Where to start?
If you’re thinking of purchasing a home in the near future, or you may be a few years away from your home purchase goal, I can help you understand the options available and find the right mortgage option for you.
What is a mortgage?
A mortgage is a loan for a home with a contract between you and the lender and real estate is used as the collateral for securing the loan.
What is a mortgage contract?
The mortgage contract is a written agreement between you and the lender. It outlines details such as the terms of your mortgage, the options, penalties if not paid on time or if paying more than the prepayment privileges, fees associated with your mortgage and other important details. The contract also details the property that will be secured as collateral.
Why get a mortgage?
If you do not have enough money to purchase a house, a mortgage can make home ownership possible. It is typically risky for banks and lenders to lend hundreds of thousands of dollars to people however by using the property as security for the loan this helps to minimize their risk.
A lien is put on your house by the mortgage lender on closing. Your closing date is the date you take possession of the house.
Are mortgage rates lower then personal loan rates?
By having the loan secured against real estate, this reduced risk to the lender helps as the lender can lend to you at a lower interest rate. This is why mortgage rates are lower than personal loan and credit card rates.
What are the different types of mortgages?
There are two main types of mortgages, fixed and variable, and each one comes with advantages and weaknesses. The choice of which is better for you is a personal decision based on your outlook of the economy and interest rates, as well as your tolerance level with fluctuations in interest rates.
Fixed rates are the most popular and this is where you lock in a rate for a certain term. Typically these terms are from six months to 10 years and the longer you lock in the rate, the more protected you will be against increases in interest rates during the term.
For this extra protection, fixed rates are higher than variable rates and also the longer you secure a rate, such as 10 years over five years, the higher the interest rate.
Variable rate mortgages are also sometimes called adjustable rate mortgages. The main difference between them and a fixed rate mortgage is that the interest rate can change during the term. The variable interest rate is offered based on the bank’s mortgage prime rate and this rate is benchmarked to the Bank of Canada overnight rate.
As the Bank of Canada overnight rate goes up and down, the bank’s mortgage prime rate will go up and down and therefore your variable mortgage interest rate will go up and down. During these changes one of two things can happen, your payment will increase or decrease or your amortization will increase or decrease, if the bank or you do not change the payment amount.
Some people prefer that their payment stay the same in order to assist with budgeting however a caution, a small change in prime can I have a large impact on your amortization and it may be more challenging in the future to get back on track in a rising rate environment if you are not adjusting your payment with each rate change.
How to get a mortgage?
You need to apply and be approved for a mortgage.
Typically a lender will look at your employment, credit history, assets and liabilities, debt to income ratio and other financial details.
Documents: There is a variety of documents needed when obtaining a mortgage including down payment verification, income verification, void cheque and lawyer’s contact information.
Debt to income ratio: There are two ratios that a lender typically looks at. They are your gross debt ratio (GDS) and your total debt ratio (TDR). Lenders will compare your current debt obligations in relation to the new home purchase obligations. For the home purchase these obligations include payments such as heating, property taxes, condo fees if applicable and the mortgage payment.
Credit history: Banks and lenders typically need to see a credit score of medium to strong strength. Having a credit score above 700 is ideal. The credit score is out of 900 points in total.
Pre-approval: It’s a good idea to obtain a pre-approval before you begin your search for a home. The pre-approval will help uncover any challenges in your finances that you may or may not be aware of, help guide you with what documents will be needed once you have made an offer on a home and provide you with extra confidence that you can make an offer on a home of a certain price.