Mortgages 101: Your guide to mortgage options when buying a home in Canada
May 12th 2020
Finding your dream home is challenging enough, but many home buyers will agree that the mortgage process is the bigger mountain to climb. Not only do you have multiple types of mortgages to explore, but each one comes with its own unique requirements, advantages, and disadvantages to consider.
If you’re feeling confused or overwhelmed about your mortgage options in Canada, this mortgage guide is for you.
How Do You Get a Home or Condo Mortgage in Canada?
Homebuyers can pick one of several channels to buy a mortgage. Let’s look at each one in more detail:
Brokers are licensed professionals who operate independently. They typically have access to a network of banks and other lenders to give you more mortgage options. Banks may offer volume discounts to brokers to help you secure a better rate than you could get by going direct. However, you won’t have access to lenders who don’t leverage brokers, so you could be missing out on a better rate.
Direct lenders, such as banks, sell their products directly to the consumer. They may also make their products available to brokers. This channel accounts for the largest share of mortgages.
Private lenders are common go-tos for niche markets, such as customers with bad credit. Many home buyers use private lenders when they are unable to secure a mortgage from another channel. Interest rates are usually higher to compensate for the additional risk the lender assumes.
Mobile Mortgage Specialists
An up-and-coming channel in Canada, mobile mortgage specialists are a hybrid of a mortgage broker and a direct lender. They’re fully commissioned, so they’re usually available outside of business hours to ensure borrowers get personalized, responsive service.
However, because they’re directly employed by the bank, mobile mortgage specialists are only able to sell you the bank’s products.
Comparing Mortgage Product Options
Each lending channel may have multiple mortgage products to choose from. Here’s a brief overview of some of the most common mortgages:
- 20% down payment provided by the buyer
- Low loan-to-value loan
- Can move from a variable rate to fixed rate or change terms without penalty
- Interest rates will change when changing the term of the loan
- Interest rate remains unchanged for a period, usually 1-5 years
- Easier when managing a budget
- May end up paying more if interest rates decrease during the loan term
- Interest rates are subject to fluctuation
- May end up paying more or less than a fixed rate, depending on market conditions
- Monthly mortgage payment may fluctuate, making it harder to budget
- Combination of fixed and variable rate mortgages—half of the loan is fixed, while half is variable
- Best of both worlds
- Terms for each loan are different, which can be difficult to manage during renewal
- May be difficult to transfer to another lender
How Are Mortgage Interest Rates Determined?
Mortgage rates can vary by lender and home buyer, depending on a number of factors.
Some things, like the economy, inflation, and bond yields, are out of your control. Other things, like credit score and work history, may help you earn a lower interest rate. In addition, a higher down payment can reduce the risk the lender incurs, which may allow you to obtain a better rate.
Talk with your chosen lender to explore factors within your control that may help you qualify for a lower interest rate.
How to Apply for a Mortgage in Canada
Typically, home buyers apply for a mortgage after their offer on a property has been accepted. Once you decide on a lender and type of mortgage, you can start working toward getting approved. Here’s a quick breakdown of the process:
Your lender will require you to fill out a mortgage application either in person, online, or by phone. The application will request information such as:
- Work history
- Proof of employment
- Additional income sources
- Proof of down payment
- Banking information
- Property-related documents (the accepted offer, the listing sheet, property address, and contact information for the real estate lawyer).
Check with your lender to ensure you have all the necessary documentation and information to move forward.
Choosing a Mortgage Product
Mortgage products and requirements can vary by lender. While it’s a good idea to decide which type of mortgage you want to apply for, you should remain flexible in case you do not meet the requirements or are otherwise unable to qualify. Your lender can help you compare your options and choose the right product that will bring you closer to your home ownership goals.
Once you complete your application, your mortgage specialist will shop around for the best financing and rate on your behalf.
Once they lock in a mortgage product and rate, the mortgage associate will require you to approve the loan and ensure you understand your commitment to repayment. Any documents they require to move forward must be submitted within ten days of mortgage approval.
Working with a Mortgage Lawyer
Your lender will send all related mortgage documents to your real estate lawyer. Once your loan is approved, you will meet with your lawyer to sign the loan documents. Take time to review these documents to ensure the loan terms and interest rate reflect the agreement and that the names and addresses are accurate. Small errors like these may delay your closing.
There are several closing fees you’ll be required to pay upon signing the paperwork. You’ll need to bring a bank draft check to the closing to cover the down payment and any applicable closing costs. Your real estate agent should inform you what these costs are before closing day.
You will also be required to provide proof of homeowner’s insurance (and flood or fire insurance, if applicable), along with proof of payment.
Consider All Your Mortgage Options
It’s important to understand the mortgage process before diving headfirst into a long-term commitment. When you take time to research your mortgage options in Canada, you’ll have a more affordable outcome and a smoother home buying and selling experience.
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