It’s a new year, which is a time to reflect, renew, and recharge. Perhaps your resolution is to save for your first home, or just become more knowledgeable about buying a home? We’re ringing in the new year with a countdown of 10 frequently asked questions about mortgages.
FAQs About A Mortgages
Can I afford a mortgage?
Assessing whether or not you can afford a down payment and regular payments is an important first step. Have a look at what you qualify for, as well as what you can actually afford.
To determine if you qualify for a mortgage, your gross annual income, credit history, and assets/liabilities are taken into consideration.
Affordability is based on your household income, your personal expenses each month (including any other debt you’re paying off), any home expenses (condo fees, heating costs, taxes), and mortgage insurance (if it’s required). You also need to ensure you have enough money on hand for the down payment, and closing costs associated with making the purchase of a home, like legal fees.
You can plug your financial details into payment and mortgage affordability calculators to paint a picture of your financial situation.
What’s the difference between a mortgage broker and a bank?
According to the Mortgage Professionals Canada’s (formerly CAAMP) fall mortgage report, 45% of borrowers obtained their mortgage from a Canadian bank, 42% from a mortgage broker. So, what’s the difference?
There are a few differences between banks and brokers. A broker is a licensed specialist who is the intermediary between you and the lender, while a bank is the lender that will issue the mortgage directly, and receive your monthly mortgage payments.
RateHub.ca recommends using a broker for a few reasons. Banks will allow you to consolidate all of your services with one provider, which can offer a certain level of trust. They will also provide customer service to you after closing. However, a broker has access to multiple lenders (including the Big Five banks) and rates, they’ll shop around for the best rates to match your financial situation, and can often pass along discounts to you. A bank will only offer their own rates and products, leaving the negotiating up to you.
What’s a variable rate mortgage?
A variable rate mortgage is a type of mortgage where the interest rate can fluctuate due to changes in the prime lending rate. A variable rate will be quoted as prime plus or minus a certain amount, such as prime minus 0.50%. If prime is 2.70%, then your rate will be 2.20%. If your lender’s prime rate goes up or down, your mortgage rate will, too. The prime rate can fluctuate, but your rate’s relationship to prime will remain constant over your term. Variable rate mortgages usually have lower interest rates, but they don’t offer the same stability that a fixed rate mortgage does.
What’s a fixed rate mortgage?
A fixed rate mortgage is a type of mortgage where the interest rate stays the stays the same for the duration of your mortgage term. For example, if you have a five-year fixed rate mortgage at 2.89%, your rate and mortgage payment amount will stay the same for those five years. Fixed rate mortgages are more popular, and offer more stability than variable rate mortgages.
What costs are associated with when buying a home?
There are a number of costs to consider before buying your home, other than your mortgage and you’ll need some cash set aside in addition to your down payment. Your costs will vary depending on what type of home you’re buying (house or condo) and where the home is located. Costs can include the land transfer tax, legal fees, title insurance, home inspection and appraisal fees, and even taxes on CMHC insurance (issued by the Canada Mortgage and Housing Corporation).
What’s an amortization period?
This is the actual length of time it takes you to pay off your mortgage in full. The maximum amortization period in Canada is 25 years for high-ratio mortgages (where the buyer puts down less than a 20% down payment and requires CMHC insurance), and can go up to 35 years for conventional mortgages (those with a down payment of 20% or more). On the other hand, a term is the length of time you commit to one mortgage rate, lender, and associated mortgage terms and conditions.
What’s the difference between a closed, convertible, and open mortgage?
A closed mortgage is a great option for those who are planning to take a little longer to pay off their mortgage, and interest rates are typically lower. You can’t negotiate or refinance throughout the mortgage term, nor prepay (making a lump sum payment toward your mortgage) by more than the limit in your terms and conditions without incurring a prepayment penalty (often, you can prepay a certain amount of the original principal amount, once a year). Closed mortgages can be fixed or variable, and interest rates are lower than rates on an open mortgage.
A convertible mortgage offers similar benefits to a closed mortgage, but it allows you to change the type of mortgage you have – either between fixed and variable rates, or from a shorter term to a longer term – before your term is up, without penalty. Not all lenders offer convertible mortgages.
An open mortgage is great for those who plan to pay off their mortgage in the short term. They can be prepaid, even in full, at any time throughout the mortgage term, without the borrower having to pay a hefty prepayment penalty. However, the flexibility of an open mortgage comes at a cost – typically in the form of higher mortgage rates.
What will my monthly mortgage payments be?
Your monthly mortgage payments correspond to the amount of your down payment, whether or not you have mortgage insurance, your amortization period, the rate and type of your mortgage, and taxes. A mortgage payment calculator will allow you to test scenarios and compare mortgage rates, plus it will calculate CMHC insurance and the land transfer tax. And shop around for the best mortgage rates.
Do I need mortgage default insurance?
Commonly known as CMHC insurance, you’ll require it if your down payment is less than 20% of the purchase price. This protects your lender in case you default on your loan.
What options are there to pay off my mortgage faster?
It’s great to be ambitious about paying off your mortgage, but it’s also important to plan your mortgage around your current financial situation, with a bit of wiggle room or a backup plan in case you run into unforeseen obstacles down the road.
If you already have a mortgage, you should shop around and compare rates again when you’re ready to renew. You may find yourself with some added savings and extra money each month, which you can put toward your mortgage.
You could also consider taking advantage of lower interest rates by refinancing your mortgage. However, refinancing before your term is up will result in a penalty, so it’s important to do the math to determine if this will actually result in extra savings for you. A mortgage refinance calculator can help you determine the costs.
Check if you can make biweekly payments, instead of monthly. This will work out to an extra month’s payment toward your mortgage every year. Bear with us…there are 52 weeks in a year, and 12 months. If you pay half of what the monthly mortgage amount would be, but every two weeks, by the end of the year you’ll have paid the equivalent of 13 months instead of 12.
You can also put money directly to the principal amount – but be careful of those prepayment penalties!
We hope you’ve learned a few things about mortgages that you might not have otherwise known. With this newfound knowledge, you’ll be a more educated home buyer.
RateHub.ca is a website that compares mortgage rates, credit cards and deposit rates with the goal to empower Canadians to search smarter and save money.