Mortgages can sometimes feel intimidating, especially if you’re a first-time home buyer, but they don’t have to be. Your mortgage broker or lender will typically help guide you towards the best option for you and your financial situation. In the meantime, we’ve assembled some of the top questions we’ve received about mortgages over the years to help give you a better understanding of the topic.
How much should I save for a down payment?
The more you’re able to save for your down payment, the less you’ll need to borrow. The old rule of thumb is to save 20% of your purchase price for the down payment, but it’s only actually required for purchases over 1 million. Under 1 million to $500,000 you’ll need 5% of the first $500,000, and 10% for the portion above $500,000. For under $500,000 you’ll need 5%. When you’re saving up make sure to keep in mind you will need to have cash for your closing costs as well. These can run from 1-4% of your purchase price.
What is a mortgage pre-approval?
A mortgage pre-approval is an important first step when starting the home buying process, it will show you much you’ll be able to borrow. If you’re pre-approved, it means a lender has stated that you qualify for a mortgage loan based off of an in-depth review of your finances, including a hard credit check. You’ll then have the benefit of knowing what the maximum amount a lender is willing to finance, and if you’re shopping for a fixed rate, they can lock in an interest rate for a set amount of time, usually around 90 days. If interest rates go up during that time, you still get the promised rate. It’s important to remember that pre-approval is not the same as being approved for a mortgage. Once you’ve made a successful offer on a house you’ll have to formally apply for a mortgage.
When should I get a mortgage pre-approval?
For a smoother home buying process, you should look at getting a mortgage pre-approval in the weeks leading up to going out to see places, and definitely before you make an offer on a home. This will ensure you’re only looking and offering on homes that you know you can afford. That’s not to say you can’t look at a home or offer on one without pre-approval. You’ll just need to add a financing condition to your offer for your protection.
Is a mortgage pre-qualification different from pre-approval?
Pre-qualification is a quick and easy way to estimate how much of a loan you’ll be approved for. Most traditional lenders have an online pre-qualification tool where you enter your income, debt, and assets to get an idea of what you can afford. If you decide to seriously consider offering on a home, you’ll want to get a pre-approval to ensure there is a lender who’s willing to work with you.
What is the stress test?
To qualify for a mortgage from a bank, you’ll need to pass the stress test. This applies to purchasing a home, refinancing, changing your mortgage lender, taking out an additional mortgage or applying for a home equity line of credit. The only exception is if you’re renewing your mortgage with the same lender, then you won’t have to pass the stress test again.
The stress test is designed to protect you from taking on too much mortgage debt. You’ll have to prove that you can afford payments at a rate of either the interest rate provided by your lender plus 2%, or 5.25% (the minimum qualifying rate) whichever is higher. This determines if you’ll be able to afford your mortgage even if interest rates rise. See if you would pass the stress test here.
Can you get a mortgage with a low credit score?
As a general rule of thumb, you need to have a credit score of over 680 to qualify for a mortgage with a traditional lender, like a bank. If your credit score is lower than that it doesn’t mean you won’t be able to get a mortgage, you’ll just need to explore different options.
1) Offering a higher-than-average down payment, and needing to borrow less, can look more attractive to traditional lenders.
2) Look at a “B lender”, a lender outside of a traditional bank like a credit union or a trust company. These lenders tend to be less strict than traditional lenders and can offer a mortgage to someone with lower credit, but with potentially higher interest rates.
3) Consider adding a co-signer with a good credit score to your mortgage. This reduces the lenders risk as the loan has a backup, someone willing to pay if the primary borrower can’t.
While these steps can help you get a mortgage with a low credit score, it may be in your best interest to wait and work on your credit score before trying again. This will make it easier to get approved and you’ll be more likely to get lower interest rates.
How do I know which mortgage options are right for me?
There are four main things to consider when looking at mortgage options. For a more detailed look at the types of mortgages check out our other blog post.
1) Fixed or variable rate. A variable rate mortgage has an interest rate that fluctuates depending on the Bank of Canada’s prime interest rate. As the BoC moves the prime rate up or down, the interest rate and your monthly payments on your mortgage also fluctuate.
A fixed rate mortgage has an interest rate that is set at the beginning of the loan and will remain the same for your entire loan term. Fixed rate mortgages are linked to the bond market and are based on bond yields, which is the annual rate of return on a bond.
2) Amortization period. The amortization period of your mortgage is the length that it will take to pay it off completely. The length of time you are given depends on how much of a down payment you make when you purchase your home. If you put down anything less than 20% of your maximum amortization is 25 years. If you put down more than 20% your amortization period could be up to 30 years with a traditional lender.
3) Length of Term.You’ll have multiple terms within your amortization period, The term is the length of time a lender will loan the mortgage funds to you, usually between two and five years. At the end of the term you’ll either pay the balance owing or renegotiate the mortgage for another term.
4) Open Vs Closed. An open mortgage is a flexible mortgage that allows you to pay off your mortgage in part or in full before the end of the term by increasing your monthly payments or making an extra lump sum payment.
A closed mortgage is a mortgage where the terms are outlined at the beginning of the loan, and there are penalties if those terms are not followed. In most closed mortgages you can make lump sum payments up to a maximum specified in your contract, usually 15-20% of the initial loan amount. Anything more than that would result in a penalty.
There’s also an option of a convertible mortgage which allows you to change from open to closed or vice versa at some point during the term.
What advice do you have to pay off my mortgage quicker?
Here are a few tips on how to pay down your mortgage as quickly as possible.
1) Choose a shorter amortization. A shorter amortization means higher monthly payments and paying down that mortgage faster. Always make sure to choose the monthly payments that are manageable for you.
2) Make frequent payments. Making weekly or bi-weekly payments can help shorten your mortgage and reduce the amount of interest you pay.
3) Choose an open mortgage. An open mortgage gives more flexibility than a closed mortgage, you are free to make additional payments whenever you like to help pay down your mortgage quicker.
I have a pre-approval and firm purchase agreement, what’s next?
At this point your mortgage broker will formally apply for a mortgage for you. You’ll need to provide specific documentation regarding your income, assets, debts, your down payment, and the home you’re purchasing. It’s important to be as transparent as possible at this point. Errors in documentation can lead to a mortgage that is not a right fit for you and, purposely providing false information can result in serous financial and legal consequences.
