Tips for Mortgages

Mortgage Terms

A mortgage is just a loan that uses a property as collateral to ensure that the debt is repaid. If something happens and the loan payments aren’t paid, then the bank can sell the house and get its money back.

The principal = loan amount.

The amortization period = the length of time it takes to pay off the loan. 25, 30, 35 or even 40 years.

The term = the length of time that the bank has agreed to lend you the money for – usually 5 years. When the time period is up, then you sign up for another mortgage. This means that you also have to requalify.

A mortgage can be used for financing many different things, including:

  • Buying or building a new home
  • Buying an existing home
  • Refinancing to consolidate debts
  • Financing a renovation
  • Financing the purchase of other investments
  • Financing the purchase of investment property

Since a mortgage is a fully secured loan, the interest you pay is usually less than with most other types of financing. Many people use the equity in their homes to finance the purchase of investments and they can even write off those interest costs against their taxable incomes.

Equity is the difference between what you owe on your home & the market value of your home. After a few years you will be surprised at how much it is.

Should I get pre-approved for a mortgage?

Yes!

For 4 reasons:

  1. You'll know exactly how much you can pay for a house. That tells you which houses to look at. Don’t make the mistake of thinking that just because you’re paying $1000 per month for rent, that that means that you will qualify for $1000 house payments. Not necessarily.
  2. It saves the disappointment of finding a house you love and discovering that you can’t get a mortgage for it.
  3. You know where you’ll be getting your mortgage from and you know the person you’re dealing with. This saves you a lot of stress.
  4. A Pre-Approved mortgage is free and they'll guarantee your interest rate for up to 120 days - if rates go higher, your rate will not be affected, and if rates go lower, you get the lower rate.

Your Credit Rating

Your credit rating is a measure of your credit-worthiness. It provides a credit history, which is a list of facts about how you handle debt - when you make payments on time and when you’re late. From this they give you a score which is a number that they use  for your rating.

What most people don’t realize is, that whenever you apply for a loan for anything, points are deducted from your credit score. If you visit several banks and apply at them all, looking for the best deal, they’ll each check your credit rating and you will lose points each time. This could have a serious affect on your rating and whether or not you’ll get that mortgage. If you’re wondering about rates, call the banks or go on line to find out. This is why a good mortgage broker is worth his weight in gold. He deals with them all and will search for the best rate for you. He can often get you a better rate at your own bank than you can get yourself.

Conventional Financing

The conventional mortgage – you must have at least 20% of the purchase price for a down payment.

High Ratio Insured Financing

High ratio financing – any mortgage where the Buyer has less than 20% down.  You can even buy a house with nothing down but your interest rate will be higher. This type of mortgage must be insured. The insurance company guarantees that if a purchaser defaults on a mortgage that the bank would get all their money back. Today there are three companies set up to insure mortgages, Canada Mortgage and Housing (CMHC), Genworth Financial, and AIG United Guaranty.. The cost of this insurance varies according to the amount of downpayment and is typically added to the mortgage and amortized over the entire amortization period. This way a consumer does not have to come up with the insurance premium at the time of purchase but can defer this cost over a period of time.

The premium costs range from 1.75% to 3.1%.

Cash Back Options

Some lenders offer a cashback option however the interest rate is higher. You can get up to 7% of the mortgage back on a 10 year mortgage. On a 5 year mortgage you can get 5% (1% per year)

This was originally offered to help first time buyers with buying their appliances but now it’s used for legal fees or moving costs or renovations on your new home. There are no rules. You can even take a holiday.

The only problem is the higher interest rate. You only get the posted rates.

Sometimes, however, the cost of the higher interest rate can be beneficial. If you have credit cards or loans, you may benefit from the ability to pay off those with the cash back amount

Using your RRSP for a down payment

The guidelines are as follows:

Only buyers who meet the definition of a first time home buyer qualify. If only one of the buyers qualifies, only he may cash in his RRSP for down payment purposes under this program. Each buyer may borrow up to $20,000.00 from their RRSP to use as a down payment on a qualifying home. (i.e. two buyers may use $20,000 each)

Revenue Canada considers these withdrawals to be a loan you are making to yourself. You must make repayments to your RRSP of equal amounts over the next 15 years. If the amount is not repaid in a year, that year's amount will be taken into income and taxed. It is acceptable to repay more than 1/15th of the funds per year. In order for a home to qualify, it must be located in Canada and intended to be used as your principal residence.

Did your landlord thank you for making his mortgage payments?

Every renter who says they can't possibly take on the responsibility of a mortgage is wrong. Because they are already making a monthly mortgage payment. It just happens to be their landlord's and it's the landlord who is building up equity in his property, not the person making the payments.

Almost any homeowner will tell you that the purchase of their new home was the best financial decision they ever made. Yet every day many prospective new home-owners fail to take the steps necessary to learn what they need to know in order to take that first step towards home ownership.For many people their home is their retirement fund.

Mortgage Life Insurance

You will be offered this option and it may be a good idea. Shop around. Ordinary term insurance for the amount of your mortgage will probably be a cheaper option.