When purchasing real estate, unless paying cash, buyers typically finance a portion of the purchase price. The conditional pledge of the property to a creditor as security for performance of an obligation or repayment of a debt is called a mortgage. The amount of money borrowed, called the principal, plus interest, which is the cost of using the borrowd funds, are paid back to the creditor in regular installments over the term of the mortgage agreement.
Home Financing Methods and Sources
There are many methods of financing to be considered when purchasing a home including:
- Cash from savings
- An existing mortgage.
- A new conventional mortgage.
- A high-ratio mortgage.
- An interest-only mortgage.
- A seller-take-back (STB) mortgage.
- A combination of conventional and seller-take-back mortgages.
Most mortgage financing is available from sources such as the chartered banks, trust companies, life insurance companies, credit unions, loan companies, finance/mortgage loan companies, mortgage brokers, private placements and sellers.
Conventional & High Ratio Mortgages
The standard mortgage loan in the marketplace today for up to a maximum of 80% of the lending value of the property - typically the lesser of the purchase price and the property's appraised market value. They usually do not require mortgage loan insurance coverage.
When a mortgage exceeds 80% of the purchased property's appraised value, the borrower is required to take out mortgage loan insurance to protect the mortgage lender in case of default. This coverage is provided by Canadian Mortgage and Housing Corporation (CMHC) and Genworth Insurance Canada who must reimburse the mortgage lender should the borrower default on his or her mortgage.
The mortgage loan insurance premium itself is calculated on a sliding scale based upon the amount of the mortgage as presented in the previous section. You can pay your premium in two ways: as a lump sum when you purchase your home or as part of your monthly mortgage payments. But keep in mind, if you're paying it monthly, you're also paying interest on the premium!
Both Conventional and High-Ratio mortgages can be amortized over varying periods - usually with month, 1, 2, 3, 4, and 5-year terms then in 5 year increments up to 25 years.
Fixed Rate versus Variable Rate Mortgages
Under most fixed rate mortgages, the amount of the principal and interest payments will not change over the term of the mortgage regarless of whether interest rates rise or fall. In exchange for this stability, a higher interest rate than would be paid under a variable mortgage will likely apply. However, for many homeowners such protection against rising rates is important for their peace of mind.
Under most variable rate mortgages, the amount of the principal and interest payment won't change but the amount that is applied to principal and interest will vary over the mortgage term as they are subject to periodic adjustments in accordance with changes to the prevailing interests rates. As the prevailing interest rates goes up the amount of each payment applied to the interest portion of the payment increases and the amout applied to the reduction of the principal decreases. Variable mortgage rates have almost always been lower than comparable fixed rates. Additionally, most variable rate mortgages may be switched to a fix rate mortgage at any time without charge.
First Time Buyers
If you are a first-time home buyer, chances are you're not walking into your deal with a huge down payment. However, you can purchase a home with as little as 5% down payment if you qualify with CMHC's First Home Loan Insurance. To qualify for 95% financing as a first time buyer, you must satisfy all of the following criteria:
- Canadian property that will become a principal residence;
- GDS (P.I.T.H. + Condo Fees) must be less than 32%; and
- TDS (P.I.T.H. + Condo Fees + Debt Obligations) must be less than 42%.
Mortgage Life Insurance
Your mortgage lender may also suggest that you buy mortgage life insurance, which provides coverage for your family should you die before your mortgage is paid off. This type of insurance is often available through your lender, who then simply adds the premium to your regular mortgage payments. However, given the advantages of acquiring such a policy through an insurance broker relative to your mortgage lender, we recommend that you acquire this coverage from an insurance broker.
Arranging for Pre-Approval of Mortgage Financing
Once you've made the necessary calculations, determine the amount of financing you require, and feel that you are ready to obtain a mortgage, it's a good idea to select a mortgage lender to get pre-approved. This means that the lender will look at your finances to more formally establish the amount of mortgage you can afford. At that time, the lender will give you a written confirmation or certificate for a fixed interest rate, which they will honour for a specific period of time.
Some buyers may not wish to pursue a mortgage pre-approval until they have found the home they want to purchase. However, the idea of having a pre-approved mortgage amount makes the search for your new home much easier and less time-consuming because you have an understanding of what you can afford. It also removes the necessity of registering an offer that is conditional on your receiving mortgage finance approval and this may, in turn, enable us to negotiate a more attractive purchase price.
When arranging for pre-approved mortgage financing, you should look for:
- Competitive interest rates. You may be willing to pay a little more to get the flexible features you desire.
- A 90-day rate guarantee. This will protect you against rising interest rates while allowing you to take advantage of falling rates.
- Flexible payment options. These enable you to tailor the mortgage to your lifestyle. Discuss payment frequency and lump-sum payment options. Find out if your lending institution will allow you to skip a payment in special circumstances or double-up on your payments.
- Closing Costs: Ask about the lender's policy with respect to realty tax holdbacks on closing.
Wherever possible, insist on paying realty taxes directly to the municipality.
In seeking pre-approval, you must complete and submit a mortgage loan application. A standard Mortgage Loan Application is also presented at the end of this section. The mortgage lender will then request, review and verify:
- Your personal information, including identification such as your driver's license.
- Your employment including confirmation of position, salary and tenure in the form of a letter from your employer(s).
- Your net worth.
- Your most recent Notice of Assessment from Canada Revenue Agency.
- Information and details on all bank accounts, loans and other debt obligations, investments and other real estate holdings.
- The source and amount of your down payment and deposit(s).
- Proof of source and adequacy of funds to cover the closing costs - these are usually between 1.5% and 4.0% of the purchase price.
Upon loan pre-approval, a Mortgage Commitment is issued for the borrower(s) signature acknowledging acceptance of the terms and conditions.
Final Mortgage Financing Approval
Concurrent with the closing of the purchase and assuming the appraisal of the purchased property is satisfactory to the lender, you will be required to provide the mortgage lender with the following:
- A cheque to cover the mortgage appraisal and application processing.
- A copy of the fully executed Agreement of Purchase and Sale.
A copy of the MLS listing.
- A copy of the most recent survey, if required by your lawyer.
- Verification of the equity you are putting into your new home.
Mortgage Loan Application
A primary and any co-applicant(s) will be required to provide the following information with supporting documentation when applying for mortgage or other types of home financing with a finance institution or broker:
¨ Full legal name
¨ Current residential address with home / business contact numbers / years at this residence
¨ Previous residential address and number of years at that residence
¨ Martial status
¨ Date of birth
¨ Social Insurance Number
¨ Number of dependents
¨ Dwelling status
¨ Current Employer: Full name and address
¨ Industry sector
¨ Position description
¨ Length of tenure
¨ Gross annual income and type
¨ Other annual income and source
¨ Previous Employer: Full name and address
¨ Industry sector
¨ Position description
¨ Length of tenure
¨ Existing group life insurance coverage
¨ Existing personal life insurance coverage
¨ Credit protection insurance coverage
¨ Critical illness insurance coverage
¨ Disability insurance coverage
¨ Asset & Liability: types/descriptions, lender, asset value, liability bal, mthy payment, co-borrower
¨ Real Estate: address(es), asset value, liability balance, mthy payment, co-borrower
¨ Total assets, total liabilities and net worth
¨ Property to be Financed: address
¨ Monthly maintenance, annual property taxes and condominium fees
¨ Legal description, tenure type, lot size, and owner type
¨ Property zoning
¨ Building age, type, style, size and square footage
¨ Environmental hazards
¨ Purchase price/value
¨ Down payment and source
¨ Existing mortgage
¨ Type of financing being sought
¨ Legal counsel name, address and contact information
¨ Property survey or title insurance coverage
¨ Real estate brokerage and sales representative names, addresses and contact information