Mortgages-Canada

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Well here's a start:


Terminology

Mortgages in Canada appear pretty similar to the UK. But some of the terminology is different, so here's a list of common terms:

    • Newcomer Mortgage is a mortgage program to help newcomers who don't have credit ratings etc., and allows you to use alternate proof of credit worthiness. There are generally lower deposits etc., required under this program as well.

You can read more here: http://genworth.ca/en/products/new-to-canada-program.aspx https://www.ratehub.ca/new-to-canada-mortgage

  • Amortization Period - The number of years over which you plan to repay the mortgage.
    • From July 2012 the maximum amortization period for an insured mortgage is 25 years.
    • It can be changed over the life of your mortgage.
    • A change is sometimes used to balance the payments, e.g., a longer amortization period will lower the regular payment but, as it extends the loan period, it ultimately leads to your paying more interest over the life of the mortgage.
  • Appraised value - An estimate of the value of the property, conducted by a certified appraiser for the purpose of mortgage lending.
  • Assumability - Allows the buyer to take over the seller's mortgage on the property.
  • Closed mortgage - A mortgage that locks you into a specific payment schedule. A penalty usually applies if you repay the loan in full before the end of a closed term.
  • Condominium fee - A payment among owners, which is allocated to pay upkeep expenses, generally of the commonly shared elements or facilities of the property.
  • Conventional mortgage - A mortgage loan issued for up to 80% of the property's appraised value or purchase price, whichever is less.
  • Deposit - This is the payment you make to show your good faith in making an Offer to Purchase and to secure the purchase of the property.
    • It is paid once you have agreed the sale.
    • It is often 1% of the purchase price, but is often more in a Seller's Market.
    • When buyers are in competition a larger deposit is often needed to make your offer more interesting.
  • Down payment - The buyer's cash payment toward the property that is the difference between the purchase price and the amount of the mortgage loan. It is different from the deposit. From October 15, 2008 buyers must have at least a 5% down payment.
  • Equity - The difference between the home's selling value and the debts against it.
  • High-ratio mortgage - A mortgage that exceeds 80% of the home's appraised value. These mortgages must be insured for payment.
  • Home equity line of credit - Often abbreviated to HELOC. This can replace, or be an addition to, a conventional mortgage. A HELOC is an open ended line of credit that can be used for any purpose. Minimum payments each month are interest only but the interest rate is variable and is linked to the bank's prime rate. From July 2012 the maximum amount of a mortgage plus HELOC is 80% of the value of the property. They are not available for buyers who have a high loan to value mortgage.
  • Interest charge - This is the payment you make to the bank to thank them for lending you the money! If you have an amortization period of anywhere near 25 years, you'll end up paying more in interest -- over those years -- than your house is worth. The interest charge normally is included in your regular monthly payment.
  • Interest rate - The value charged by the lender for the use of the lender's money, expressed as a percentage. (See "Interest Charge," above.)
  • Land transfer tax, deed tax or property purchase tax - A fee paid to the municipal and/or provincial government for the transferring of property from seller to buyer.
  • Maturity date - The end of the term of the loan, at which time you can pay off the mortgage or renew it.
  • Mortgage insurance - Any mortgage that exceeds 80% of the appraised value of a home requires mortgage insurance from the Canada Mortgage and Housing Corporation (CMHC). It protects the lender against loss if the borrower is unable to repay the mortgage.
  • Mortgage life insurance - Pays off the mortgage if the borrower dies.
  • Mortgagee - The financial institution or person that lends the money.
  • Mortgagor - The borrower.
  • Open mortgage - Allows partial or full payment of the principal at any time, without penalty.
  • Payments - These are the regular payments you make to repay the principle and interest charges. They can be made weekly, bi-weekly (every two weeks), semi monthly (twice a month) or monthly.
  • Portability - A mortgage option that enables borrowers to take their current mortgage with them to another property, without penalty.
  • Pre-approved mortgage - Qualifies you for a mortgage before you start shopping. You know exactly how much you can spend and are free to make a firm offer when you find the right home.
  • Prepayment privileges - If the terms of the mortgage loan give you prepayment privileges, you are allowed to make payments in addition to your regularly scheduled payments.
  • Principal - This is the capital amount borrowed or still owing on a mortgage loan. At the time of purchase, the principal is the cost of the house less your downpayment. As you pay off the mortgage, the principal will be reduced. Interest is paid on the principal amount.
  • Refinancing - Paying off the existing mortgage and arranging a new one or renegotiating the terms and conditions of an existing mortgage.
  • Renewal - Renegotiation of a mortgage loan at the end of a term for a new term.
  • Second mortgage - Additional financing, which usually has a shorter term and a higher interest rate than the first mortgage.
  • Term - This is the life of the particular mortgage you have arranged and is usually shorter than the amortization period. In the case of a fixed rate mortgage, the interest rate is fixed for the length of the term. You need to re-mortgage at the end of the term, but usually have the option of renewing the current mortgage or changing to a different mortgage provider.
  • Title - Legal ownership in a property.
  • Variable rate mortgage - A mortgage with fixed payments that fluctuates with interest rates. The changing interest rate determines how much of the payment goes towards the principal.
  • Vendor take-back mortgage - When the seller provides some or all of the mortgage financing in order to sell their property.

Types of Mortgages

There are different types of mortgage. Types and terms include fixed interest rate and variable interest rate, closed and open. These are often combined eg a 5 year fixed, closed mortgage. The terms mean:

Fixed - the interest rate is fixed over the term of the mortgage.

Variable - the interest rate will vary according to changes in the bank's prime rate which in turn usually varies with the prevailing market conditions.

Open - you can leave the mortgage at any time without penalty.

Closed - there will be a penalty to leave the mortgage before the term is complete.

If you repay a closed mortgage early there will be a Penalty. The most common penalty seems to be the greater of either 3 months interest or the interest rate differential. This is the difference between the amount of interest the bank would have received from you if you carried on paying the mortgage, and the interest they receive by depositing the amount of the mortgage you repaid early.


How much can I borrow?

A standard mortgage is for up to 80% of the value of a home. You can get higher loan to value ratios but if you are putting less than 20% down your bank is required to buy mortgage loan insurance. The cost of the policy is added to the loan amount. Although the borrower pays for it, the insurance policy is entirely for the lender's benefit. From October 15, 2008 buyers are required to have a minimum 5% downpayment.

The amount a bank will lend you depends upon your monthly income. The mortgage payment, plus property tax, plus heating costs plus 1/2 condominium fees (if any) cannot exceed 35% of your gross monthly household income. https://www.cmhc-schl.gc.ca/en/finance-and-investing/mortgage-loan-insurance/calculating-gds-tds

For example, if a couple earn $100,000 a year between them, their gross monthly income will be $8,333. Their maximum housing cost is 8,333 x .32 = $2,666.56. Say that the property they want to buy has a monthly tax cost of $300 and expected heating costs are $200 pm they will have $2,166.56 to service a mortgage.

If they were unable to negotiate anything off the bank's posted mortgage rate of 5.19% fixed for five years (at January 2011) this would be equivalent to a mortgage of approximately $380,000. If they had a $20,000 down payment they could afford a $400,000 home. However, they would need to find a $12,000 mortgage insurance premium which, in this case, cannot be added to the mortgage as it would exceed the 95% limit. If the same couple had $100,000 deposit they could buy a $500,000 home with a $400,000 mortgage and no insurance premium would be required.

Banks get nervous if you are spending more than 40% of your gross income on mortgage and other debt commitments. Therefore, if you have other loans outstanding the amount a bank will lend you for a mortgage may be reduced.

If you arrive in Canada without a job a bank will likely require a 35% downpayment.

BE forum members who are in Canada on temporary work permits have encountered a variety of reactions from banks and mortgage companies. Some of them have found that banks / mortgage companies have demanded they make downpayment in the 35% - 40% range, while other posters have found that their banks / mortgage companies have been content with downpayments as small as 5%. It varies greatly from one financial institution to the next and from one region of Canada to the next.

If you want to check this information against an independent source, Canada Mortgage and Housing Corporation has a web page entitled Mortgage Calculator - How Much Can You Afford?

Financial Consumer Agency of Canada also has excellent information about mortgages, including a mortgage calculator.

What interest rate will I pay?

Banks offer different interest rates depending on the type and term of the mortgage. All the banks post their standard rates on their websites.

New arrivals, with no credit history in Canada and needing a high loan to value mortgage, may be stuck paying the posted rate for the initial mortgage term. Others with an acceptable Canadian credit history will be able to negotiate something off the posted interest rates.

You can see the rates offered by ING Direct or PC Financial and these are a realistic target for negotiation. If you have very good credit and a sizable amount of equity you should be able to get a little below these rates. https://www.lowestrates.ca/mortgage

With this in mind, as a new arrival, you may chose not to lock into a long-term closed mortgage at the bank's posted rates. However, this is a gamble because interest rates may rise before you have the opportunity to re-negotiate.

Where can I get mortgage?

All the major retail banks offer mortgages. Other sources include:

  • On-line banks like ING Direct and PC Financial (see links above)
  • Credit Unions. These are like the building societies used to be in the UK. You become a member rather than a customer and are entitled to share in their profits.
  • Mortgage brokers may have access to funds that are not available to the general public. This is especially useful for difficult or unusual loans. It is worth checking what a mortgage broker can find and compare it to what you can negotiate yourself.
  • Your vendor. The person selling you your home may have a mortgage that you can assume. This is especially beneficial if it has a low fixed interest rate. The vendor may save on early redemption penalties.


More information

Canada Mortgage and Housing Corporation

Financial Consumer Agency of Canada

Housing-Canada section of the BE Wiki