The majority of people will require a loan of some sort from a lender in order to purchase a home. This type of loan to purchase a home is called a mortgage loan.
A mortgage loan is used to finance the purchase of property. The lender will use your home as collateral for the loan, meaning that if you fail to make several payments the lender can take back the home to recoup the mortgage loan. Mortgage payments are typically repaid monthly but can also be paid by-weekly or weekly, during the specified term of the loan. Lenders or banks don't always want you to know this simple fact but the faster you can pay off your loan the less interest you pay and more money you save.. Always read the fine print and ask the lender: is it possible to make a lump sum payment in a closed mortgage loan? and if so is there a cap on that payment? Also be sure to ask if there are any penalties and if so what are they specifically.
Typically you will find that mortgage payments are almost always a blended mortgage, meaning the mortgage payments include the principal (the physical amount borrowed from the lender) plus the interest of that mortgage (the cost for borrowing the money). It is also possible that mortgage payments may also include pro-rated property taxes.
- If you are fortunate enough to put a down payment of 20% towards the purchase price of your home, the Lender will most likely give you what's called a conventional mortgage.
- If you do not have 20% to put down toward the purchase price of your home the lenders or banks consider that then to be a high-ratio mortgage. This kind of mortgage loan usually requires mortgage loan insurance, And will ultimately cost you more as a home owner paying off your mortgage.
- It is important to understand that banks are not your friends, they are a business. Therefore that mortgage loan insurance is designed to protect the lender, and by law, most Canadian lending institutions require you to carry it, (insurance that is) especially if your down payment is below 20%. Because a mortgage is insured, if the borrower (you) fails to pay the mortgage, the lender is paid back by the insurer. The cost for this type of insurance is in the form of a premium (more money spent) and can be paid in a single lump sum or it can be added to your mortgage and included in your monthly payments.
Types of mortgages based on payments:
- An Open mortgage is a mortgage that is flexible, basically meaning that you can repay in part or in full at any time without penalty, but the interest rates are higher than a closed mortgage.
- Closed mortgages offer the more desirable low interest rates and the fixed payments, (so you know every month what your payment will be) but they are inflexible. Prepayments and lump sum payments are not usually allowed without stiff penalty.
- Although not as common, split mortgage or a multi-rate mortgage allow you to arrange part of your mortgage at one rate and term; and the another part at a different rate and term.
Types of mortgages based on interest rates:
- With a fixed rate mortgage, it offers a locked-in interest rate that does not change or fluctuate during the life of the loan agreement.
- A variable rate mortgage means that the interest rate can and will change and fluctuate up and down to whatever the market rate changes to. While monthly payments stay the same, the ratio of the payment that goes toward the principal and interest rate will change.
- Protected (or capped) variable rate really just means that there is a set limit on how high your interest rate will rise. typically if you receive this kind of mortgage you will be charged a premium.
- Adjustable means exactly that, that both the interest rate and the mortgage payment can fluctuate based on current market conditions.
Be aware and conscious that there are several smart ways to reduce your mortgage, such as making a larger down payment or making lump sum principle payments, deciding to choose a shorter amortization period and, if possible, increasing your regular monthly payments. Doing one or all of these can significantly reduce your mortgage and interest on that mortgage.
Getting approved for a mortgage
If you have finally made the decision and are ready to search for a home you will most likely need a mortgage. Your first step should be to do some due diligence and select whom you would like to use as a lender in advance and arrange for pre-approval. Your lender at that time will evaluate all aspects of your financial situation and establish the amount of mortgage you can afford ahead of time, making the buying process much more pleasant and direct.
Who should you really use? a bank, lender or broker?
There are many avenues an individual can choose from if you need a mortgage loan: there are your typical banks and credit unions, trust companies, for some their pension funds, and independent mortgage brokers. Always do your own due diligence; work off of references but always investigate all institutional options because every company is different and although the rates maybe similar their terms and conditions may not be.
Another option to think about is contacting an independent mortgage broker to do the majority of the leg work for you. Since an independent mortgage broker does not work for any specific lending institution, they will shop around for the absolute best mortgage rate that suits your needs.
A second mortgage is simply another mortgage loan against an existing property that you currently own. This mortgage loan will be held in addition to the principal, and the interest of that second mortgage is owed under the first mortgage. A second mortgage will traditionally have a higher interest rate and a much shorter amortization period.
Things your lender may ask for during the pre approval stage:
You will need to provide your lender with personal information, some of which may or may not include:
- Your bank statements,
- The last three years of notice of assessment,
- The last two years of your T4 and or T4A,
- The source of your income,
- The last 3 months of your paystub,
- A letter from your employer explaining the details of your job and confirmation of your salary or hourly rate,
- Proof of any financial assets,
- Any RRSP's,
- Source and amount of your down payment, and if it is a gift the "gift letter" stating as such, plus proof of source of funds for the closing costs.
Once you are pre-approved for a mortgage, the lender will give you written confirmation for a fixed interest rate, valid only for a limited time, typically 2-3 months or more. Getting a pre-approved mortgage makes the search for your new home much easier on you and a lot less time consuming for all parties involved because you now have a realistic goal and know what you can afford and where. Just remember that even after all that work and pulling the documents together for the pre approval, the approval you received is not set in stone. You must still meet with your lender during the final conditional offer period to get the final mortgage approval. At that point when you sit with your lender he or she will ask you for the property listing and signed Offer of Purchase and Sale and finalize everything.