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 assist you and understanding your options available to help find the right mortgage for you.
What is a mortgage and how do they work?
A mortgage is a loan for a home with a contract between you and the lender where real estate is used as the collateral for securing the debt.
If you don’t make your obligated mortgage payments set out in your contract, after a certain length of time, the lender can foreclose on the property. From there they would sell the property and use the funds from the sale to pay off the mortgage debt outstanding.
A written agreement:
The mortgage contract is a written agreement between you and the lender. It outlines details such as the terms of your mortgage, the options, the penalties if not paid on time or if paying more than the pre-payment privileges, fees associated with your mortgage and other important details. The agreement also details the property that will be secured as collateral.
A mortgage makes home ownership possible:
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.
A lower rate for you:
By having the loan secured against the property, this reduced risk to the lender helps people as well, as the lender can then lend to you at a lower interest rate. This is why mortgage rates are lower then personal loan and credit card rates.
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 of fluctuations in interest rates.
Fixed and variable:
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 for, 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 for, such as 10 years over five years, the higher the interest rate.
Variable rate mortgage is 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 offer 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 for, 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 mortgages 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.