Monday, June 26, 2017 15:30

The Mortgage Process

Mortgage Process

If you have determined that you are ready to purchase your first home and have read our Buying Process Information then it is time that you learned about mortgages.

A mortgage is basically a Loan secured against Real Property (your home). When anyone in Canada buys a home and is unable to pay the full purchase price upfront they require a mortgage.

While your local Bank may lead you to believe that their limited product range is all you need to know about mortgages, the mortgage market is in fact quite large.

The purchase of your home is likely the largest purchase you will make in your lifetime. As large as this purchase is, many consumers don’t take the time to truly understand their mortgage and this can end up costing thousands of dollars.

The Pre-Approval

Typical conditions

What’s in a Mortgage

The Pre-Approval

The first step in your Mortgage journey, after you have decided that homeownership is right for you, should be to obtain a Pre-Approval.
Pre-Approvals are great for two reasons.

1. A Pre-Approval will give you a clear understanding of how much you can afford to buy. More so by talking to the MyNewMortgage.ca team you will get a better understanding not only of how much you are pre approved for, but more importantly how much you can afford.

2. Pre-Approvals not only help you determine what price range you should be shopping in, but they also come with an Interest Rate Guarantee.  This means that for the period that your Pre-Approval lasts (usually 120 days) you are guaranteed the lowest rate offered by the lender. If rates go up, you still have the same rate you were Pre-Approved with. If rates go down, then you will get the lower rate.

What You Should Know About Getting Pre-Approved

– Pre-Approvals come with no obligation and are completely FREE
– You are guaranteed the lowest interest rate for the entire commitment period
– It only takes 10 minutes to fill out the Pre-Approval application

Pre-approval amount

This amount can vary depending on the product and mortgage company.  As a mortgage broker we shop the different lenders to find a product that meats your needs.   Generally speaking lenders do not want you to spend more than 35% of your income on your housing expense.  Housing expenses include your mortgage payment of principal and interest, property taxes, condo fees and an amount for heat.  We call this calculation the Gross Debt Service ratio (GDS).  To this amount we  add your monthly payments for any loans, lines of credit or credit cards. This additional ratio is called the Total Debt Service ratio (TDS). This amount together with your housing expenses cannot be more than 42% of your gross income.  If you have a high credit score some lenders do allow you to go a little higher than 42%. We strongly suggest you do a budget so that you do not overextend yourself.

Benchmark interest rate

This is a rate that the finance minster introduced in April 2010.  The benchmark interest Rate is the rate that  all high ratio clients (clients who have less than 20% downpayment)  have to use to qualify on for terms 1 to 4 years and for the variable rate mortgage.  The thinking is that the variable rate will increase and they want to protect you when your mortgage comes up for renewal in 1 to 4 years so that you can still afford your mortgage.

The Benchmark Rate is an average of the posted rates of the major bank lenders in Canada. So if you are getting a mortgage rate that is NOT a 5 year fixed rate then you will have to qualify on a rate that is usually about  a percent and a half higher than your discounted 5 year fixed rate mortgage. As a result, you will qualify for less of a mortgage.

What Do Lenders Look For?

A Pre-Approved mortgage is based on the information you provide on the application. The lender is assuming without verifying that the information you provided are accurate and verifiable.
Lenders typically will look at 5 main factors when reviewing a mortgage Pre-Approval
1. Who You Are
2. Your Employment History
3. Your Income
4. Your Credit History
5. Your Debts

What a Pre-Approval Doesn’t Do

It is important to note that while we strongly recommend getting Pre-Approved for a mortgage, it is not a substitute for a mortgage approval.  You should be wary about waiving any financing condition on a Purchase Agreement in lieu of having a Pre-Approval.
The reason for this is while a Pre-Approval will tell you what you can afford based on a number of factors it does NOT take into account the actual property you are purchasing. Lenders have guidelines for properties that must be met regardless of how well qualified you are as a borrower.
Also keep in mind that Pre-Approvals do not require any documentation to prove your income or other information that you used to apply. While you may earn enough to qualify for the mortgage if you are unable to confirm this information in a manner which is acceptable to the lender your Pre-Approval won’t matter very much.
The bottom line is make sure you are working with a Mortgage Expert who can make sure all your mortgage needs are been met. This will make your experience much more enjoyable!

(APPLY TODAY FOR A PREAPPROVAL)

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Typical conditions include:

Salary/Job letter from your company of employment on a letterhead stating your job title, time of tenor with the company, salary/hourly wage plus number of hours guaranteed, if applicable.  If you have been with the company for less than six months the mortgage company could also require that the salary letter states that you are not on probation.

If you earn a base salary plus commission, we can use the average of the last two years as your income.  If this amount is lower than your base income, your base income is used.

If your income consist of 100% commission click here

Paystub, this would be your most recent paystub received from your employer.

Sometimes T4’s and/or Notice of Assessments are required you will be advised if these are needed.

Confirmation of down payment

RRSP/Savings/Chequing  a/c – statement showing 3 months account history is required

Gift – Gift letter (please ask us to supply you with a form to be completed)  gifted amount needs to be deposited to your account at least 10 days prior to closing, once these funds are deposited we need a copy of your bank statement showing the gifted funds.

Borrowed funds – We need to know the terms of the loan, so that we can factor the loan re-payment into your application.

Purchase Agreement – A copy of the signed offer to purchase together with any waivers.

MLS Listing – You will receive a copy of the property listing from your realtor.  We will need a copy of this to confirm the details of the property including property taxes and condo fees.

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What’s In A Mortgage?

Term

This is the length of the mortgage agreement. Terms can range from 6 months to over 10 years. Once the term expires, the balance of the mortgage is due, or more commonly a mortgage renewal is done that allows you to obtain a new product and interest rate.

Conventional or High Ratio Mortgage

A conventional mortgage refers to a mortgage that applies to no more than 80% of the purchase price of the property, or the appraised value – whichever is less. The remaining 20% or more is referred to as your down-payment.

For mortgages where the down-payment is less than 20% and the mortgage is consequently greater than 80% of the purchase price, you have what is referred to as a high ratio mortgage. Any mortgage of this type in Canada has to be insured by one of the mortgage insurance companies – either the Canadian Mortgage and Housing Corp (CMHC), Genworth or Canada Guaranty. The Insurer will charge a premium for this mortgage default insurance which is added on to your mortgage amount. This insurance protects the lender if you default on your mortgage and your property is sold via power of sale and there is a shortfall to what is owed on your mortgage, the insurer will pay out your lender and the insurer (or a collection agency on their behalf) will come after you for the difference. Since this investment is relatively safe for your lender they are able to offer very competitive interest rates which is set against the bond market.

Fixed Rate or Variable Rate

If you have selected a Fixed Rate Mortgage your interest rate is fixed, therefore the payment remains constant throughout the course of your term. For this reason fixed rates are the most practical mortgages to obtain as you will know each month what you have to pay and what your mortgage balance will be at the end of the term.
Variable Rate Mortgages are also referred to as Floating Rate Mortgages because the interest rate can change month to month depending on fluctuations in the lenders prime rate. For this reason they are can be a riskier investment for most first time homebuyers as your month to month mortgage payment can fluctuate.

Mortgage Fact: 66% of Canadians have Fixed Rate Mortgages. 29% of Mortgages in Canada are variable Rates and 4% of Canadian mortgages are hybrid or combinations.

FOR MORE INFORMATION ON FIXED AND VARIABLE CHECK OUT OUR PAGE THAT BREAKS IT DOWN FOR YOU

Open or Closed

Open mortgages may be paid off at any time during the term. These mortgages have terms for shorter time periods and have higher interest rates as a result. Open mortgages make sense for people looking to sell their homes in the near future or who will be making large lump sum payments on the mortgage.

Closed mortgages are commitments that have a maturity date. If you want to pay your mortgage off you will have to wait until the end of the term or otherwise incur penalties. Prepayment privileges with closed mortgages vary and therefore it is very important to know the specifics of any mortgage agreement you enter into.

Amortization

If regular payments were made the amortization period is the amount of time it would take to fully pay off the mortgage. A standard amortization is 25 years and with recent changes to the Canadian mortgage rules you can go to a maximum of 30 years. For conventional mortgages with a 20% down payment or greater the amortization can still be 35 years and some lenders even offer 40 years.
The above information comprises the basics of your mortgage. Before entering into any agreement we ensure that our clients have a mortgage that is ideally suited for their individual circumstances and goals.

Mortgage Fact: 22% of Canadian mortgages have amortizations over 25 years. This number is 42% for Canadians who purchased a new home or condo in the past year

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Down Payment

When purchasing a home in Canada you can put down as little as 5% of the purchase price. CMHC (Canada Mortgage and Housing Corporation) insure mortgages with down payments from 5% up to 20%

Mortgage Chart

Most first time home buyers have not had the time to accumulate large down payments. As a result many of them are entering the housing market with down payments under 20%.

Any down payment that is less than 20% of the purchase price in Canada is called a ‘High Ratio’ mortgage. This means that it requires Mortgage Default Insurance issued by CMHC, Canada Guaranty or Genworth Financial.

This insurance allows lenders to be insured for the value of your mortgage should you default on your mortgage. As a result of this added security lenders are more willing to approve people for mortgages who have smaller down payments.

High-ratio mortgages have premiums associated with them. The below chart shows the premiums that apply to different down payments. As you can see the smaller your down payment the greater the premium. Also if you opt for an amortization over 25 years you will be charged an extended amortization surcharge of 0.20% for an additional 5 years up to a new maximum amortization of 30 years.

The premium amount will be added on to your mortgage amount and will be amortized along with your mortgage. In Ontario and Quebec the premiums are subject to Provincial Sales Tax which cannot be added to the loan amount and must be paid at the time of closing.

The chart below illustrated the premiums associated with different Down Payments.

cmhc premiums

As you can see from the chart above, saving more for your home purchase will not only decrease your mortgage payment but also reduce the amount of the premium you will have to pay should you have less than 20% down payment.

Down Payments can come from a number of resources. If the down payment is coming from your own resources (savings); then lenders will typically want to see 90 days of bank statements showing the money in your possession. You may also receive the down payment money as a gift from an immediate family member. Contact us we will provide you a form to be completed and signed by donor and recipient, this gift letter states the gifted amount and declares that the money is not repayable and is a one time gift to you.

Down Payments can also come from secured lines of credit or loans. We need to know the terms of the loan, so that we can factor the loan re-payment into your application.

Funds can be withdrawn from your RRSP as part of the Home Buyers’ Plan.

The Home Buyers’ Plan (HBP) is a program that allows you to withdraw up to $25,000 from your registered retirement savings plan (RRSPs) to buy or build a qualifying home for yourself or for a related person with a disability.

Your RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them under the HBP, or they may not be deductible for any year.

Generally, you have to repay all withdrawals to your RRSPs within a period of no more than 15 years after the 1st year of withdrawal. You will have to repay an amount to your RRSPs each year until your HBP balance is zero. If you do not repay the amount due for a year, it will have to be included in your income for that year.

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Watch a Video where a Financial Planner explains the Home Buyers’ Plan|http://www.youtube.com/watch?v=8alBomjsK2c
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Don’t let your down payment be a barrier for you to enter the housing market. There are many options and ways to come up with a down payment. In fact, there are even no down payment mortgages which are called Cash Back Mortgages.