Owning a home is one of the defining milestones in our culture, a signal that we have grown up and entered the adult world. It was the primary aspiration of previous generations as it gave them something to be proud of, to pass down to their children, and to build their equity. However, when the economy took a turn for the worst, many people became reluctant to purchase a home, either because everything felt too unstable to make the commitment or because the economic downturn had left them in a financially compromised position.
Now that the economy is improving, there is a renewed interest in home ownership. The current generation is embracing this goal of the previous generations. Investing in a home feels like a more secure prospect than it did just a few years ago. As a result, there is more interest in understanding the process of obtaining a mortgage to purchase a home.
When taking out a mortgage, you need to be worried about more than just the best mortgage loan rates; you need to know the process, how to protect your investment, and what types of loans best suit your needs. From the rules and regulations set by the Federal Government of Canada to evaluating potential lending institutions , your knowledge will be your first line of defense against a less than ideal decision.
Mortgage Loan Basics
Few people can afford to purchase a home outright. Even those who can do not always want to, as owing money on your home can protect it in the event of a lawsuit. As a result, the vast majority of homeowners will need to obtain a mortgage.
A mortgage, in its simplest form, is a loan to be applied towards the purchase of a home. However, there isn’t just a single type of mortgage available to you. Based on your individual needs, you will need to select the type of mortgage that is right for you. The two most common types of mortgages are fixed-rate and variable-rate.
When you opt for a fixed-rate mortgage, you will establish the interest rate to be paid when the loan is signed for. This rate will remain the same throughout the life of the loan. Out of the two types of mortgages discussed here, fixed-rate is the most common.
The biggest draw of a fixed-rate mortgage is its predictability. The homebuyer enters into the process knowing exactly what he or she will be paying for their home each month. The purchase price of the house is evenly spread over each month for the duration of the loan. This ensures protection against wildly fluctuating interest rates.
These mortgages are easy to understand, making them ideal for those who are financial novices. The biggest decision with a fixed-rate mortgage is deciding the duration of the loan. A short term mortgage will result in higher monthly payments with less interest paid while a long term mortgage will give you lighter monthly payments while charging more in interest.
However, they are not the right choice for everyone. Fixed-rate loans can be more difficult to qualify for than other mortgages, making it more difficult to secure. As the interest rate is usually higher than with other mortgages, buyers who do qualify will still have less to spend. Finally, should there be a drop in the interest rates, someone with a fixed-rate mortgage would fail to benefit from them.
When you take out a variable-rate mortgage, the interest rate will change based on the overall rates currently available on the market. In general, there is a set period of time in which the interest rate is fixed at a low home mortgage loan rate—lower than what is available if you opt for a fixed-rate mortgage. Once the time period expires, the interest rate will change on a monthly—or sometimes more frequent—basis. As interest rates usually increase as time goes by, this means paying a much higher rate in the later years of the loan.
Variable-rate mortgages are often the best option for those who would otherwise be priced out of the market they are wanting to buy in. It is also ideal for those who do not have the money available at the time of purchase, but have secure knowledge that they will have it in a few years. However, as you cannot predict the rates, it makes it difficult to create a steady budget.
The Cost of a Mortgage
The majority of what you pay each month is based on principle and interest. When you first begin repaying your loan, the majority of what you pay will be interest as the amount still owed is large. As you pay off your loan, the amount the interest can be charged on will decrease and more of your payment will go towards covering principle. Additional costs include taxes and insurance.
Before you Sign
You should not put your signature on a single piece of paper until you run the numbers and figure out exactly what you can afford. Unscrupulous lenders will push you to go for more than what you can afford and offer terms which can hurt you in the long term. Once you do know what you can afford, you should consider going lower and playing it safe.
How the Federal Government Regulates Mortgages
As one would expect, the Federal Government of Canada sets rules and regulations which impact the mortgage lending industry. For the most part, these regulations are what you would expect. However, there are a few changes which have occurred in recent years which might catch you by surprise.
Recent regulations have restricted the length of loans available from the majority of lenders. While 40 year loans were once available, the maximum length allowed is now 25. This makes it more difficult for those who cannot afford a 20% or greater down payment to purchase a home. It is also required that a minimum down payment of 5% be given, no longer allowing for loans which do not require a down payment.
Opening a Line of Credit
A mortgage alternative available to you is a line of credit. When you open a line of credit with a lending institution, the institution agrees to allow you to borrow a specific amount of money. You can use as much or as little of this money as you need, but you cannot exceed the agreed upon amount. Unlike a traditional loan, interest is not charged on the amount of money which is unused. It also means that the money is available to you at any time, so you can use it as you need it.
With a line of credit in Canada , you are given a lot of flexibility. When you take out a typical loan, you must use the money for a specific item—in the case of a mortgage, that would be the purchase of a home. This money cannot be used to repair or renovate the home. Money obtained from opening a line of credit can be used at your discretion, from home repairs to medical bills.
In terms of conceptualizing how this works, think of it not as a loan, but as a credit card—you take what you need, as you need it, up to a certain amount. You make monthly payments and are charged interest only on what you owe. Additionally, interest rates on lines of credit tend to be lower than credit cards and other types of loans, making them a very tempting option.
The length of time your line of credit covers is referred to as the draw term. During this term, you can use the credit as needed. Once this term is over, all interest and principle is due. The amount of credit you can obtain will primarily be based on your credit score. The lender will also look at your income to determine your ability to repay.
Another alternative to the traditional mortgage is a package loan . This is a nice middle ground between traditional loans and lines of credit. In terms of securing and accessing the fund, it works as a mortgage, with the full amount being given up front instead of being accessed on an as needed basis. However, it offers flexibility in terms of your spending, similar to the way a line of credit would function.
With a package loan, you take out a single loan to finance the purchase of the home, repairs, and furnishings. For those who have the money for a down payment and not much else, this can be a lifesaver. This type of loan is especially beneficial to those who are looking to purchase a fixer-upper home for a low price so that they can rehab it.
Depending on the lending institution, package loans can also come with a bank account and a line of credit, making this even more flexible. As a result, they can provide greater financial security for a new homeowner as well as make it easier for them to incur large amounts of debt.
Using the Canadian Mortgage and Housing Corporation to Secure Mortgage Insurance
The premier issuer of mortgage insurance in Canada is the Canadian Mortgage and Housing Corporation . When you receive a loan from one of their approved lenders the CMHC will issue mortgage insurance on the loan.
In general, you will be required to obtain mortgage insurance if you give less than 20% as your down payment. Mortgage insurance is designed to protect the lender, not the borrower. In the case that the borrower defaults on their loan, this insurance makes certain that they do not need to lose the money they loaned. While the policy is taken out in the name of the lending institution, they do not eat the costs of the insurance themselves. Instead, they will build the cost into your loan, passing it on to you. As a result, you will want the mortgage insurance which is the most affordable—the CMHC offers this to you.
The biggest advantage of obtaining mortgage loan insurance is that it allows you to opt for a low down payment. With CMHC mortgage insurance, you can get your down payment as low as 5%. They allow their insurance to be applied to a wide variety of housing types and they offer it throughout Canada. There are several options to choose from and the insurance plan will be designed to custom fit your needs.
In order to obtain CMHC mortgage insurance, you must meet the following requirements:
- The home which the mortgage is for is located in Canada.
- The maximum purchase price of the home is less than one million dollars.
- You must be able to make a down payment of at least 5%.
- The down payment must have been paid via your own funds or a close relative’s.
- The total housing costs cannot add up to more than 32% of your gross household income.
Financial Lending Institutions
Lending institutions are institutions which lend funds to applicants who meet their requirements. In general, when we think about lenders, we think about banks. However, banks are not your only option when seeking a loan. There are two primary types of lending institutions which offer mortgage loans.
If you are in need of a loan, chances are the first option you consider is going through a bank to obtain it. This is the most common way to obtain a loan. With the variety of banking institutions in Canada, chances are good that you can find one which meets your needs.
A mortgage broker serves as a middle man between you and the money lender. Their goal is to shop around for the best deal for you. This means that they are working on your side to find something that suits your needs and provides for you. This can be highly beneficial in the financial world where few people are looking out for anyone besides themselves and is often the best option for a mortgage loan with bad credit.
If you are ready to dive into the world of home ownership, you need to enlist the help of a team that will be on your side. The mortgage brokering services of iMortgage Solutions are the top of the line and designed to put your wants and needs first. With years of experience on all sides of the home buying process, they have the expertise needed to guide you through the process. Contact them today at 403-870-2669 or visit them online at MyMortgageBroker.com to get started.