Mortgage Frequently Asked Questions

A pre-approved mortgage provides prospective home buyers with a strong sense of the maximum amount of mortgage that they qualify for, along with an interest rate guarantee from a lender for a specified period of time (usually 90 to 120 days). It should be one of the first steps a home buyer should take when looking for a home or property.

A pre-approval does not absolutely guarantee that you'll receive the funds (as the final amount may be subject to conditions), but it's a very good indicator of the maximum amount you should consider when looking to purchase.

The pre-approval process requires that you provide financial and credit score information in order to determine what size of loan you're eligible for, based on lender and government requirements and regulations. Your down payment will be also be factored into the amount.

A down payment is the amount of money that you pay at the time of purchase toward the price of your home. Your mortgage loan covers the rest. You should have a good idea of how much you can put toward the down payment before talking to a potential lender or mortgage broker.

When you are at the stage of being ready to make an offer to buy a home, you will need to provide the seller with a deposit. The deposit forms part of your down payment, with the rest to be paid when you “close” the purchase of your new home.

The minimum down payment requirement depends on the purchase price of the home. For a purchase price of $500,000 or less, the minimum down payment is 5%. When the purchase price is above $500,000, the minimum down payment is 5% for the first $500,000 and 10% for the remaining portion.

The minimum down payment on investment properties and properties valued at $1,000,000 or more is 20%. Other situations, such as being self-employed or having poor credit may also impact the required down payment amount.

Most lenders will accept down payment funds that are a gift from an immediate family member (parent, sibling, child). A gift letter signed by the donor is usually required to confirm that the funds are a true gift and not a loan. If mortgage default insurance is needed (with down payment less than 20%), the lender or insurance provider may require the gift money to be in the purchaser's possession before the application is sent to them for approval.

If you're a first-time home buyer, the federal government has programs to help, including the Home Buyers' Plan (HBP). This program allows you to withdraw up to $35,000 in RRSP savings ($70,000 for a couple) to help finance your first down payment, and to repay the withdrawn funds within a 15-year period.

Do you already have money saved for your first down payment? It may make good financial sense to apply your down payment through the Home Buyers' Plan — provided you have enough RRSP contribution room for the intended amount. You may receive a tax deduction that could be applied back to repaying the RRSP withdrawal amount, or put towards other home expenses

Mortgage default insurance (sometimes called mortgage loan insurance) protects the mortgage lender in case you are not able to make your mortgage payments. It does not protect you.

You must pay for mortgage default insurance if your down payment is less than 20% of the purchase price of your home. This is called a high-ratio mortgage. Your mortgage costs will be higher if you need to get mortgage default insurance.

The premiums for default insurance range from 0.60% to 6.30% of the loan amount. They can be added directly onto the mortgage amount or paid as a lump sum before the mortgage is advanced.

In Canada, mortgage default insurance is provided by three companies: Canada Mortgage and Housing Corporation (CMHC), Sagen and Canada Guaranty.

The maximum amortization period is 25 years for mortgages with mortgage default insurance.

A conventional mortgage is usually one where the down payment is equal to 20% or more of the purchase price, with a Loan-to-Value (LTV) of 80% or less. It typically does not require mortgage default insurance, and so the borrower does not have to pay these insurance premiums. Mortgage interest rates may be slightly higher, however, for lenders to offset the lack of default insurance.

The main difference between open and closed mortgages is the amount of flexibility you have in making extra payments on the principal or in paying off the mortgage completely. These types of extra payments are called prepayments.

Open mortgages allow you to make prepayments whenever you want. You can even pay off the outstanding balance in full with no penalties payable. Closed mortgages often include prepayment privileges, which give you the option to make prepayments up to a certain amount.

By making prepayments, you can save thousands of dollars in interest charges by paying down your mortgage faster.

The amortization period is the length of time it takes to pay off a mortgage in full. The amortization period is not the same as the mortgage term, which is the length of time your mortgage agreement will be in effect (for example, five years).

If your down payment is less than 20% of the purchase price of your home, the longest amortization period allowed is 25 years.

Although a longer amortization period means lower mortgage payments, it is to your advantage to choose the shortest amortization period—that is, the largest mortgage payments—that you can comfortably afford. You will pay off your mortgage faster and will save thousands or even tens of thousands of dollars in interest in the long run.

When you apply for a mortgage, lenders may offer you options with either fixed or variable interest rates.

With a fixed interest rate, you will know in advance the amount of interest you will have to pay (assuming you don’t make any prepayments), and therefore how much of the original loan amount will be paid off during the term. The interest rate is set or “fixed” when you apply for a mortgage. This interest rate remains the same for the entire term.

With a variable interest rate, your payment amount changes if the interest rate changes. A set amount of each payment is applied to the principal, and the interest portion fluctuates depending on changes to the interest rate. If the interest rate goes down, your payments will decrease. If the interest rate rises, your payments also increase.

Paying off your mortgage faster means you could save significant money on interest costs. Plus, you'll increase the equity in your home or property at a faster pace, as you pay down more principal. It's important to have the right mortgage product right off the start, so that you have the flexibility you need to achieve your financial goals.

Depending on the lender and flexibility of your current mortgage, to pay off your mortgage faster, you can:

• Switch from a monthly to a bi-weekly or accelerated payment schedule, which increases your payments to put more down on the principal.
• Make principal lump sum payments annually, or more often if lender allows.
• Double-up your monthly payment.
• Select a shorter amortization when you renew your mortgage term.

Your lender will register what is known as a “charge.” This process provides a means of securing a mortgage or other loan against your property. There are two types they may use: standard and collateral.

Residential mortgages have traditionally been registered with a standard charge.

A collateral charge mortgage allows you to use your home as security and potentially borrow additional funds or change loans and other credit agreements, without the need to discharge your registered mortgage, register a new mortgage for a higher amount and pay legal fees.

A home equity line of credit (HELOC) is a revolving line of credit secured by your home. You can borrow money up to the credit (global) limit, which is usually a percentage of your home’s value, not to exceed 65%. A HELOC is an option for borrowing on your home’s equity, which is the difference between the value of your home and the unpaid balance of any current mortgage.

It is also possible to get a HELOC instead of, in addition to, or containing a traditional mortgage. These products may be split into portions that you repay in different ways. For example, a HELOC may have a portion with a fixed interest rate, another portion with a variable interest rate, and the balance as an available open line-of-credit. When a HELOC is combined with a traditional mortgage, the global limit can be up to 80% of the value of the home.

There are several costs that you'll be responsible for when buying a home or property. Here's a quick list for reference.

• Down payment. You'll need to have at least 5% down, maybe more, depending on your situation. To qualify for a conventional mortgage, you will need a down payment of 20% or more.
• Deposit that counts towards your down payment, that is required by the seller to show your commitment to buy their property.
• Home inspection fee. We highly recommend a professional home inspection, which will bring to light areas of repair or maintenance and to ensure the house is structurally sound. Ask for a written report for your future reference.
• Mortgage default insurance (including PST) if you are putting less than 20% down. These premiums can be paid in a lump sum at the beginning, or factored into your mortgage payments.
• Land Transfer Tax (LTT). Calculated as a percentage of the purchase price of the property, with the amount varying depending the province.
• Legal fees, disbursements and title insurance. These are costs that are associated with or are obtained through your solicitor. Fees for these services may vary significantly.
• Other costs may be involved in closing your mortgage, such as property insurance, tax or utility adjustments.
• Moving costs. Don't forget to include the cost of moving your belonging, or paying for cleaning or upgrading before you officially move in.

After bankruptcy, it can be a challenge to re-establish your credit in securing a funded mortgage. However, depending on the circumstances surrounding your bankruptcy, some lenders may consider providing mortgage financing. Contact our Mortgage Broker, Erin for more details.

For child support and alimony paid by you to another person, this amount is typically added as a monthly liability when determining the mortgage you qualify for.

If child support and alimony are received by you from another person, the amount is typically added to your total income before determining the size of mortgage you can qualify for — provided proof of regular receipt is available for a period of time determined by the lender.