In today’s ambitious world, everyone plans to own their place of residence at some point in time. How often have you imagined yourself as a prosperous homeowner? What often gets overlooked is how big of a financial commitment property ownership actually is. A mortgage can help make the dream of home ownership a reality, at the cost of a decades-long period of debt. That’s why it pays greatly to be informed, and everything you need to know about mortgages in Canada can be found in this article. Let this be your ultimate guide to finding a mortgage that helps you save and fits your lifestyle.
Don't Waste Money With Banks.
Get Exchange Rates Up to 2% Better With KnightsbridgeFX
| LENDER | 5Y/F/C | 5Y/V/C | 3Y/F/C | 1Y/F/C |
| HSBC Bank | 2.44% | 2.25% | 2.39% | 2.69% |
| intelliMortgage | 2.13% | 1.95% | 2.14% | 2.79% |
| True North Mortgage | 2.29% | 1.99% | 2.39% | 3.19% |
| Mortgage Architects Brokerage | 2.69% | 2.35% | 2.69% | – |
| Dominion Lending Centres | 2.69% | 2.35% | 2.64% | – |
| Tangerine Bank | 2.69% | 3.25% | 2.64% | 3.39% |
| Bank of Montreal (BMO) | 2.84% | 2.45% | 2.99% | 3.39% |
| TD Canada Trust | 3.09% | 2.35% | 2.89% | 3.39% |
| Caisses Desjardins | 5.19% | 3.69% | 4.34% | 3.39% |
| LENDER | 6M/F/C | 1YR/F/C | 2YR/F/C | 3YR/F/C | 5YR/F/C | 5YR/V/C |
| EQ Bank | 4.94% | 4.24% | 4.64% | 4.73% | 4.84% | 4.99%* |
| CHIP | 5.39% | – | – | – | – | 4.99%* |
*affected by prime rate fluctuations
In simple terms, a mortgage is a type of loan that is used to buy property and is typically taken out for home ownership. For the average person, a mortgage is their primary financial commitment, so it pays to be as informed as possible on the rules surrounding them. Usually mortgages are requested from large financial instructions (such as credit unions or banks) by individuals for the purpose of affording a house, and are scheduled to be repaid within an agreed time span called the amortization period. For the average working class citizen, a mortgage represents the largest amount of borrowed funds that they will ever take out in their whole life. It represents a financial burden that can take decades to fully repay, but is usually necessary to secure a permanent residence.
From a more detailed perspective, a mortgage falls under the secured loan These types of loans are backed by collateral, or insured by an underlying asset to lower the lender’s risk. In a mortgage, the asset backing the loan is the house itself – and since the loan is secured in this way the offered interest rate is able to be very low. Much lower than a personal loan or line of credit.
The bottom line: mortgages are not plain and straightforward. When considering all the moving parts (which are all dependent on each other) in a mortgage, it can be a very complex financial product. This usually results in people overpaying for their mortgage, since most of the time financial institutions (the lender) are more knowledgeable on the topic than an individual (the borrower). As a result, it is important to at least have a firm grasp on the basics before locking into a contract. Your mortgage rate (also known as the interest rate on your mortgage) is what the lender will ask for in return for lending a certain amount necessary to purchase a property. As a basic example, if you borrowed $1000 at a 6% annual interest rate, you would owe an additional $60 at the end of the year. This is a relatively small sized loan but the same financial principle applies to a mortgage. Usually, an individual’s payment frequency (how often a payment is made) for a mortgage is weekly, bi-weekly, or monthly. The more frequent the payment, the faster the entire mortgage gets paid off. For a mortgage, rates can be fixed or variable – we will cover more on this below.
A down payment is defined as a lump sum amount of funds (a percentage of the asking price) that is required upfront at the beginning of the mortgage process. Apart from it showing a borrower’s saving efficiency in order to secure home ownership, a down payment is mandatory under Canadian law. The minimum acceptable range is currently 5-20% down on the borrowed amount, which means you must put forward a minimum of $25,000 in savings to be offered a mortgage on a $500,000 home. Fortunately, the down payment is subtracted from the total loan value – so as a lender you stand to benefit greatly from a higher down payment. Effectively speaking, the larger your down payment can be, the less interest you will have to pay down the road on the total loan.
Mortgage amortization is essentially the total time span you have to pay off the mortgage. In Canada, the average amortization period is around 25 years. The amortization period you negotiate with your lender is directly tied to the total amount of interest paid. Increasing this period will “stretch out” your payments, making them smaller in size – but it will result in a higher amount of total interest paid. On the other hand, the shorter your amortization schedule is, the sooner the mortgage is paid off albeit with larger periodic instalments; your total interest paid however will be lower. Note that the period of amortization is not the same as your mortgage term. Your mortgage term is just a timeframe set up by the mortgage provider where the rules of the deal are locked in (this can be anywhere from 1 to 10 years in length). One term does not necessarily reach the total length of a mortgage – once a term expires, you can renegotiate the conditions of your mortgage as part of the mortgage renewal process.
When considering how much mortgage you need, make sure to evaluate how much mortgage you can afford. While there is no one-size-fits-all master calculator that can be used to determine this value, given that every person’s financial situation is unique, there are a couple things that can be leveraged to discover your mortgage needs. First of all, consider the size of the down payment you can afford. If you barely have enough available savings to make a minimum down payment the house, consider waiting on more income or opting for a lower-priced residence instead. A useful tool to keep in mind is your Total Debt to Service Ratio, or TDS. This ratio represents the amount of periodic income that goes towards paying off your required obligations and debt in a given time period (usually calculated monthly). The CMHC, or Canadian Mortgage & Housing Corporation, recommends having a TDS ratio of less than 42%, although borrowers should aim for 28%. Not only are you more likely to be approved for a mortgage by having an accurate TDS within the necessary range, a lower overall TDS ratio equates to higher bargaining power in terms of the size of the mortgage.
A fixed rate mortgage ensures that the payments to be made each period (each month) will be equal to one another, or in other words constant, during the entire mortgage term. A variable rate mortgage is a little more complex in the sense that your periodic mortgage payments will fluctuate. The variable rate is ultimately a function of a prime rate, alongside either a premium or discount. The prime rate is subject to change as it is the result of market forces and the Bank of Canada’s overnight lending rate, so it won’t be consistent throughout every monthly installment. However while the prime rate fluctuates, your relationship with the prime rate may never change. For instance, a bank may offer you a variable mortgage deal consisting of: prime rate with a discount of 0.5%. This means that throughout your mortgage term you would always pay whatever the prime rate currently is subtract 0.5%. Therefore, by making a decision between fixed and variable interest rates, you are also making an assumption about the future trajectory of interest rates. If you believe that the nation’s overnight lending rate will increase in the medium to long term, you should opt for a fixed rate (and vice versa). It is worth noting that historically over the past 10 years variable rates have outperformed fixed rates on average – but remember that past performance is not a reliable indicator of future performance.
Announced by the Federal Bank of Canada, the prime lending rate ultimately depends on the condition of the economy at a point in time. The state of the economy, at any given period, is determined by a multi-factor analysis to find the nation’s rate of inflation. These factors include the national unemployment rate, currency strength, GDP ratio, and consumer price index. If inflation is high, the prime rate will also be high, since the Bank of Canada aims to make borrowing/acquiring debt less attractive. On the other hand if inflation is low, the prime rate will also be low, because the Bank of Canada will try to stimulate the economy by making debt more affordable. Apart from massive fluctuations of the prime rate from 1970 to the year 2000, it has held a relatively small range of 3% to 5%.
|
FIXED RATE |
VARIABLE RATE |
|
| PROS |
|
|
| CONS |
|
|
The main differentiating factor between these two types of mortgages is their degree of flexibility. Closed mortgages have a lower interest rate in general, but your mortgage must be paid off at the end of the agreed upon amortization period. This is not a good option if you anticipate being able to pay off the mortgage in full before the specific day, since early amortization on a closed mortgage comes with a penalty. On the other hand, open mortgages are associated with a higher interest rate on the loan, but come with the flexibility to pay off the entire mortgage at any given time within the term without charges. While fixed, closed rate mortgages are currently more popular in Canada due to their lower rates, individuals that anticipate a substantial increase in future income may choose to have an open rate mortgage. Typically an open mortgage is signed with the expectations of receiving a lump sum of money soon, such as a gain from the sale of an asset (current house) or inheritance money.
In short, yes you can. The pre-approval route is initiated when a lender analyzes your finances and judges whether or not a mortgage is the right move in your financial situation. If pre-approved, the lender will inform you of the total loan size and interest rates you qualify for with their financial institution. Pre-approval can speed up the process of moving into a newly discovered home, since it increases your likelihood to be accepted by the seller. A seller will typically consider bids that are pre-approved for mortgages first, since it shows your ability to meet the ask price; therefore less hassle for the seller.
While mortgage conditions are usually fairly rigid, your payment schedule options can vary from different lenders. Some financial institutions may allow you to adjust your payment frequency which affects the size of your periodic installments, while at other financial institutions you could incur a penalty for these changes. Make sure to discuss payment privileges with your lender prior to locking into a contract, since there is a good chance you’ll be charged to make these adjustments down the road. There will also be a penalty for exiting your mortgage before the term expires (whether to accept a lower rate or to move out of the home before it has been paid off). This fee can be managed by speaking to your lender about mortgage portability, and adding it to your contract.
In Canada, your credit score can fall anywhere within the range of 300 to 900. A score of 750 and above is considered to be outstanding, and the higher your score the more likely you are to receive better mortgage offers. Usually, reliable lenders will look for your credit score be at least 600-700 in order to be considered.
A reverse mortgage grants access to senior homeowners (minimum age is 55) to borrow funds against the equity value of their home – without mandatory periodic repayments until the loan matures (typically when the homeowner either moves to a different residence or passes away). Reverse mortgages essentially operate as an alternative to HELOC (Home Equity Line of Credit), since a HELOC is more difficult to qualify for. The primary downside to a reverse mortgage is that the interest rate is a few points higher than a conventional property loan, but in turn it allows retirees with zero income to tap into their residence equity to pay bills. Assuming the housing market trend of appreciating property value continues, the borrower can benefit greatly because their overall cost of borrowing is diminished. Given the current economic climate, is comes as no surprise that there is an increase in public demand for reverse mortgages – as more and more retirement entries are finding themselves short on cash. And while historic reverse mortgage rates are unattractive, the deals are getting better in the short run.
In terms of the financing, a reverse mortgage will never take claim against the entire home’s fair value – only ever partial equity. Usually, a reverse mortgage will only be loaned on 55% or less of the total equity, and can be paid out as a lump sum or scheduled deposits. Fees will also be incurred on both the setup and closing of the loan.
In Canada there are many options to choose from when considering a mortgage loan. First off, you must choose either a lender or a broker for your mortgage. A mortgage lender will directly grant you the funds to buy the home. Lenders include financial institutions such as credit unions, banks, and mortgage companies. A mortgage broker however will not lend you the money themselves. Instead, they act as an intermediary that seeks out a lender for you. As a result, they will offer you a broad range of options to choose from.
By deciding to purchase a home, you’re accepting a great amount of financial responsibility. A mortgage will likely be the single largest interest-accumulating loan in your lifespan. And while that fact may seem daunting, in most cases it’s a necessary tool to own property. That’s why we firmly believe in getting you the best rate possible – when you’re looking at a loan repayment period that can last for decades, you shouldn’t settle with just any mortgage provider! In order to help you cut down your search for the best rate, we’ve listed Canada’s most competitive mortgage (and reverse mortgage) rates for your benefit. All that’s left for you to do now is to decide on the perfect mortgage plan to match your perfect new home.
If you’re looking to save up for a sizeable down payment and are unsure of what financial product to use, click here for our article on High Interest Savings Accounts
The advantages of a short term mortgage (typically less than 3 years) include having smaller rates that result in a lower interest payment. At the same time, you’d likely have to renew your mortgage contract more often, which puts you at the mercy of fluctuating interest rates. A short-term mortgage is a better choice if you anticipate paying it off soon, while long-term mortgages are better for future budgeting. A longer mortgage term leads to a greater deal of stability and protection against changing rates. However, with long-term you forego the opportunity to capitalize on lower rates if they ever become available.
Looking at different rates and mortgage offers is something that the majority of soon-to-be homeowners do. It may seem stressful and tedious at first, but more often than not it pays off. By comparing the rates of multiple lenders, you could stand to benefit from big savings in the long run. At the end of the day, the more loan offers you compare, the higher the likelihood of finding a competitive rate.
Since mortgage rates are extremely volatile, do not be surprised to see daily rate fluctuations. Possible dates include entire regular workweek from Monday to Friday. Mortgage workers consult “daily mortgage rate sheets” every morning to plan out loan offerings.
As long as you do a bit of research to prepare a fair request, you should be able to leave your lender’s office with a better mortgage offer. At the end of the day, nobody wants to overpay on the biggest loan they’ll ever take out – keep that in mind when negotiating terms. Instead of just simply head butting the current mortgage rate offerings, be honest with your lender in regards to why you deserve a lower rate. If you feel like the current rate they’re asking is stretching your wallet too thin, ask questions about relieving this particular issue.
Moving your mortgage from one property to another is called porting. It’s performed before the expiry date on the mortgage term, usually in the case of a housing switch. The process is not always straightforward and inexpensive, but most often it beats cancelling and going through a separate mortgage application. In order to do this successfully, make sure your mortgage contract is already portable. If not, you’ll be faced with a tough time negotiating portability. While most lenders are offering portable mortgages today, it’s still good to inquire about it before you sign. Most fixed mortgages are portable while variable mortgages will feature less portability.
The primary mistake that people make when shopping for mortgage rates is to not view enough offers. It’s very possible to save hundreds of Canadian dollars each year just by comparing the best mortgage rates in Canada. Another common error people make is not having a sizeable down payment for the mortgage plan that they want. It pays off in the long run if you can afford a high down payment, since you would be reducing the amount of total interest paid. Other mistakes include settling for a worsened deal as a result of not getting pre-approved, not meeting credit score requirements, and applying just recently after changing employment.
An early exit to any mortgage is associated with a high number of closing fees. Not only will you lose your initial application fees, but you’re likely to face a large penalty. Ensure that your decision to cancel the mortgage is thoroughly considered, and the benefits of switching mortgages outweigh the drawbacks. The main positive of a mortgage cancellation is the opportunity to lock in a lower interest rate for a new term. Be sure that you won’t sell the underlying property in the short term, because then the advantages of a lower interest rate definitely won’t outweigh the cost of cancelling.
Mortgage points are essentially a lump sum fee that can be paid by the borrower to lower the mortgage interest rate by a fixed amount. For example, paying 1% of the total mortgage value could mean a reduction of 0.25% on the rate (different values apply to different mortgage providers). As a result, buying points can help to alleviate the burden of large monthly payments. If you’re considering purchasing mortgage points, do a cost-to-benefit calculation to see if your cumulative monthly savings from buying a mortgage point will cover its fee. In most cases, if you are relatively close to amortization it is not worth it to buy a mortgage point – it makes more financial sense to invest in points for long term properties.
In virtually all situations the answer is no. While mortgage points are in fact completely optional, closing the deal and signing a mortgage contract prevents you from further negotiating points during the mortgage term.
A home inspection is exactly as it sounds – an inspector will perform a formulaic examination on a property to determine its health. The process includes taking note of structural components (the walls, floors, roofs, basements, attics, etc) and also energy systems (piping, heating, electrical, etc). Typically the results will be sent to you within one business day following the inspection, and helps to relieve purchasing anxiety regarding the home’s condition. Home inspection for mortgages can make a life-changing decision much easier for a small one-time fee, and decreases the chance of picking the wrong house for you.
The majority of mortgage lenders will consider any gift funds from acquaintances as acceptable. The donor will need to sign a form that signifies the funds are in fact gifted and not loaned, and the funds will need to already be set under your name.
In short, yes. The act of getting a second mortgage is simply taking out another loan against the equity of your home. A basic refinancing rule of thumb for how much you could borrow in Canada is: 80% of your property’s appraised value, less the remaining balance of your initial mortgage. Note that you now owe periodic instalments on both mortgages which put you at a higher risk of losing your home, since you’re under more financial pressure to avoid defaulting. While taking out substantial long term debt at a low rate has the potential to work out, the issue is entirely subjective. Be wary of how much home equity you’re willing to leverage.
As a general rule, you won’t be approved for a mortgage loan without some form of income confirmation. If you are self-employed (without a job letter), lenders will check for proof of income in your tax forms from previous years. These inspections will search for business activities, licenses, or other verification to authenticate positive cash flow.
A HELOC, also known as a Home Equity Line of Credit, is more adjustable than a mortgage. Like a traditional mortgage, a HELOC is taken out against the equity value of your home to provide you with additional funding. The primary difference between the two financial products is that HELOCS are open, which means you could spend the amount or pay it off at your discretion, without penalty. Conventional mortgages however will place strict limits on how much you can contribute to the loan repayment each year. While the HELOC comes with a freedom guarantee, it does not come with a rate guarantee. Since the rate “roams” or fluctuates on a HELOC much more often than a mortgage, you might be paying much larger interest rates with a HELOC.
Naturally, mortgage providers are not interested in writing loans for individuals with a poor credit score, since they are likely to default. In Canada, the absolute bare minimum credit score needed for a mortgage is 620, but you can expect these offers to be very unfavourable to the borrower (high interest rate), so the lender can offset some risk. A “good” credit score a mortgage in Canada typically hovers around 700, although it is best to call and confirm with your financial institution.
Mortgage insurance, or CHMC insurance, is a mandatory financial service in Canada for down payments less than 20% on a home, in order to shield the lender from default risk. While it may seem counterintuitive to a buyer to add another charge to their mortgage contract, CHMC insurance helps to keep mortgage rates low since a lender’s risk of losing their money is also low. A few things regarding mortgage insurance qualification: it is not available to purchase on homes that cost over $1 million, and the largest amortization period you can have insured is for 25 years. Note that you would pay the insurance premium only on the mortgage amount provided, not the value of the home. The premium can range anywhere from 0.60% to 4% based on the size of your loan-to-value ratio. The higher the LTV, the larger the premium.
As long as your reverse mortgage funds are tied to home equity, there are virtually no restrictions on how you choose to spend it. Most reverse mortgage borrowers – typically retirees – use it to: pay off existing debt, supplement their lifestyle, cover healthcare charges, and generally treat it like regular income.
A reverse mortgage is considered income that is tax-exempt, so it will not affect any retirement benefits including your pension plan. As a result of this, reverse mortgages can be extremely beneficial in retirement as an income supplement.
In most cases in Canada, you will need a couple identification forms (Drivers license, health card, etc) and signed proof that the subject property is in fact your primary residence. On top of this you will require to disclose your existing mortgage if there is one, property tax payments, and any additional legal forms that your reverse mortgage provider asks for.
As of the time this article was written, there are only two main reverse mortgage providers in Canada (EQ Bank and CHIP/HomeEquity) that are worth considering due to their good reputation and competitive rates.
In theory, a reverse mortgage can be the right solution to your financial troubles if you consider a few factors. Owning this type of loan allows you to avoid paying it off until death or until you switch residences – at which time the balance is returned. Doing this, you relinquish a considerable amount of home equity – which will affect your personal estate planning. If any heirs were listed on your inheritance, they will only receive the difference between the property value and what you own. This rule also applies if you need to move to a LTC (long-term care facility) for well-being purposes. Another thing to consider is your planned occupancy – if you don’t see the home as a permanent location and decide to move after signing a reverse mortgage, you’ll face multiple fees and penalties that can sum up to thousands of dollars.
Not necessarily. In basically every case, you still retain ownership of your home in a reverse mortgage. The only real way to lose the property in this situation is if you can no longer afford the up-to-date legal maintenance fees. Some common examples include tax on the property, insurance premiums, and repair costs. If you lose the ability to cover these expenses, the reverse mortgage provider reserves the right to accelerate the due date of loan – putting you in a serious financial dilemma.
While both have their respective pros and cons, a reverse mortgage is typically more expensive at the cost of receiving a huge payment delay period. Home equity lines of credit (HELOCs) are less expensive but must be paid back periodically. The most important thing to consider when comparing the two is reliability of income. A HELOC is better for individuals that need quickly repayable funds in the short run, while a reverse mortgage is more advantageous for individuals that need a reliable income source in the long run.
We are built to beat bank exchange rates and save you money
KnightsbridgeFx is registered with FINTRAC, under the MSB registration number M09819788. Like most financial institutions, we are required to validate the identity of all clients. We have strict measures in place to protect your privacy.
Our Offices
Main office (Appointment only)
First Canadian Place
100 King Street West
Suite 5700 Toronto, ON,
M5X 1C7
(416) 479-0834
Toll-Free: 1-877-355-5239
Fax: 1-877-355-5239
All rights reserved. Knightsbridge Foreign Exchange
Currency Exchange Canada.
