Don’t overburden your cash flow. North Americans are taking on far too much debt, partly influenced by lower borrowing costs. When money is cheap, people take on more debt; when interest rates rise, they reduce debt.
Rates Rates Rates Please do your homework and check our mortgage rates. It is far too easy to take out or renew a mortgage from your local bank that you visit regularly. When you get a mortgage renewal letter from your current lender, work at negotiating a contract or comparing lenders who may have fewer restrictions plus at a competitive rate. A broker or lender may offer much lower rates. A few basis points can make a big difference when it comes to paying off a mortgage.
As a mortgage specialist, I can help. For personalized financial advice, you should speak with a licensed mortgage broker to compare and sell mortgages. He or she will focus on your specific needs, which is just as crucial as a reasonable rate.
Read the fine print. Blessings or potential problems can be ascertained in the details. Know what you’re signing. What are the prepayment options, late payment fees, and refinancing penalties? Is a variable rate mortgage convertible into a fixed rate? If so, how will the lender calculate the fixed rate?
Maximize the frequency of your payments. Consider paying bi-monthly versus monthly to shorten your payment amortization period.
Further, reduce your amortization period. After paying a mortgage for five years, try to reduce the amortization period by those five years. In this way, a 25-year mortgage amortization period is reduced to 20 years.
Know your mortgage facts. It is essential to know the facts about your current mortgage and one that you may renew. Check out what your interest rate is and what your monthly payments are per month. Find out when your mortgage is up for renewal. In certain cases, there may be a penalty for getting out of your mortgage early or restrictions. A change in your rate, such as moving from a variable rate to a fixed rate, might be a good move. Know your total income, liabilities, debt repayment costs and expenses. The lender will then determine how much you can afford. A good rule of thumb is that your mortgage payments should not exceed more than 40% of your net income.
Before shopping for a new home, getting a preapproved mortgage lined up several weeks before closing is essential; you also want to look at what mortgage brokerages are offering. Often you can find a competitive rate with excellent terms provided by an advisor who offers mortgages.
Often the mortgage rates advertised by your bank are higher than rates that a mortgage broker can find. Also, avoid restrictions on making lump-sum payments or high fees if you need to leave the mortgage before renewal.
If you own a current home, get it evaluated
Get your credit score from Equifax or allow a brokerage to acquire it
Taxes and assessments from the last two years
Careful accounting of your household income
Assess your liabilities, such as credit cards and loans
Assess your assets held in investments and savings accounts
Have enough for a down payment on hand
Also, have enough cash for closing expenses for legal fees, mortgage and title insurance, and transfer taxes.
Budget for extras such as buying new appliances or condo fees if applicable
Research the meaning of mortgage contract terms as it applies to each specific company offering a lower rate. Know about:
Open versus closed mortgage
A line of credit works well if you are going to renovate.
Accumulating a down payment for a first-time homebuyer or a reno can be a challenge. Many younger adults have other obligations such as student loans, rent, and basic monthly expenses.
What are some tactical options to enable you to acquire a down payment:
First, consider what you can afford By calculating what you truly can afford for a down payment or a renovation plan if you are considering staying in your current home, we can look at the refinancing scenarios. By calculating your post-reno value, you may be eligible for more mortgage money.
Your RRSP may have the answer The Home Buyers’ Program (HBP) allows first-time home buyers up to $25,000 withdrawal (double that for a couple to $50,000). This manoeuvre is tax-free from accessible RRSPs. Consider that you will be taking on the responsibility of establishing a repayment plan. Canada Revenue Agency (CRA) allows the HBP insofar as you pay back your RRSP funds at approximately 1/15 of the funds borrowed per year, over 15 years. If those monies are not paid back on time, they will be taxed as income at your going rate.
A tax-free gift of money Gifted funds from a parent or a blood relative may provide a downpayment. A written document must be provided, indicating that the funds are a gift without any requirement to pay back the money.
A loan from a friend or relative Perhaps a grandparent or a friend can loan you the down payment with a fair interest rate, with a manageable repayment agreement. Consider also using other borrowed funds or using an unsecured line of credit.
Consider a lower-priced starter home Consider a fixer-upper or a lower priced first home. With current lower interest rates, pay down the mortgage as quickly as possible. Then with your good credit rating, apply your new equity to purchase your dream home.
Many Canadians are stunned by what has happened to the Canadian Real Estate market in our key cities. Some think it has been wealthy foreigners buying up our best houses and lands. Others believe the problem is due to the misdirected legislation federally and provincially — an absence of reasonable laws designed to protect the home prices for Canadian citizens from being artificially inflated. Still, others think it is the low-interest environment offering near-zero interest rates responsible for the crazy inflation. Or is due to houses being quickly flipped, increasing the value sometimes by up to or more than double what the home initially agreed to be sold for? During the pandemic, there was an extreme bidding up of house prices. It may be a mixture of all of the above.
Many intense studies are underway. Josh Gordon of Simon Fraser University has studied all potential causes. Historically, there is a lack of essential data available, despite being in an age when data influences our life decisions.
Michael Babad, of the Globe and Mail, published as far back as Apr. 21, 2016, that millennials — children of baby boomers — find it difficult, or near-impossible financially, to live in Vancouver or Toronto.
Millennials who are just starting out and want to buy a home may find it hard to afford a mortgage. Michael Babad goes on to note that:
“Paying for a house has become so difficult that saving for a down payment takes years in Toronto and possibly decades in Vancouver, new research suggests: Toronto is troublesome, and Vancouver positively out of sight, according to a National Bank Financial study, although it is far easier in other Canadian markets such as Montreal and Calgary” and “in Toronto and Vancouver, affordability for homes other than condos is the worst in National Bank records dating back to 2000, based on first-quarter data”.
National Bank’s senior economist Matthieu Arseneau and associate economist Kyle Dahms analyzed comparative real estate prices and increases, in contrast to incomes, required down payments and the mortgage payment required as a percentage of income (referred to as the MPPI). Vancouver and Toronto markets pop off the grid compared to other prices.
Based on the time it takes to save a down payment for a single-detached house, semi or townhome, you might consider using a mortgage specialist.
National Bank’s senior economist Matthieu Arseneau and associate economist Kyle Dahms, analyzed comparative real estate prices and increases, in contrast to incomes, required down payments and the mortgage payment required as a percentage of income (referred to as the MPPI). Vancouver and Toronto markets pop off the grid compared to other prices.
Based on the time it takes to save a down payment for a single-detached house, semi or townhome you might consider using a mortgage specialist.
We are only a click away. Contact us today and we will be happy to help you.
Amortisation refers to the number of years it will take to repay your mortgage in full. Based on your down payment and current legislation, amortisation periods can run up to 30 years.
Shorter amortisation periods allow you to accelerate paying off your mortgage. The other advantage is that you will pay less interest the more the timeline shortens. The tradeoff is that you will pay more for your monthly payment.
The mortgage payment and method need to unify with your overall financial plan. For example, a mortgage of $400,000 at an average fixed rate of 5% and a 30-year amortisation will have a $2,134 monthly payment, and you will pay $368,506 interest over the 30 years. Reducing the period to 25 years, you’ll pay more at $2,326, but your total interest expense will be reduced to $297,924, saving $70,882.
In our calculator section on this website, we have mortgage calculators, which may prove helpful for planning.
Canada Mortgage and Housing Corporation (CMHC) provides Homeowner Mortgage Loan Insurance, which is required by law to insure lenders against default on high-ratio mortgages.
A high-ratio mortgage This a mortgage with a loan value of more than 80% of the value of the home purchase price (the borrow puts down under 20%).
Note: Bear in mind, legislation may change from the date of this article. Talk to your mortgage agent for an update.
A conventional mortgage This is a mortgage with more than a 20% down payment, which means it has less than 80% of a loan to value ratio — less than an 80% stake in the home’s equity value when purchased.
Homeowner Mortgage Loan Insurance required by law
When a person is buying a home, a new homeowner, in most cases, takes out a mortgage. A mortgage is a loan taken out by a borrower referred to as the mortgagor from a lending institution, referred to as the mortgagee. The property is used as security for the debt. Homeowner Mortgage Loan Insurance is required by law to insure lenders against default on a high-ratio mortgage.
You repay the principal amount loaned to you The principal is the actual loan amount that the mortgagor is expected to repay to the mortgagee (loaning institution). Additionally, the interest is paid over the repayment period (amortization) of the mortgage.
A mortgage is a fully secured loan A mortgage is a fully secured form of financing. Thus, the interest you pay is usually less than with most other types of financing, such as when you buy a car or use a credit card. Once you have built up equity value in your home, a mortgage can finance many different things, including:
Constructing a new home
Purchasing an existing home
Consolidation of debts
Financing a renovation
Financing the purchase of other investments
Financing the purchase of investment property
How do you qualify for Homeowner Mortgage Loan Insurance?
The home is in Canada.
For CMHC-insured mortgage loans, the maximum purchase price or improved property value must be below $1,000,000. Note: Legislation may have or change at any time.
Consideration to How Much Can You Afford
Before you begin shopping for a home, it’s essential to know how much you can afford to spend on homeownership. You will want to plan ahead for the various expenses related to homeownership. In addition to purchasing the home, other significant expenses include heating, property taxes, home maintenance, and renovation as required. Two simple rules can help you figure out how much you can realistically pay for a home. You must understand these rules to understand if you will be able to get a mortgage.
Ask your mortgage agent what the typical minimum down payment is currently for the purchase price of the dwelling, depending on the dwelling type.
Single-family and two-unit dwellings
Three- or four-unit dwellings
Typically, the minimum down payment comes from personally owned resources. However, a down payment gift from an immediate relative is acceptable for dwellings of 1 to 4 units. For eligible borrowers, additional sources of down payment, such as lender incentives and borrowed funds, are also permitted. Check with your lender for qualifying criteria and availability.
Your total monthly housing costs, including Principal, Interest, property Taxes, Heating (PITH), the annual site lease in the case of leasehold tenure and 50% of applicable condominium fees, shouldn’t represent more than 32% of your gross household income (Gross Debt Service (GDS) ratio). Use the GDS form to calculate how much you can afford in housing costs to be eligible.
Your total debt load shouldn’t be more than 40% of your gross household income. The Total Debt Service (TDS) ratio is your PITH + the annual site lease in the case of leasehold tenure and 50% of condominium fees (if applicable) + payments on all other debt / gross annual household income. Add up your costs and determine your Total Debt Service ratio using the TDS form.
It would be best also to consider closing costs (for example, legal and land transfer fees) equivalent to 1.5% to 4% of the purchase price. Many first-time buyers are surprised by these costs.
Closing costs include but are not limited to one-time items such as lawyer fees, GST and PST as applicable, land transfer tax if applicable, adjustments, etc., to allow you to complete the house purchase.
Other requirements may apply and are subject to change.
Definitions: Since the buyer/borrower is pledging the property, he/she is “mortgaging” the property and is known as the “mortgagor”. The lender is the recipient of the pledge and therefore is the “mortgagee”. The mortgagor mortgages the property to the mortgagee.
Many people prefer not to risk not knowing if their mortgage rate will climb higher due to rising interest rates. Many on a fixed budget want to reside in their home peacefully, not worrying about the potential for increasing rates. We all have to understand our risk tolerance on the one hand and our desire for practical frugality on the other.
When the bank rate rises .25%, variable rates can climb higher. Variables are flexible in the financial market. As such, the market affects most variable mortgages by a significantly higher extrapolated percentage of increase (factors which are applied differ among banks). For this reason in an economic environment of rising interest rates, it may be in your best interest to review and possibly reform variable mortgages or interest-only mortgages to a more guaranteed period of five years or higher.
Do the math, asking yourself if you are sure you want to proceed at a fixed rate.
The upside is that with a five-year term, you can know your expense precisely for the entire period. Conversely, the upside of the added risk of the variable rate is that you may not see an increase (as we do now in several banks) and you might even see a fluctuating decrease of rate.
Give me a call, or contact me via my website to discuss your options.
As a dedicated mortgage professional, I can access numerous lending institutions offering unique mortgage products. First-time homebuyers or those either with a mortgage for renewal or looking to refinance, give us a call. You needn’t look any further as we offer great options as a one-stop broker.
Not all products are the same. Our goal is to reveal the options available for you in Canada, to offer superior mortgage products with reasonable terms and rates. The good news is that we don’t tether to any single lender giving me the freedom to help you find mortgage success without biased advice. Not only that – we will work hard with you to ascertain decisions for your future.
Feel free to ask me any questions you may have regarding mortgages, and I will promptly guide you to a fitting solution. Reach out to me – I am a licensed professional ready to advise.
We have been blessed with low interest rates affecting lower mortgage rates. Have you thought about what happens to mortgage rates and how a household’s expenses go up when these rates rise?
Some mortgage thoughts to ponder:
Variable mortgages. Variable-rate mortgages can be a good option when facing declining rates in the short term. And they can be risky if rates rise. Ask your mortgage advisor what mortgage plan suits your needs?
When it’s time to renew your mortgage. Consider that you have a chance to work with an independent mortgage expert to save money. Watch for the letter that tells you it is time to renew or your notices coming in from your financial institution.
Pay your bills and credit cards on time. Even phone company bills not paid can end up on your Equifax report. When applying for a new mortgage, your lender can see your credit score just when you need to appear in good standing as a responsible borrower.
Don’t apply for credit everywhere. Avoid signing up for store credit cards because such applications trigger a credit inquiry. Too many inquiries make it look like you may be strapped for cash flow.
Mortgage HELOC debt versus total debt. High-interest debt can be rolled into your mortgage if the interest rate is lower than your other loans. Plus, you may be able to include renovation costs in your new mortgage. Just be careful not to increase your HELOC (home equity line of credit) ratio close to your home’s value. There is always a temptation to use up your equity. Note: Talk to your mortgage advisor about the pros and cons of raising HELOC debt tied to your home if home values decrease dramatically or when bankruptcy occurs.
Know your mortgage prepayment penalty. To get out of your mortgage early, the right mortgage with a lower penalty could save you a lot of money! Compare these penalties when shopping for your new mortgage with your mortgage expert.
View mortgage pay-downs as an investment. A pay-down will pay it forward into your net worth. Thus prepayment privileges are essential! If you make monthly payments, consider paying your mortgage weekly or biweekly to reduce the amortization period.
Give your mortgage an annual checkup. Keep your mortgage healthy – give it a yearly checkup. Even a minor tweak can better position your real estate planning.