The dream of homeownership in Canada is alive and well. According to a recent Royal LePage survey, it’s what nearly half of Canadians older than 25 years old want. However, today’s housing market can be very different from what you have known before if you come from a country with a subsidized or socialized housing sector.
The purpose of this guide is to give you an understanding of the mortgage process in Canada and help you choose a home that fits your budget.
If you are reading this, there’s a good chance that your new life in Canada starts with buying a house. In fact, for many people, it’s the biggest purchase they will ever make, so it’s essential to find out as much as possible. This article will help you through the process and eliminate some of your concerns about mortgages in Canada.
Understanding Mortgage Terminology in Canada
Before you start the process of applying for a mortgage, there are some key terms you should understand. Once you know what they signify, it will be easier to decipher information about mortgages provided by banks, real estate agents, and other professionals who deal with them daily.
Some might sound familiar, while others could be entirely new for you. Below are some of the essential terms you should know before applying for a mortgage.
- Principal: The principal is the amount of money borrowed, not including interest or fees. Therefore, if you borrow $300,000 at 5% p.a., your principle is $300,000.
- Interest Rate: Interest is the money charged for borrowing your money. Most loans have an interest rate, usually expressed in percentage per year.
- Fixed-Rate Mortgage: The interest rate you sign up for in your mortgage agreement will remain unchanged throughout the term of your mortgage.
- Variable-Rate Mortgage: Variable-rate mortgages are where the interest rate is not fixed and may fluctuate according to a predetermined formula.
- Collateral: Collateral refers to any guarantee you provide if you cannot make your monthly payments or default on any of the terms and conditions in your mortgage agreement. For example, a common form of collateral has a second property that you own and can be sold to cover the unpaid portion of your loan.
- Mortgage Term: Most mortgages in Canada are closed-term (have a predetermined term that cannot extend) and fully amortized, which means you make equal monthly payments of principal and interest to reduce your balance.
Types of Mortgages
When you go through purchasing a home, the lender will consider your financial position (income, credit rating, debts), the type of property you plan to buy (for example, single-family dwelling or condo), and your timeframe for repayment. Once they understand all of these parameters, they will suggest different mortgages based on their requirements.
Depending on your needs, your lender can offer you a variety of mortgages with different terms and conditions depending on your financial situation. However, some of the most common types that are recommended for first-time buyers are:
A conventional mortgage does not require any additional insurance coverage to assure the risk of default. In addition, homestead protection is automatically included in this type of mortgage which means you cannot be forced to sell your home in case of default.
High Ratio Mortgage
A high ratio mortgage has a down payment requirement between 5% and 19.99%. In Canada, most lenders require you to have at least 5% of the purchase price of the cash home, with the remaining amount financed through a mortgage loan.
Mortgage Loan Insurance
In case you have a down payment of less than 20% for purchasing your home, your lender will require additional insurance coverage to protect against default. Mortgage loan insurance protects lenders against loss in cases where mortgage payments are not made.
Conventional High Ratio Mortgage
Conventional high ratio mortgage is a recommended type of mortgage for first-time buyers that features a down payment of more than 5% with the balance financed through a mortgage.
Mortgage Pre-approval Process
Once you have finally found the perfect property for you and discussed the price with the real estate agent, it’s time to approach a lending institution to pre-approval your mortgage. Your lender will do a complete assessment of your financial position and ask all the necessary questions to determine how much money they are willing to lend you.
The lender will use different ratios to determine your eligibility for a mortgage. For example, your gross household income ratio compared to your fixed monthly debt payments, including the new home purchase, should not be more than 32%.
The pre-approval process is usually completed within 48 hours, depending on what type of property you are buying and whether it requires additional approvals from a strata board or not.
Mortgage Application Process
Once you have been approved for a mortgage, the lender will provide you with a document called a ‘vesting letter’ that will include your name and the property address, as well as the maximum amount they are willing to lend you. Next, go ahead and sign a purchase agreement with the seller and ask your real estate agent to forward the listing information to your lender.
You will have to provide the lender with copies of all documents related to the sale of your home, including any offers you have received from other buyers. The offer copy must include how much money they are willing to pay for the property and the closing date. Lenders also require a copy of your last mortgage statement to determine what kind of terms you had on your previous mortgage and how much equity is available in your home.
They will then provide the necessary funds to the vendor (seller), who will pay off their existing mortgage with their financial institution. All that’s left is waiting for the title transfer and your mortgage funds to be released. It usually takes between 15 and 45 days, depending on what province or territory you buy real estate.
There’s no such thing as a dumb question in buying your first home. Do not hesitate and ask away if you feel like you are bothering the lender with too many questions. Also, you can expect some surprises since things always take longer than expected, and the lender will probably ask you for additional documents to be submitted.
Best Mortgage Online can help you search for home loans in Canada, contact us at 1-855-567-4898 (toll free).