ALL ABOUT MORTGAGES

There's a good chance already know the basic concept of getting a loan to become a homeowner. But in reality, mortgages are fairly complex, as it includes financial calculations, offer comparisons, and various levels of approval.

In this article, you'll find out more about mortgages in simple, easy-to-understand language. I will guide you through the mortgage process from start to finish.

What is a mortgage?

A mortgage is a loan that you can use to buy real estate, which acts as collateral for your loan. Mortgages are usually large and usually repaid in 25 or 30 years. When you take out a mortgage, you agree to make regular payments. Payments for these mortgages consist of principal and interest. When the payment is made, the interest is covered first and then the principal. Mortgages allow mortgage lenders to own property if you do not make the agreed payments on time.

Mortgage Process

If you decide to buy a house, the next step is to figure out how to pay for it. Unfortunately, most of us don't have the money saved to buy a full home. That's where mortgages come in. Before looking for a property, it's a good idea to get a mortgage pre-approval. If you are pre-approved, you will know exactly how much you can afford for your home. You can also mitigate the risk because you are much less likely to make an offer to a home that you can't afford.

Once you receive the pre-approval, you can buy the house. It is useful to create a list of needs and wants. That way, you can see each house objectively when deciding if it suits you.

If you find a house you like, make an offer. Once your offer is accepted, work with your banker or mortgage broker to get your final mortgage approval. Documents and information must be provided at this step. The lender will then sign off and provide a Mortgage commitment, and you can remove the loan terms from your offer.

How do you know it's time? (click here to view my Instagram post on how to make calculations to know if you are ready to afford a house)

When is a good time to buy a house and get a mortgage? A good time is when you are personally and financially ready. This means that you have a stable job, establish yourself in your personal life, and are committed to staying in the same place for the next 5 or 10 years.

When applying for a mortgage, the lender wants to make sure you can afford it every month. The lender does this using two leverage ratios. Gross Debt Service ratio and Total Debt Service ratio.

The GDS ratio indicates the percentage of total monthly income required to cover housing-related costs (mortgage payments, property taxes, heating and maintenance costs (if applicable)). Most lenders are aiming for a GDS ratio of less than 39%. The

TDS ratio is similar to the GDS ratio. It looks the same as the GDS ratio, but takes into account any other debt you may have. It is B. Credit Card Debt or Credit Line. Normally, 3% of the outstanding balance is used for debt repayment purposes. For fixed installment loans (car loans, car leases, personal loans, etc.), the payment is used to repay the debt. Most lenders are aiming for a TDS ratio of less than 44%.

Please note that the mortgage payments used in these calculations are higher than you actually pay. This is because payments are calculated at an inflated stress test rate which is currently higher of 5.25% or the interest rate plus 2%.

Where can I get a mortgage?

There are several ways you can take when looking for a mortgage, such as going to a bank or credit union or working with a mortgage broker.

Banks

When looking for a mortgage, your instinct is probably to go to the branch of your local bank where you have a checking account. Banks offer a variety of products, and it's helpful to have all your important financial information in one place. Some banks also offer additional benefits when you bundle your mortgage with another product.
However, simply borrowing a mortgage from an existing bank that you use for checks and savings may miss the more competitive interest rates offered elsewhere. The mortgage market is very dynamic and shopping is always a good idea.

Mortgage Broker

Another way to look around is through a mortgage broker. Independent mortgage brokers have access to dozens of lenders and can provide fair advice. Even if you end up going to a branch of a local bank, at least you have the peace of mind that you've got a good deal.

Important terms:

Pre-qualification

This is ideal if you are just thinking about buying a home. The lender collects basic information about your finances and then gives you an approximate number of amounts that they may lend to you to buy real estate.

Pre-approval

Pre-approval of a mortgage is more formal than pre-qualification screening. At this stage, the lender will review the financial information you have provided and perform a credit check. If you are pre-approved, that means the lender has promised you a loan, but the final amount they will lend to you and the terms of the mortgage are in fact real estate appraisals and market volatility.

Mortgage Stress Test

This is a calculation of whether you can afford a mortgage even if interest rates rise. The results of this stress test determine the eligibility of the mortgage you want to take home and apply to all homebuyers, including those who are paying a 20% down payment at their home. The benchmark rate for qualifying under stress test is greater of either 5.25% or the interest rate plus 2%. This means if you are offered 2.99% by the lender, then your qualifying rate is 5.25%; but if you are offered 3.79% interest rate by the lender, then the qualifying rate will be 5.79%.

Deposit

This is the amount that must be paid in advance when purchasing a property. The more down payment you have, the less mortgage you will need. The amount of your down payment depends on the purchase price of your home. For example, if you spend less than $500,000 at home, you only need to put down 5% of the purchase price.

Mortgage Interest Rate

This is the interest you pay for your mortgage. This determines the interest you pay over the entire term of your mortgage. The interest rate on your mortgage can vary depending on whether it is fixed or variable.

Closing Costs

Examples of closing costs include real estate attorney fees, real estate transfer taxes, housing inspections, appraisal fee and moving costs. It is advisable to budget for closure costs between 1.5% and 4% of the home purchase price.

Different types of mortgages:

Insured

For insured, you need to pay the default mortgage insurance to protect the lender. For this reason, most lenders offer the lowest mortgage rates on these products.

Insurable

Insured or traditional mortgages are for paying a down payment of 20% or more at home. In this case, you do not need to take out mortgage insurance. In this case the mortgage is insured by the lender instead of the borrower. Lender pays the insurance premium and insures your mortgage.

Uninsurable

An uninsured mortgage is a mortgage that does not meet the government guidelines for any of mortgage insurance companies to insure. Examples include buying a home over $1 million and amortization of more than 30 years of investment. For this reason, uninsured mortgages tend to have the highest mortgage rates .

Term and Amortization:

The mortgage term is the period during which the terms of the mortgage are guaranteed. When you have a fixed rate mortgage, the interest rate on your mortgage will remain the same over time.

Mortgage amortization is the time it takes to fully pay off your mortgage. Canada's standard period is 25 years and nothing prevents short-term or long-term choices as long as you pass the stress test.

Open and Close Mortgage:

With an open mortgage, you can repay your mortgage in full at any time during the period. For this reason, mortgage rates tend to be higher. Open mortgages only make sense if you expect a huge cash windfall or intend to sell your home in the near future.

A closed mortgage has limitations on how much extra money you can put towards your mortgage beyond your regular mortgage payments. Because of that it comes with a lower mortgage rate than an open mortgage.

Fixed and Variable Mortgage:

With a fixed rate mortgage, your mortgage rate and payment amount remains the same during your mortgage term. With variable rate mortgages, mortgage rates and payments can change over the life of the mortgage based on changes in the lender's base interest rate. These mortgages usually have higher mortgage rates than variable rate mortgages. This is for stability because we know exactly the mortgage interest rate and payment.

What do lenders look for when approving a mortgage?

Lenders consider several factors when deciding whether to approve a mortgage application. You look at your income, down payment, assets, liabilities, credit, and the property itself.

Income

Lenders look for borrowers with a stable source of income. You must be able to prove that you have enough income to pay your mortgage payments on a regular basis. If you are a full-time and hourly wage employee, you will spot the eyes of most lenders. If you are a full-time or part-time worker with unguaranteed time, or if you work on a contract basis, it usually takes average of two income years for the lender to consider your income. For proof of income, you`ll usually need to provide a letter of employment, recent paystub, T4s, and notices of assessment for the last two years.

If you`re self employed usually you can still get a mortgage, however you`ll need to provide more documentation. The income from your own business is less stable than a fulltime salaried position in the eyes of lenders, you`ll need to be in business for a minimum of two years and provide Personal T1 Generals, Notices of Assessment and Corporate Financial Statements (if applicable) for the two most recent years.

Down payment

Usually, if the deposit is from a bank account, the lender wants to see the transaction history for 90 days. If the funds are from an investment or RRSP, you will usually need to submit a three-month statement. If the sale is for another property, you will usually need to provide a copy of the signed agreement of purchase and sale; and a recent mortgage statement if the property you sold has a mortgage. When you receive gift money, the lender usually asks for a signed gift letter and confirms evidence that the money has been transferred to your bank account.

Assets

You need to provide the lender with an overview of your assets such as checking accounts, savings accounts, TFSA, RRSP, unregistered accounts, vehicles, etc. Assets are not considered in the calculation of the leverage ratio, but important assets prove to the lender that you are a responsible borrower. Imagine someone making $200,000 a year for 10 years, but having no assets at all. It will raise a red flag with the lender. Did the borrower use all the monies he earned?

Debt and credit

Debt and credit are linked. The lender looks at the type of credit you have, the outstanding balance and payment status, your credit score and credit history when assessing you as a borrower. This information is included in the borrower's credit report and the lender must obtain written approval for access.

Lenders usually look for borrowers with a credit score above 670 or 680 without payment delays or overdue. However, you may still be able to get a mortgage if you are overdue, or in some cases bankruptcy or filing a consumer declaration. Lenders will usually want to know why you have a credit error. If this is due to your uncontrolled living environment (for example, you got sick or were dismissed from work and are late for your invoice), otherwise prove you are a responsible borrower.

Property

The last thing the lender considers is the real estate itself. This is done through an appraisal. Depending on the property and its location, some lenders may use an automated valuation model (AVM) to determine the value of the property. Other lenders may require a full valuation and need the appraiser to visit the property for the evaluation. A real estate appraisal confirms that the real estate is worth the amount you paid. It also notifies the lender of the condition of the property.

Things to consider when getting a mortgage:

Tip: Mortgage rates should not be the only factor that you consider when applying for a mortgage. Below are some situations why:

Do you want to cancel your mortgage?

When you take out a mortgage, you probably won't think of breaking it. However, many things can happen during a typical five-year mortgage term. If you think you need to cancel your mortgage during the period, we recommend choosing a lender and mortgage type with a low mortgage penalty. Variable rate mortgages usually have lower penalties than fixed rate mortgages.

How will I be punished if I break my mortgage?

If you are breaking your mortgage during the mortgage period to buy a new home, you may be able to avoid mortgage penalties by transferring your mortgage. Porting your mortgage means you bring you and your mortgage to a new property. Some lenders have a more flexible portability policy than others. One lender may give you only 30 days to port your mortgage, while another lender gives you 90 days. If this is important that you ask the lender for more information on their portability policy.

How about prepayment?

If you want to proactively repay your mortgage, you need to pay in advance. Prepaid payments are usually made in three forms: regular increments, doublings, and lump sum payments. Not all lenders offer the same prepayments. For example, one lender might only let you make 10% lumpsum payments and increase your mortgage payment by 10% per year, while another may let you make 15% lumpsum payments and increase your payment by 15% per year. By choosing the lender with the right prepayments for you, you can pay down your mortgage at the pace you want without incurring a penalty for making too many extra payments.

Final Word

As you can see, there are a lot more things to consider when shopping for a mortgage than just the mortgage rate.

The mortgage process can be stressful, but it doesn`t have to be. After reading this article, the next time you apply for a mortgage, you should be better prepared. Knowing exactly what the mortgage lender is looking at, where to look, and what they expect will make the process much smoother.

Contact me for more info:
📞 (647) 323-5310
📧 bhupinder.singh2@century21.ca

If you’re thinking of SELLING, BUYING, BUILDING, or INVESTING in London or the surrounding area, 📲 call me @ 647.323.5310!
Bhupinder Singh
Realtor® Salesperson
"Client Focused, Results Oriented"
Century 21 First Canadian Corp.