Residential Mortgages

Buying a Home in Canada                                                                                          

We answer the question ‘How much can we afford?’ and offer reasons to get pre-qualified before you go house-hunting. Moreover, we provide you a checklist to following when applying for your mortgage and offer insight into prepayment privileges.

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Making the right choice when it comes to purchasing a home is a matter of good planning. There is so much to learn, especially on your first purchase, that it’s essential to surround yourself with qualified professionals throughout the process. Even with the help of qualified professionals, you’ll need to understand, in a general sense, how the process works. Our hope is that this article we be a very helpful introduction to the process of buying a home and qualifying for a mortgage in Canada.

Affordability and Financing of Buying a Home in Canada

The question of ‘How much can we afford?’ is largely answered by comparing your income to expenses in two different formulas:
1. Your gross income to your future mortgage payments, heating costs, strata fees and property taxes, commonly called the Gross Debt Service Ratio (GDS Ratio)
2. The three previous expenses plus all other debt servicing costs that you regularly pay on a monthly basis. This formula is commonly called the Total Debt Service Ratio (TDS). The TDS Ratio often includes the payments you make on credit card debt, automobile loans, existing lines of credit and student loans as well as other similar loans.

The current maximum ratios for individuals and couples with a 5% to 20% down payment are 39% for GDS and 44% for TDS. In English, this means that lenders will allow you to use a maximum of 39% of your total pre-tax or gross income to pay for your mortgage payments, property taxes and heating costs. And a maximum of 44% of your total pre-tax or gross income for these payments plus all other debt servicing cost you may have –see previous paragraph for examples.

By using these ratios I can help you select a price range for your new home that you are going to be comfortable with and let you know what the maximum mortgage that you will qualify for. This will save you time , money and disappointments you may incur by looking at homes over your price range.

Why Get Pre-Qualified?

There are 3 good reasons to get pre qualified for your mortgage:

1. It saves you time from looking at homes outside your price range.
2. We can get you an interest rate locked in for up to 120 days. This protects you from any rate increases that can happen after you have written and offer but before you close on the purchase. This could save you thousands of dollars in interest.
3. It makes your offer more appealing to a seller, if they know you are a qualified buyer. This means they will look at your offer more seriously which can even result in a lower purchase price.

This pre-qualifying stage is also a good time to find out about the differences between conventional mortgages and high ratio insured mortgages. Ask about assistance for first time the federal government’s “RSP Homebuyer’s Plan” letting you use funds from your RSP to purchase a home and the option of using a gifted down payment to help you qualify.

Applying For Your Mortgage – A Checklist:

•A copy of the accepted Offer To Purchase, MLS print out, Strata Documents and the land survey.
•A current salary letter from your employer.
•Self-employed individuals need financial statements for the past three years as well as personal income tax returns.
•Confirmation where your down payment came from (i.e. bank statements or a gift letter).

If you are buying a home to be constructed you will need a copy of the building plans and specifications, the land survey, plus your agreement with the builder. With these documents in hand, I can move quickly to secure an unconditional mortgage approval once you’ve found the perfect home.

Making House Hunting Fun!

By taking care of your mortgage needs first you can focus your attention on the details of the home you are buying.  Take the guesswork out of shopping for a home by taking advantage of all the professional resources available to guide you through the many choices available when purchasing your first home.

Mortgage Life Insurance

You should look at mortgage life insurance, disability and critical illness insurance, especially where two incomes are involved. Just like fire insurance, you will sleep better knowing that you are covered for those curve balls that life throws at us.

Prepayment Privileges

I could go on at length about the various features of each mortgage type but in the interest of time, our best advice is to contact me with the questions you are most concerned about. I know the pre-payment privileges of the various financial institutions on the system. These let you pay down your mortgage faster. Also be aware that the longer the amortization period (the time it takes to pay off a mortgage), the more interest you will end up paying. Amortization periods range from five to twenty-five years.

Accelerated mortgage payments such as Bi-weekly payments divide the monthly payment in half and make them payable every 2 weeks. This means you will make 26 half payments a year or 13 full payments a year. This extra 2 half payments can reduce your mortgage from 25 years down to 17 years.

Some clients find having a payment every 2 weeks hard to budget for as there will be 2 months in every year that have 3 half payments in it. This extra payment can through your bank account balance out of whack if you are not very careful and not following which months have the extra payments.  You can accomplish the same goal by just increasing your monthly payment by 10% and making 12 monthly payments a year.


Portable and Assumable Mortgages

Another option to consider is portability. If later, you decide to sell your home and buy another, you should be able to take your mortgage with you or transfer it to the buyer of your home without penalty. This can turn out to be a major advantage if your mortgage rate is below current market rates.

Selecting the Right Mortgage:

The basic choices to look at in selecting a mortgage include:Portable and Assumable Mortgages
 Another option to consider is portability. If later, you decide to sell your home and buy another, you should be able to take your mortgage with you or transfer it to the buyer of your home without penalty. This can turn out to be a major advantage if your mortgage rate is below current market rates.
•Conventional or high ratio mortgages
•Term length
•Closed or open mortgages
•Fixed rate vs. variable rate

A conventional mortgage is a loan for less than 80% of the appraised value or purchase price of the property, whichever is less. A high ratio mortgage is usually for more than 80% of the appraised value or purchase price. This type of mortgage is often referred to as an NHA mortgage because it is granted under the provisions of the National Housing Act and must, by law, be insured through CMHC, GE or a private insurer for which the borrower pays the insurance premium, application, legal and property appraisal fees.

The term you select is important. Short term mortgages can be appropriate if you believe interest rates will drop come renewal time, but in many of these circumstances, they are inferior to a variable rate mortgage. Long term mortgages are suitable if you feel rates will rise in the next few years, they also provide you with the security of knowing what your payments are for a long term. This can be especially important for first time homebuyers. The key is to choose a mortgage that fits your tolerance to risk.

A closed mortgage usually offers a lower interest rate than an open one of the same term, but the open mortgage lets you pay off as much as you want, any time, without penalty. This is a feature many consumers pay for and do not use. The pre payment options that come with most closed mortgages are usually sufficient.

You can choose a fixed or variable interest rate. A fixed rate mortgage allows you to budget precisely for whatever term you select anywhere from six months to 35 years. A variable rate fluctuates with the market and allows you to follow the rates as they drop. These mortgages are very useful in a falling interest rate market.

The Next Step

This offers an outline of the steps involved when buying a home and qualifying for a mortgage. But it has probably left you with a few questions. We would love to hear from you – please take the time to Contact Us if you have questions.