Mortgage Terms to Know!
What is a fixed rate mortgage?
What is a Variable rate mortgage?
What's the difference between Pre-qualification and Pre-approval?
How much of a mortgage can I afford?
How much do I need for a down payment?
What happens if I'm not satisfied with a mortgage offer?
What is the difference between Term and Amortization?
Open Mortgages
Closed Mortgages
What are the benefits of a Mortgage Agent?
What is a mortgage agent?
Can I use my RRSP for Down Payment?
What is a fixed rate mortgage?
The interest rate on a fixed-rate mortgage is set for a pre-determined term - usually between 6 months to 25 years. This offers the security of knowing what you will be paying for the term selected.
What is a Variable rate mortgage?
A mortgage in which payments are fixed for a period of one to two years although interest rates may fluctuate from month to month depending on market conditions. If interest rates go down, more of the payment goes towards reducing the principal; if rates go up, a larger portion of the monthly payment goes towards covering the interest. RBC open variable rate mortgages allow prepayment of any amount (with certain minimums) on any payment date.
What's the difference between Pre-qualification, Pre-approval and Full Loan approval?
Pre-qualification:
Pre-qualification is the first step in obtaining the mortgage that you need to purchase the home of your dreams. It's a simple step where an institution examines your financial situation in terms of income and liabilities in order to establish your lending potential in terms of GDS and TDS.
This is accomplished through the review of a simple application process that includes the pertinent information. It is important to note that this is not the same as a pre-approval, as credit has not been reviewed and income has not been verified and funds for closing are not verified.
Pre-approval:
Refers to the verification of the applicant's ability to borrow. A pre-approval gives a potential home-buyer the advantage of knowing how big a mortgage they will qualify for and the ability to use this information in negotiating the final selling price of a home.
Parts of the pre-approval process include an analysis of borrowers credit history, a review of the client's employment history, and a verification of down payment funds.
How much of a mortgage can I afford?
The amount of a mortgage for which one can qualify is generally founded in what are known as qualification ratios: Gross Debt Service ratio and Total Debt Service ratio, or "GDS" and "TDS". Lenders evaluate one's monthly income, as well as their monthly debt obligations, to determine a fair and feasible amount of mortgage available to the prospective borrower. This figure is calculated via their GDS and TDS guidelines. Generally, lenders will have an acceptable Gross Debt Service ratio ranging from 28-32%. In other words, 28-32% of one's monthly household income can be reasonably set aside for one's mortgage payment, in the eyes of the lender. Furthermore, most lenders will have an acceptable Total Debt Service ratio of 36-40%. In other words, 36-40% of one's monthly household income can be reasonably set aside for one's total debt obligations, including their impending mortgage payment. To calculate exactly how much you may borrow, please refer to our CALCULATOR available by clicking on the HOME tab above. Make sure that you incorporate the proper interest rate, as this can have a profound effect over the life of a mortgage. NOTE: As part of this calculation, you also need to estimate and include the property taxes, homeowner's insurance, and CMHC fees (if applicable) you might need to pay, which are considered part of your monthly expense.
How much do I need for a down payment?
According to the guidelines of the Canadian Mortgage and Housing Corporation (CMHC), one must have a minimum down payment of at least 5% of the total cost of the prospective property. With a down payment between 5 - 24.99%, one's mortgage is deemed "high-ratio". A high ratio mortgage is subject to a CMHC premium in accordance with the following schedule:
With a down payment of 25% or greater, the mortgage is deemed "conventional". A conventional mortgage is not subject to any CMHC fees. Thus, a larger down payment represents a two-fold advantage to the prospective homebuyer. First, the prospective homebuyer will avoid CMHC premiums with 25% down payment. Secondly, a larger down payment will relate into smaller monthly payments, or a shorter amortization; both of which lead to interest savings over the life of the mortgage.
Yes, you can buy a home with a down payment of less than 10%:
Single-family dwelling: 5%
Two-unit dwelling: 7.5%
Minimum equity of 5% from your own resources is required. Gift down payments from an immediate relative are acceptable.
Maximum house price ceilings apply for 5% down payment. Limits of $125,000, $175,000 or $300,000 apply to locations throughout Canada. Please contact us for the maximum price
What happens if I'm not satisfied with a mortgage offer?
Don't accept it. You have no obligation to accept any of the offers that are made to you by LendingTree or any of our affiliated lenders.
What is the difference between Term and Amortization?
The "term" of the mortgage should not be confused with the "amortization". The amortization of the mortgage refers to the entire length of time that it will take for the mortgage to be paid and the house to be thusly, "free and clear". The term is the period for which your current payment obligations are valid. In other words, you may choose a five-year term and a 25-year amortization. This would mean that your interest rate, your payments, and your pre-payment options would be the same for the next five years. At the end of these five years you would re-negotiate the term, and the amortization would now be 20 years. Fixed rate Mortgages can be "closed" or "open".
Open Mortgages
Allow one to pre-pay some, or all of, their outstanding mortgage obligation at any time, without penalty. - Generally, open mortgages have a six-month, and a one-year term option with higher interest rates than closed mortgages of the same term length.
Closed Mortgages
Generally, closed mortgages are offered in terms ranging from six months to ten years. - Generally, closed mortgages offer more stringent pre-payment options subject to various pre-set regulations. For most people, such pre-payment options can be vital to reducing the amortization of one's mortgage and should be properly discussed with one's lender/agent.
What are the benefits of a Mortgage Agent?
If you plan to sell your home without the aid of a real estate agent, then you must seriously consider working with a mortgage agent. Even though you are not buying a home or getting a loan, it is the mortgage agent that actually puts the entire transaction together for a smooth closing after you and the buyer decide on the terms of the contract.
What is a mortgage agent?
A mortgage agent is an independent real estate financing professional who specializes in the origination of residential and/or commercial mortgages. Typically they do not fund or service the loan itself, but instead, they act as an agent or manager for capital sources who act as loan wholesalers.
A mortgage agent is also an independent contractor working, on average, with 40 wholesale lenders at any one time. By combining professional expertise with direct access to hundreds of loan products, a agent provides consumers the most efficient and cost-effective method of offering suitable financing options tailored to the consumer's specific financial goals.
Can I use my RRSP for Down Payment?
Today, about 50% of first-time home buyers use their RRSP savings to help finance a down payment. With the federal government's Home Buyers' Plan, you can use up to $20,000 in RSP savings ($40,000 for a couple) to help finance a down payment on a first home. You then have 15 years to repay your RRSP.
To qualify, the RRSP funds you're using must be on deposit for at least 90 days. You'll also need a signed agreement to buy or build a qualifying home - new or resale.
Even if you have already saved for your down payment, it may make good financial sense to access your savings through the Home Buyers' Plan. For example, if you had already saved $20,000 for a down payment - and assuming you still had enough "contribution room" in your RRSP for a contribution of that amount you could move your savings into a registered investment at least 90 days before your closing date. Then, simply withdraw the money through the Home Buyers' Plan.
The advantage? Your $20,000 RRSP contribution will count as a tax deduction this year. Use any tax refund you receive to repay the RRSP or other expenses related to buying your home.
While using your RRSP for a down payment may help you buy a home sooner, it can also mean missing out on some tax-sheltered growth. So be sure to ask your financial planner whether this strategy makes sense for you, given your personal financial situation
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