So you are thinking about buying a new home? You may be wondering how mortgages work, if you would qualify for a mortgage, and if there are any special issues you should be aware of.
Here is a quick look at some facts and information about mortgages.
- Canada has one of the most solid mortgage systems in the world, evolved over many decades. It’s a balanced system that is intended to help people become homeowners, while not taking excessive risks—that is, it demands responsible behaviour from both lenders and borrowers.
- The vast majority of lenders follow prudent and careful lending practices. Borrowers are qualified for a mortgage according to how much debt they are able to manage. Traditionally, lenders estimate that 32% of the borrower’s income can be safely allocated to “housing debt”, i.e. repayment of a mortgage with interest, taxes and energy use. Other debt is also factored in—car loans, student debt, credit card balances and so on. In total, up to 40% of total income can go towards debt payment. (Note: some lenders may use different percentages.)
- Lenders will also consider other personal information, such as length and security of employment, credit history and proven ability to handle debt. For instance, did you take out loans before, and did you pay them back on time?
- Typically, you should have a minimum down payment of 5% of the value of the home you are buying.
- Mortgage insurance is mandatory in Canada for all high-ratio mortgages, where the mortgage represents 80% or more of the total value of the property. This protects the lender in case the borrower becomes unable to pay the mortgage. For homebuyers with less than a 20% down payment, mortgage insurance allows them to benefit from the same mortgage rates and features as those with higher down payments.
- Most mortgages are amortized over 25 years—that’s how long it will take to pay the loan off completely. For most people, this offers manageable monthly payments. A longer amortization period lowers your monthly payments, but you will end up paying more in the long run, because the longer you borrow the money, the more it will cost in interest. There may be times, such as the initial years of homeownership, where a longer amortization period can be considered. Consult with your mortgage professional about the options that best match your needs and circumstances.
- The interest rate you pay on your mortgage will fluctuate over the lifespan of the mortgage. The rate is locked into specific terms that can range from six months to 18 years or more. Many people chose terms of five to seven years, because they tend to offer the best balance between an attractive rate and the security of knowing exactly what your housing expenses will be for a considerable length of time.
- Mortgages come with a great deal of flexibility. It is important to discuss your options, such as pre-payment, with your lender so you can tailor your mortgage to best suit your own situation and preferences.
- Lenders are realistic and know that sometimes borrowers encounter financial difficulties, due to illness or lay-offs, for instance. Talk with your lender about any special programs they may have to deal with “what if” scenarios, such as deferred payment plans. Mortgage insurance providers will also work with homeowners experiencing financial difficulties to help them keep their homes.
- Some new home builders offer mortgages at preferential rates for their homes. In such cases, the builder is not the lender, but has made arrangements with their own financial institution to provide mortgages to qualified purchasers.
Take a first step towards homeownership. Talk with a mortgage specialist to see what lenders are offering—mortgage rates are at a historical low right now. Get pre-qualified for a mortgage so you know exactly how much you can spend on your new home, if you decide to go ahead. Then visit the new home builders in your community and see what is possible on your budget.
If you are ready, this is a great time to buy a new home.