What is a Mortgage?
A mortgage is a type of loan that allows one to buy a house, land, or a different kind of real estate or pay for its maintenance and renovation. A mortgage loan usually means that a significant amount of money is provided for a specific term, and borrowed money must be repaid within the scheduled periods, including interest, fees, and installments. Typically, a mortgage agreement stipulates that the lender has the right to take your property if you fail to pay off your mortgage debt plus interest. Most lenders categorize home mortgages as a primary residence, second home, etc.
Mortgage loans make it possible to enjoy your own home before you save the required amount to buy it.
Mortgage loans are not only designed for the purchase of real estate (land, houses, apartments, condominiums, etc.) but can also be used for renovations and reconstructions. Repayment over the life of the loan includes principal and interest on the loan.
Mortgage payment options usually offered by lenders are as follows:
- monthly payments — one payment per month
- semi-monthly payments — two payments per month (your monthly payment is divided into two equal parts).
- biweekly payments — one payment every two weeks (your monthly payment is multiplied by 12 and divided by 26)
- weekly payments — one payment per week (your monthly payment is multiplied by 12 and divided by 52)
- accelerated bi-weekly payments — 1 payment every two weeks (monthly payment divided by two)
- accelerated weekly payments — one payment per week (monthly payment is divided into four equal parts).
Mortgages differ from other types of loans because:
- the loan is secured by real estate;
- a balance of the loan may still be outstanding at the end of the term;
- full repayment of the mortgage often requires a contract extension until the mortgage is fully repaid;
- passing a stress test is often necessary to obtain a mortgage;
- a down payment (confirmed equity) is required;
- penalties apply if you need to cancel the contract.
Obtaining a mortgage loan is complicated. Many checks are required, and lenders verify customers’ risk profiles by looking at their credit history. Before applying to a lender, it pays to check the credit history to see if there are discrepancies. Credit score requirements for mortgage loans are typically strict. Take your financial habits seriously to get better mortgage terms and a high probability of approval. Lengthy loan review and approval processes could jeopardize your deal. Check how long it would take to process your application.
The purchase of a property requires investment preparation with a contribution of own funds, even if the lender finances a more significant amount. The amount of the loan contribution affects the mortgage costs and can provide for a lower interest rate. Therefore, the more you pay at the beginning, the lower the loan burden.
The market offers variable-rate mortgages and fixed-rate mortgages. Initially, variable rates may be attractive, but over the amortization period may change loan payments and overall loan cost. Fixed-rate mortgages would mean no surprises and less stress during the mortgage process.
It is worth evaluating the difference between the amount the bank can approve and the amount the borrower can realistically repay without straining the household. The calculation is a crucial stage, and a mortgage calculator can be an excellent supporting tool and a mortgage stress test (for variable rate mortgages). Make sure that you can afford payments as a borrower and will not risk your newly purchased real estate. Additional mortgage cost is implied due to homeowners insurance and other fees applied by financial institutions.
If a borrower has a poor credit history, it does not mean there are no chances to get a mortgage. There are different solutions, for instance:
- Credit score improvement (that can save you a pretty good amount via lower mortgage payments and better terms);
- alternative mortgage lenders who work with all credit scores, even with those with less-than-perfect credit;
- get a loan from friends or family members;
- online lenders;
- credit unions;
- co-signer or guarantor for your mortgage;
- avoid "guaranteed approval" that violates federal mortgage lending rules because creditworthiness must be checked in every case.
Note: the lower your credit score, the more interest you will pay to mortgage lenders.
Borrowers need to remember essential tips:
- take advantage of the online application for the sake of your time and check out multiple options at different lenders;
- balance mortgage terms with your income possibilities and compare rates and mortgage terms offered;
- check out what type of mortgage works best for you (high ratio or low ratio);
- check if you are eligible for a lower rate;
- evaluate the affordability of home prices;
- take advantage of a mortgage calculator and determine the benefits you can get from various mortgage lenders, go over a mortgage stress test, potential property taxes, homeowners insurance, the impact of the mortgage on personal finance, and different repayment models (for example, a bullet payment in a lump sum);
- take advantage of being pre-approved, and many lenders offer such a possibility;
- wisely choose the mortgage lender and check out convenient payment frequency and amount of regular payments; choose variable rates only if you can pass the stress test;
- work with your budget; if you do not have such a habit, it is the right time to start;
- make regular payments timely;
- if you face difficulties keeping up with the repayment pace, contact the lender and show that you are a responsible borrower ready to seek solutions together, it is always possible to put you back on track if you wish to keep your real estate.
A lender is interested in minimizing the risks and getting earnings from lending money. At the same time, borrowers look for the best rate, convenient mortgage term, bearable monthly mortgage payment, reputable financial institutions, etc.
Some borrowers are caught up in the idea of quick loan repayment, but as some experts say, sometimes a longer mortgage loan term can be beneficial; if there are too strict penalties for early repayment, the borrower can invest more in repayment once a year or at other intervals. This can save on interest payments. When discussing mortgage options with a consultant of mortgage lenders like a bank, a mortgage broker, a credit union, or another financial institution, find out about early repayment options and terms.
Major types of mortgages in Canada
There are many types of mortgage, and each has specific features that impact mortgage payment amount, type of interest (fixed rate or variable rate), annual percentage rate, mortgage amount, etc. Therefore, it is essential to find a mortgage that works for you.
- Open or closed mortgages (open mortgages usually have higher interest payments, but it can be a good choice if you want to repay early and sell the property shortly. Closed mortgages limit the additional amount that can be added to the regular payments each year).
- Transferable mortgage is a way to transfer a mortgage from the previous property to a new one, but you should be aware of the lender's restrictions. A transferable mortgage allows you to take over someone else's mortgage, releasing the seller from the mortgage once the buyer approves the mortgage loan;
- According to the mortgage rate type, there is a variable-rate mortgage and afixed-rate mortgage. For example, a five-year fixed mortgage means, that during the life of this loan your mortgage rate will remain unchanged and will not affect the total purchase price. Standard or more complicated collateral registration.
- Mortgages can be with cashback or without cashback. Lenders may restrict the use of cashback, e.g., it should not be used for a down payment.
- Home Equity Line of Credit (HELOC) is a loan secured by real estate with a limit set by the lender, a revolving line of credit with regular interest payments.
- Mortgage with liability insurance (mortgage loan insurance in the form of lender title insurance and homeowner title insurance).
- One more unofficial category is a mortgage directly from a lender or a mortgage broker.
- Reverse mortgage is a popular loan product for older people. They use the equity in their home to obtain money from lenders and do not have to make regular loan payments. The lender's money is paid in exchange for the equity in the home, and the borrower can live in the property for the rest of his or her life. If the property is to be sold or the borrower dies, the mortgage becomes due and must either be repaid/refinanced by the heirs or the property must be sold to cover the loan.
How to apply for a mortgage?
- The first step is to check your credit score and check for errors on your credit report. If there are errors, make sure they are corrected because they can affect your prospects for approval, terms of the loan, mortgage rates, etc.
- Check the offers from banks, mortgage brokers, credit unions, and other lenders, and use mortgage calculators.
- Use the application option online on the lender's website or mobile app, or apply at the lender's office.
- Compile the confirmation documents the lender needs to review your loan application.
- Get pre-approved and lock in the interest rate for a few months.
- Pass the stress test if required by the lender.
- Complete the mortgage contract by signing the loan agreement, making your own contribution, and obtaining the required insurance.
- The mortgage application process may vary in some details, but generally, it proceeds as described above.
Requirements
Generally, borrowers should meet several requirements of mortgage lenders, banks, credit unions, or online lenders:
- be of the age of majority;
- be able to sign legal documents and take out loans;
- have the required insurance;
- have a stable income and a steady job with the same employer;
- have a credit score of 680 or higher;
- have cash for the down payment and other expenses for the purchase and mortgage.
Ways to get a mortgage in Canada
Depending on the credit score, a borrower has different options in obtaining a mortgage in Canada. The higher the credit score, the more options are available, and the lower interest rates, better terms, and reputable lenders are offered. Mortgages can be obtained from:
- a bank;
- a credit union;
- a mortgage broker;
- other lenders.
The lower the credit score, the higher the payments and interest rate, but note that it is possible to obtain a mortgage even with a poor credit score.
Pros and cons
Pros
- a mortgage may be the only way to purchase your property since most Canadians either have to save money for many years or can only rent a house (a condo, apartment, etc.);
- regardless of the credit score, if a borrower intends to buy a property, it is always possible to find a tailor-made mortgage offer for your specific case;
- easy repayment, step-by-step, until the remaining debt is paid off and the purchased property is wholly owned;
- a fixed interest rate allows you to be sure of the costs you will bear during the term of the loan.
- if you have a good credit score of at least 680 points, several mortgage options and lower interest rates are available;
- early repayment of the loan is possible.
Cons
- signing a mortgage agreement means that a borrower is locked into the loan burden for many years;
- there is no full ownership of the purchased property and no freedom to dispose of it without the lender's consent;
- if a borrower does not repay their loan, the property is repossessed because it is mortgaged by the lender to cover the outstanding loan amount and interest and fees;
- interest payments over the years of the loan term are significant, especially for adjustable rate mortgages;
- potential possibility of property impairment due to market changes that cannot be 100% predicted;
- if one’s credit score is low, the interest rate and loan cost would be higher.
A mortgage loan has such advantages as bringing the borrower closer to owning a property, renovating the purchase of a borrowed property, etc. The interest rates are affordable, and the loan term allows regular payments. A good credit score makes it possible to get the best deal and increases the chances of approval. Disadvantages are that it is a loan, and a borrower cannot own a house or other property purchased with the help of a mortgage without paying it in full, there is a risk of repossession, and the borrower loses their previous efforts to obtain financing. To balance the pros and cons, one must find a suitable mortgage and work with this lender to tailor it to one's circumstances, which increases the chances of successful repayment.
How to repay a mortgage?
Depending on the lender's credit terms, this can be done by direct debit, cash payment at the lender's branch, check, online payment, etc. In addition to the method of remitting regular installments to the lender, there is another important side to mortgage repayment that reflects steps to repay the mortgage loan to the lender successfully: If you are making additional payments on the principal of your loan, you can add at least one extra monthly payment per year. Make sure the lender considers the special payment an additional payment and not a regular payment for the next installment due. Refinance your mortgage by getting better terms and a shorter loan with another lender.
Mortgage refinancing is a type of mortgage restart with the same lender where you pay a lump sum, and then your outstanding balance, amortization schedule, and amounts due are updated. Since the lender remains the same, the fees are much lower than if you cancel the contract and "move" to another lender. Make lump sum mortgage payments using additional unexpected income or saved amounts that allow you to get off the loan yoke sooner.
Apply for a loan modification to ease the burden on the lender. This will help get payments back on track and save on interest payments and the overall cost of the loan.
Legal regulation
Credit in Canada is regulated at the federal and provincial levels. The Criminal Code regulates the maximum interest rate for loans.
- It should be mentioned that for mortgage loans, there is an Eligible Mortgage Loan Regulation that defines terms such as high ratio loans, low ratio loans, total debt service ratio, etc.
- Mortgage Broker Act;
- Federal rules governing the residential mortgage market;
- Canada Mortgage and Housing Corporation Act, etc.
The real cost of a mortgage loan
The actual cost of a mortgage loan consists of all fees associated with the loan, including interest charges, insurance payments, loan disbursement costs, contract modifications, etc. When you add up all the costs associated with the mortgage, you know the total cost of such a loan. Some expenses are one-time, while others are incurred throughout the life of the loan and, therefore, must also be taken into account.
