What You Should Know About Mortgages
So you are thinking about buying a new home? You may be wondering how mortgages work, if you would qualify for a mortgage loan, and if there are any special issues you should be aware of.
Here is a look at some facts and information about mortgages.
- Canada has one of the most solid mortgage systems in the world, which has evolved over many decades. It’s a balanced system that helps people become homeowners, while not encouraging excessive risks—that is, it demands responsible behaviour from both lenders and borrowers.
- The vast majority of lenders follow prudent and careful lending practices. Borrowers are qualified for a mortgage according to how much debt they are able to manage. Traditionally, lenders estimate that 32% of the borrower’s income can be safely allocated to “housing debt”, i.e. repayment of a mortgage loan with interest, taxes, condominium fees and energy use. Other debt is also factored in—car loans, personal lines of credit, student debt, credit card balances and so on. In total, up to 40% of total income can go towards debt payment. (Note: some lenders may use slightly different percentages.)
- Lenders will also consider other personal information, such as length and security of employment, credit history and proven ability to handle debt. For instance, did you take out loans before, and did you pay them back on time?
- Typically, you should have a minimum down payment of 5% of the value of the home you are buying.
- Mortgage insurance is mandatory in Canada for all high-ratio mortgage loans—when the loan represents more than 80% of the total value of the property. This protects the lender in case the borrower becomes unable to pay the mortgage loan. For home buyers with a down payment of less than 20%, mortgage insurance allows them to benefit from the same mortgage rates and features as those with higher down payments.
- Most mortgages are amortized over 25 years—that’s the length of time required to pay the loan off completely. For most people, this offers manageable monthly payments. A longer amortization period lowers your monthly payments, but you will end up paying more in the long run; the longer you borrow the money, the more it will cost in interest. There may be times, such as the initial years of homeownership, where a longer amortization period can be considered. Conversely, a shorter amortization period will save you interest, but the monthly payments will be higher. This is due to the fact that the principal is being paid down over a shorter period of time. Consult with your mortgage specialist about the options that best match your needs and circumstances.
- The interest rate on your mortgage will fluctuate based on the different interest terms selected over the amortization of the mortgage. Fixed and variable rates are offered for specific terms that can range from 6 months to 18 years or more. Many people choose fixed rate mortgages with terms of 5 to 7 years, because they tend to offer the best balance between an attractive rate and the security of knowing exactly what your housing expenses will be for a considerable length of time. Once a term is up, you can renew the mortgage loan for another term at then current rates, which may be higher or lower.
- Mortgages can come with a great deal of flexibility. Discuss your options, such as pre-payment and increased payment frequency, with your lender so you can tailor your mortgage to best suit your situation and preferences.
- Lenders are realistic and know that borrowers sometimes encounter financial difficulties due to illness, lay-offs or other circumstances. Ask your lender about programs they may have to deal with “what if” scenarios, such as deferred payment plans. Mortgage insurance providers also have homeowner assistance programs to help families keep their homes.
- Some new home builders offer mortgages at preferential rates for their homes. In such cases, the builder is not the lender, but has made arrangements with their own financial institution to provide the mortgage loans to qualified purchasers.
Talk with a mortgage specialist to see what lenders are offering—mortgage rates are still at near historical lows. Get pre-qualified for a mortgage loan so you know exactly how much you can spend on your new home, if you decide to go ahead. Then visit the new home builders in your community and see what is possible within your budget. Contact your local Home Builders’ Association for the names of professional new home builders in your area or use the search module to the right.
If you are ready, this is an excellent time to buy a new home.