Mortgage & Refinancing Frequently Asked Questions
The downpayment usually represents between 5-20% of the total price of the property.
What is the difference between High Ratio Mortgage Insurance and Mortgage Life Insurance? High Ratio Mortgage Insurance protects the lender against payment default by the home buyer. It is required by most lenders if the home buyer has less than 20% downpayment. An insurance premium will apply. Mortgage Life Insurance protects your dependents and loved ones in the event of your death.
When the mortgage lender pays the Property Taxes, how are payments calculated? The estimated amount of your Property Taxes can be added to the mortgage payment and paid on your behalf at the appropriate times. Depending on the balance in your tax account, it may be necessary to increase or decrease the amount of monthly payments to reflect the timing of Property Tax payments.*
* Tax information consists of general comments only, for full details see the applicable legislation or review with your advisor.
Qualifying for a mortgage in Canada is about four main factors, stable income, a good credit history, making a sound choice on the property you are purchasing, and how much (if any) of a down payment you have. All four of these factors work together to determine which mortgage options will suit your situation best, and the rate you will receive by the mortgage lender.
Stable Income, whether employed or self-employed, is something mortgage lenders will want to confirm. Most mortgage lenders will required a letter of employment confirmation as well as recent pay stubs and the last two years Notice of Assessment forms from CRA (these are the notices you receive after you file your taxes each year that show your income and show whether any taxes are owing). The lender, at their discretion, may also call your employer to confirm the details in your employment confirmation.
Credit History is a piece of information always reviewed by mortgage lenders. If your credit isn’t perfect, there are programs available to you while you rebuild your credit. A credit score of 680+ is most desirable by lenders. Please see Your Credit Score for information on how your score is calculated. A credit history is always pulled by your mortgage broker when you apply for credit or seek pre-approval so that we can determine which programs will suit your situation.
Property choices also impact the mortgage qualifying process, as the real estate is the lender’s security – if for some reason – you are unable to repay the mortgage. The mortgage lender will want to be sure that the property is in good condition and that if they needed to market the property it would sell quickly. For example, condos that have previously been “leaky” are often rejected by lenders for this reason. A property appraisal is almost always ordered and involves a physical inspection of the property for the lender by a certified appraiser who assesses the condition and market value of the property to be mortgaged.
Down payments vary as there are mortgage programs that provide 90% financing for qualified purchasers. If you have a down payment of 20% or more of the purchase price, this is known as a “conventional” mortgage, and the mortgage lender will not require default insurance (and related premiums). If you have less than 20% down, the mortgage lender will insure your mortgage against default. If you have no down payment, you generally will still need to have some cash to put down for your real estate purchase deposit and for Closing Costs (estimated at 1.5% of purchase price).
When a lender offers you a mortgage, you have to repay both the original loan amount and interest through monthly payments. The interest is the biggest cost that you have to incur on a mortgage. A good deal on a mortgage is one that offers you a lower interest rate and easy repayment terms.
You can compare the rates and other terms offered by different lenders to get an idea of what the loan will cost you. In doing so, you will find that most lenders offer pretty much the same basic terms. This is because they are all regulated to a certain extent by the government. However, there could be significant differences in several other charges like closing cost, prepayment fee, appraisal cost, legal fee etc.
Hiring a mortgage broker is a good option if you are unfamiliar with the process involved in taking a mortgage and don’t want to spend a lot of time in understanding the nuances of this industry. The broker can advise you on how to go about getting the loan and he’ll give you a fair estimate of the charges that will be added by the lender. He can also point out any pitfalls in the fine print that you need to be wary of, which you wouldnâ€™t find in any FAQ section.
An experienced mortgage broker can help you find the right lender for your needs quickly, and with minimum effort from your side. As he would already know many of the lenders, he will be able to negotiate a lower mortgage rate and easier terms.
A fixed rate means your mortgage will always have a pre-determined interest rate irrespective of the changes in the economic conditions. On the other hand, an adjustable rate can be changed by the lender whenever he feels that the economic conditions have changed.
If you are looking for stable monthly payments and do not want to be dealing with the uncertainty, it is advisable to go for a fixed rate mortgage. But if you have sufficient financial cushion to absorb any increase in your monthly payments, and if you feel that interest rates are likely to go lower in the near future, then an adjustable rate mortgage might be a better option for you.
Although these FAQ would have given you some idea about taking a mortgage, you should try to understand all these concepts in detail to make a sound decision. Take help of a mortgage broker or your financial adviser before you finalize a deal.
If your transaction is due to close in the middle of the month, but your regular mortgage payments are set for the start of the month, your first mortgage payment could be delayed for several weeks. To cover this, a date is set as the IAD and an amount is collected on closing to cover this Interest Adjustment Date period.
It is often asked whether a mortgagor has the right to conduct an inspection of the property to check its condition. Legally speaking, a mortgagor can carry out any inspection that is required by him to ascertain that the mortgaged property is not in a bad condition. An inspection also allows the lender to assess the real value of the property.
Mortgage Glossary of Terms
Amortization – the length of time over which your mortgage is financed. This may be anywhere up to 30 years, with 25 years being the traditional amortization. Note that mortgage amortization is different than “mortgage term” which is the length of your agreement with the mortgage lender.
Assumable – this means that your mortgage MAY be taken over by another party if, for example, you sold your house and the buyer wanted to take over your mortgage payments. This may be of an advantage to a buyer if the rate on your mortgage is lower than current rates. Even though the mortgage is assumable, the borrower MUST qualify to the satisfaction of the mortgage lender.
Appraisal – The process of determining the value of property, usually for mortgage lending purposes. This value may or may not be the same as the purchase price of the home. A qualified appraiser physically inspects the property making note of condition, special features and then assesses the value including assessment of comparable properties.
BC Home Partnership Program is a government program to assist first time home buyers with additional down-payment funds. Click for more information
Blend and Extend – Taking your existing mortgage and adding to the term and combining the old and new rate into a blended rate on a weighted basis. It can be a good way of avoiding prepayment penalties if you are moving and increasing the size of your mortgage.
Blended payment – usually refers to a payment that includes principal and interest.
Bridge Financing – This is temporary financing that can be arranged for a variety of purposes, but generally for situations where a new home has been purchased but the old one not yet sold, or where borrows want to stay in their existing home while a new one is being constructed. Borrowers must still be able to service the debt as required by the mortgage lender.
Closed Mortgages – A closed mortgage means that you have to pay a penalty if you wish to payout your mortgage completely during the contractual term of your mortgage. Many closed mortgages allow some prepayment, up to 20% per year. These partial prepayment terms vary among lenders and need to be understood. The benefit of a closed mortgage is that they are often available at the most favourable interest rates. This may suit your needs if you do not anticipate wanting to pay down your mortgage before term expires.
Closing Costs – see FAQ page
CMHC – Canada Mortgage and Housing Corporation (CMHC) operates a Mortgage Insurance Fund which protects approved lenders from losses resulting from borrower default. CMHC insurance can insure for loans where the mortgage amount is greater than 80% of the value of the property, and insures for a variety of other specialty lending situations. A premium is charged for the insurance.
Credit Bureau – an organization that collects payment data. For more information, see our FAQ page.
Construction Mortgages – If you are building a home here in BC, we can arrange a construction mortgage for you. Typically, there are three or more disbursements made by the mortgage lender as construction of the building progresses. The mortgage lender will conduct appraisals during the course of construction and will advance funds in accordance with the appraised value of the partially completed building. Course of Construction Mortgages are often at a slightly higher rate than a standard mortgage, but the advantage is that the borrower is not paying interest on the whole amount of the mortgage at the beginning of construction. Instead, the advancing of funds as the project moves along saves interest costs, particularly where construction takes an extended period of time.
Conventional Mortgage – A mortgage where the mortgage amount is 80% of the property value or less.
Discharge – Process where lawyer removes mortgage from title registered at Land Titles.
Debt-Service Ratio – The percentage of the borrower’s gross income that will be used for monthly payments of principal, interest, taxes, heating costs and any strata fees.
Deposit (Purchase Deposit) – A sum of money paid by the purchaser when making an offer to be held in trust by the vendor’s agent, broker, lawyer or notary until the closing of the transaction.
Equity – The value the owner has in a property over and above all mortgages against the property. It is usually the difference between the market value of the property and any outstanding encumbrances.
Equity Line of Credit or Line of Credit – An Equity Line of Credit gives you access to the equity in your home, usually up to a maximum of 80% of its appraised value. The advantages are that if you need to renovate, travel, pay down other debt, etc., the rate of interest on home equity loans is generally less than other types of personal loans and credit cards. Lines of Credit are generally tied to the prime rate, see rates
Fixed-Rate Mortgage – A fixed rate mortgage is a mortgage has the rate set for a specific period of time. Generally known as the mortgage term, these terms can range from 6 months up to 10 years. Whether you should lock in for a long term or stay short depends on the interest rate trend in the market, as well as your financial situation and degree of risk tolerance. Most fixed-term mortgages allow you to make partial prepayments towards the principal balance during the term; however these privileges vary from lender to lender. We will assist you in making the best decision and can set you up on an accelerated payment plan that can save you thousands of dollars in interest. See current rates
Foreclosure – A process undertaken by lawyers where the lender obtains ownership of the property after the borrower has not made regular payments per the loan agreement.
Gross Debt Service (GDS) Ratio – The percentage of gross income required to cover monthly payments associated with housing costs. Most lenders recommend that the GDS ratio be no more than 32% of your gross (before tax) monthly income.
High Ratio Mortgage – Mortgages of less than 20% of the lesser of the purchase price or appraised value of the property. Contrasted to conventional mortgages – High ratio mortgages require default insurance.
Hold-back – Money withheld by the lender during the construction or renovation of a house to ensure that construction is satisfactorily completed at every stage.
Inter Alia Mortgage – A single mortgage covering more than one property. The term is Latin for “amongst other things.”
Interest Adjustment Date – is a date from which interest is calculated when mortgage funds are advanced before a regular payment cycle. For example if a mortgage is advanced March 29th and regular monthly payments commence May 1st, there will be an interest adjustment for 3 extra days.
IRD – Interest Rate Differential – is a common prepayment penalty method where the difference between current interest rates and the mortgage interest rate is charged for the remainder of the term. IRD is generally only applicable if current interest rates are lower than that of the original mortgage and are intended to compensate the lender for the difference in interest income it will receive.
Interim Financing – Short-term financing to help a buyer bridge the gap between the closing date on the purchase of a new home and the closing date on the sale of the current home.
Maturity Date – Last day of the mortgage term.
Mortgage Insurance – Both mortgage life insurance and mortgage disability insurance are available and should be considered by all buyers. Many buyers are qualifying based on two incomes and they should consider how they would pay their mortgage payments if one income ceased due to disability or death. If mortgage insurance is declined, it common practice to have a waiver signed to protect all parties.
Mortgagee and Mortgagor – The lender is the mortgagee and the borrower is the mortgagor.
Mortgage Term – The length of time the current mortgage agreement applies between mortgagee and mortgagor -usually range from six months to 10 years.
Open Mortgage – A mortgage which can be prepaid at any time, without penalty. Interest rates are usually higher for open mortgages.
Payment Frequency – How often you want to make payments: every week, every other week, twice a month or monthly.
P.I.T. – Principal, interest and taxes. These make up the regular payment on a mortgage if the lender is including property taxes in your mortgage payments
Porting – This means that you can take your mortgage with you to another qualifying property without having to lose your existing interest rate and avoid prepayment penalties.
Prepayment Charge – A fee charged by the lender when the borrower prepays any part of a closed mortgage beyond what is allowed in prepayment privileges set out in the mortgage agreement.
Prepayment Privileges – Lenders generally offer some prepayments without penalty like 20% per year lump sum plus 20% increase in regular payment but vary based on the mortgage agreement.
Principal – The amount of money borrowed for a new mortgage.
Private Mortgages – In some cases, borrower from a private lender can make the most sense. Financial Institutions have fixed policy guidelines that work for most people, but not all cases. Where a borrower’s situation falls outside the box, a private mortgage may be the best solution. Fees apply when we arrange private financing for our clients. Our advisors can help you decide if this is your best option.
Property Transfer Tax – Provincial Tax when property changes hands. Tax is calculated at 1% of the first $200,000 and 2% thereafter.
Refinancing – Renegotiating your existing mortgage agreement. You may be increasing the principal or paying out the mortgage in full and arranging a new mortgage.
Renewal – At the end of a mortgage term, a mortgage can be renewed if the terms and conditions acceptable to both the lender and the borrower. Otherwise, the lender will be repaid in full and the borrower will arrange financing elsewhere. It is never advisable to just renew without having your mortgage broker review available options.
Term – The length of the current mortgage agreement. This is different than amortization which is the length of time it will take to pay off the mortgage in full. The term is the length of time that the existing terms and conditions (like interest rate and prepayment privileges) apply.
Title Insurance – Title insurance is different from all other types of insurance. Policies are available for lenders AND for homeowners. Lenders often request title insurance to protect their interests if a property survey is not available (title insurance is usually faster and less expensive than getting a new survey done). A homeowner policy protects your ownership or title against losses incurred as a result of undetected or unknown title defects, for as long as you own your home. Even if you are the rightful owner of your home, there are instances such as real estate title fraud, when your title can come into question.
Total Debt Service (TDS) Ratio – The percentage of gross income needed to cover monthly payments for housing and all other debts and financing obligations.
Variable Rate Mortgage – A variable-rate mortgage often allows you to take advantage of the lowest rates available. The variable rate is usually tied to a mortgage lender’s prime rate and are generally the same as the Bank of Canada prime rate. These rates are often quoted as prime minus .5% or prime plus 1%, etc. Variable-rate mortgages have been attractive when market experts feel that rates will drop or stay level for a period of time. Variable rate mortgages have the downside of offering little security in a rising-rate environment and payments and interest expense can rise when rates rise. See our current rates.