Mortgage Financing Terms

Pre-Approved Mortgages

 All buyers should get pre-approval from a financial institution BEFORE they begin their house search.  It costs nothing. Further, it may allow you to write a "non-subject" offer on a home. This is especially important when you are in competition with another buyer.

 

 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 90 to 120 days, also sets the mortgage interest rate the lender will offer to you.  If rates go down in that period, the lender should offer you the new lower rate. Make sure that they do! Pre-approval gives you a head start on house hunting, but your final approval is still subject to a bank appraisal of the value of the home.

What a Lender wants from you

 Lenders want plenty of financial information about you and your spouse to assess your ability to repay the loan. This ability is based on your gross income 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 – birthdate, marital status, dependents, SIN #.
  • Details of employment by way of a letter of employment and a recent pay stub (income  tax returns and T-4 slips may also be required).
  • Other sources of income i.e. 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 i.e. credit card balances, car loans – the total amount you owe and your monthly payment amounts
  • If you are getting the down payment from someone (i.e. your parents), then the bank will want a note from them saying that the monies are a "gift". If you have to repay this money, it is considered a liability not an asset.

 

 Consider using a mortgage broker as they know who has the best rates.  Also, if you have a less than perfect credit rating or need creative financing and you don't qualify with conventional lenders.  Mortgage brokers don't usually lend money but they may be able to find a lender for you. They may charge a fee for this service but it is often paid by the lender.  However, find out immediately if the broker will charge you and how much!  Mortgage brokers know lending institutions policies.  Loan amounts can vary immensely depending on the lending institution when it comes to self employment, secondary income, complicated credit history, and basement suite rentals.

 

Conventional or High Ratio?

 Depending on the amount of your down payment, you will have either a conventional or a high ratio mortgage.

 

Conventional Mortgage

 This mortgage is for an amount which does not exceed 80% of either the appraised value of the property or the purchase price, whichever is lower.  Your down payment is a minimum of 20% of the purchase price.

 

High-Ratio Mortgage / No Money Down

 With this type of mortgage, your down payment is less than 20% of the cost of the home to as little 5% down. A high-ratio mortgage requires mortgage loan insurance. CMHC offers it for a premium of between 1.75% and 2.75% of the mortgage amount (additional charges may apply). This premium can be added to your mortgage payments and amortized over 25 – 30 years or paid in full on closing.

Types of Mortgages

 Although there are more options, an Open or Closed with  Fixed rate or Variable interest are the most common.

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 move before the end of the term as you most probably will have a "payout" penalty.  Mortgages are often portable, getting you around the penalty.

Variable Rate Mortgage

 If you want to take advantage of potential declining interest rates then consider the advantages of a variable rate mortgage. Your interest rate will fluctuate with the prime rate. Variable rate terms can be opened or closed and can be converted to a closed mortgage without penalty.

Mortgage Options

 

Rate of Interest

 Interest is the cost of borrowing money and is paid to the lender.

 

Term

The term of a mortgage is the length of time that you will pay a set interest rate. Terms usually last anywhere from six months to ten years. At the end of the term you either pay off your mortgage or renew it at current interest rates.

Amortization

 This is the amount of time over which the entire debt will be repaid. Most mortgages are amortized over l5 -, 20- or 25-year periods. Extended amortizations are available up to 30 years (additional insurance premium applies on amortizations over 25 years).  The longer the amortization, the lower your scheduled mortgage payments which will help you to qualify for a larger mortgage.  However, keep in mind that the longer the amortization the more interest you pay in the long run. Also, you do not automatically qualify for a shorter amortization period – this will depend on your gross income.

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 reducing the principle amount borrowed, quicker. The more payments in a year, the lower the overall interest you pay on your mortgage.

 

 Once you have decided on the type of mortgage you will be choosing, you then have to decide on the interest rate, term, amortization period and payment frequency.  You can save a lot of money if you are astute in your choices.