgage insurance fee: 2.75% of mortgage amount: |
$7,837 |
| Total mortgage including high ratio insurance fee: |
$292,837 |
Conventional Mortgages: Under a conventional mortgage, a
lender will normally provide up to 80% of the appraised value or purchase
price of a property, whichever is less. You must be able to provide
at least 20% of the value by your down payment. The main difference
between this type of mortgage and a high ratio mortgage is there is
NO insurance fee on a conventional mortgage.
Example: Say you were buying a $300,000 property had a 20% down payment
this is what the financing would look like.
| Purchase Price: |
$300,000 |
| Down Payment Available: 20% |
$60,000 |
| Amount of Mortgage: |
$240,000 |
| Mortgage insurance fee: |
0 |
| Total mortgage: |
$240,000 |
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Your Mortgage
Down payment
The amount of money you require as a down payment has been changing lately.
For years there was a requirement for a 10% down payment. This was later
reduced to 5% and eventually no down payment. In 2009, following the world
financial crisis, the amount of down payment went back to 5% and this
is what it is now. Normally, the minimum down payment comes from your
own resources. However, a gift of a down payment from an immediate relative
is acceptable. For eligible borrowers, additional sources of down payment,
such as lender incentives and borrowed funds, are also permitted. Check
with your lender to see what you will require as a down payment before
you begin looking at homes. It's to your advantage (although impossible
for most buyers) to aim for a down payment of 20% or more, so you'll qualify
for a conventional mortgage and avoid paying the mortgage insurance premium.
The larger your down payment, the easier it will be to arrange a mortgage
and carry it comfortably. The smaller your loan, the lower your interest
expense will be, and the more equity you will have in your home. Equity
is equal to the value of home minus the amount of your mortgage.
If you have money in an RRSP account it is possible for you to use these
funds as a down payment or to use for your closing costs. The Home Buyers
Plan, as it is called, will allow you to take out money from your RRSP
with the requirement that you will repay it over several years. See my
section on Home Buyer's Plan at RRSP.
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Choosing
a Mortgage Amortization Period
Once you're settled on the type of mortgage that fits
your financial circumstance you are ready to start considering the various
options available. Amortization refers to the number of years it will
take to repay the loan in full. The longest amortization period for mortgages
in Canada is 30 years. This is the most common for first home buyers.
Longer amortization periods result in lower payments, but increase the
total amount of interest paid. If you can handle a shorter amortization
period, you'll achieve tremendous savings on the interest cost of your
mortgage and live mortgage free sooner!
Example $150,000 mortgage at 6% interest.
Amortization |
25 years |
30 years |
Mortgage |
$150,000 |
$150,000 |
Monthly Payment
(no taxes) |
$978 |
$911 |
Interest paid over life of mortgage |
$140,000 |
$174,967 |
Additional interest over life of mortgage |
------ |
$34298 |
You can see by the example above the interest savings of a shorter amortization
is significant so choose the shortest amortization you can afford. It
will pay off in the end.
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Deciding on
a Mortgage Term and Type of Interest Rate
The length of time for which the interest rate is fixed
is called the term. Most mortgages have terms of six months to five years
however there are some longer terms available. The most common term is
5 years. The interest rate usually gets lower with the increase in the
term you take. For example a 1 year term would have a higher rate than
a 5 year term usually. There are exceptions because the rates are always
changing
Short versus long term
When interest rates are either high or falling, there is a tendency to
choose a shorter term mortgage. This strategy pays off if you can renew
at a lower rate six months or one year later. You may want to consider
a longer term mortgage if interest rates are rising, if you felt could
not afford higher payments if rates were to increase or if you want to
keep your mortgage payments the same for a longer period.
Variable rate mortgages
Variable rate mortgages have become extremely popular. Most mortgage officers
say that is what they personally have. The way these mortgages work is
that the interest rate is set to a amount above or below the prime interest
rate. The Prime rate is the rate that lenders offer their best customers.
Prime is the same for all lenders. The Prime Rate has been between 2%
and 3% for the past while. An example of a variable rate mortgage would
be Prime less .5 a percent. If Prime was 3% then the mortgage rate you
would be charged would be 2.5%. This often results in the mortgage rate
being significantly lower than Fixed Rate mortgages. The downside to these
mortgages is the prime rate goes up and down and so does your mortgage
payments. Most lenders agree over the life of the mortgage this can be
a great way to go but it's a gamble. You have to be prepared for the ups
and downs of rate changes. Talk to your lender about this option to see
if it is right for you.
Posted rates are negotiable
All lenders have what they call `Posted Mortgage Rates`. If you search
any lenders website you will see the rates they advertise as their Posted
Rate for Fixed rate mortgages. (this does not apply to variable rate mortgages).
This rate is hardly ever the rate you will pay is you have good credit
and a secure job. Lenders will all discount the rate they charge you on
a mortgage. The discount varies and depends on your personal situation
and the lending environment at the time. Currently lenders are discounting
between .75% and 1% but this constantly changing. So if the Posted Rate
is 6% for a 5 year fixed rate mortgage you should be offered a rate of
between 5% and 5.25% if you are a good risk. If you have some credit issues
or jobs that are not secure you may not get any discount or be charged
more than the posted rate. Often your own lender will offer you less of
a discount than a mortgage broker can get you or another lender will offer
you so look around before you commit to a lender.
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Payment Options
The three most common payment frequencies are monthly,
bi-weekly and weekly. Increasing the frequency of your payments can allow
you to pay off your mortgage sooner and reduce the total amount of interest
paid. The reason for this is you pay more and therefore more comes off
your principal. For example, if your monthly mortgage payment is $1000
you pay $12,000 annually, By making accelerated bi-weekly payments, you'll
pay $500 every two weeks or $13,000 annually.
You should select a payment frequency based on
what is convenient for you. You may want to match your payments to your
pay periods. If your goal is to pay off your mortgage quickly, consider
accelerated weekly or bi-weekly payment plans. You'll realize significant
interest savings. Other options are to choose a shorter amortization
period or take advantage of prepayment privileges.
Example: If you have a $100,000 mortgage, 8% interest rate, 25
year amortization
Accelerated Bi-weekly vs.
Monthly payments
$100,000 mortgage at 6.5% interest
compounded semi-annually |
| Payment Frequency |
Number of Payments |
Interest Costs |
Principal Payments |
Monthly @
$670/month |
300
(25 years) |
$100,956 |
$100,000 |
Accelerated
Bi-weekly @
$335/2 weeks |
538
(20 years,
9 months) |
$80,354 |
$100,000 |
| Amount saved: |
|
$20,602 |
|
| Source: Mortgage Wise Booklet,
Canadian Bankers Association |
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Mortgages and property taxes
Your monthly mortgage payment will include the monthly property
taxes. For example if you are looking at a property that has property
taxes of $2,400 a year you will pay $200 a month in your mortgage for
property taxes.
Property taxes vary property by property. However you can use about 1.5%
of the purchase price as an estimate if you don`t know the property taxes.
Here is an example how property taxes come into your mortgage payment
calculation.
Example: Property $300,000. Estimated taxes 1.5% x $300,000 = $4500 a
year or $375 a month.
Assuming you worked out your monthly mortgage payment, before property
taxes, to be $900 a month you would pay $900 + $375 or $1275 total mortgage
payments of principal, interest and taxes or PIT.
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Prepayment
Privileges
Prepayment privileges are voluntary payments in addition to your regular
mortgage payments. The money is applied directly against the principal
owing, so you'll pay off your mortgage more quickly. You'll also significantly
reduce the total amount of interest you would otherwise have paid.
Some examples of possible options available:
1) You can increase your regular principal and interest mortgage payment
by as much as 100%.
2) You can pay up to 15% of the original principal balance in a lump-sum
once annually or on the anniversary date.
Taking advantage of prepayment privilege is a good way to reduce the life
of your mortgage.
Mortgage Application
Checklist
Information you should bring to the mortgage application interview:
•Your personal information, including identification such as your
driver's license
•Details on your job, including confirmation of salary in the form
of a letter from your employer
•All your sources of income
•Information and details on all bank accounts, loans and other debts
•Proof of financial assets
•Source and amount of down payment and deposit
•Proof of source of funds to cover the closing costs (these are
usually between 1.5% and 4% of the purchase price)
Other information that may be required
•Tax returns for the past two years.
• Bank statements for the past three months.
3.Copies of all assets including stocks, life insurance and RRSP's.
4.A letter from your employer indicating your salary, your position and
how
long you have worked there. If you are self-employed, bring tax returns
and profit/loss statements from the previous three years.
5.Several recent pay stubs.
6.The names and addresses of your past employers.
7.A list of all credit cards and other debts including the lender's name,
your account number and balance outstanding.
8.A list of your home addresses for the past 10 years.
9.Copies of rent cheques for the past 12 months.
10.A copy of the purchase agreement and MLS listing sheet for the property
you are buying
11.If you have to sell your current home to buy a new one, bring a copy
of the
listing agreement. If you have already sold your current home, bring a
copy of the
purchase agreement.
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of Sandy and Judy Hines. Any duplication without permission is prohibited.
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