That’s it ! You have made your calculations, the moment when you will become an owner seems to have arrived. Now you will have to maneuver in the mortgage industry. Here’s what you need to know before you get started.
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• Read also: Guide to home ownership: the essential mortgage pre-approval
“Mortgage term” and “loan amortization”, what is the difference?
The term refers to the duration of the mortgage contract, the most common being 5 years. We are bound to the lender during the term chosen, period during which the conditions of the loan are fixed (rate, penalty, prepayments allowed, etc.) At the end of the term, we must agree on a new agreement according to market conditions, with the same lender or with another one.
The amortization refers to the period provided for before full repayment of the loan, ie 25 years maximum for the first buyer.
What is the “fixed or variable rate” dilemma?
The fixed interest rate remains the same over the term. The floating rate will fluctuate with the lender’s prime rate, which in turn moves with the Bank of Canada’s key rate. Most of the time, on a contract of five, the variable rate will cost less in interest than the fixed rate. So why do people choose fixed? For the feeling of security.
Mortgage insurance, what is it for?
Mortgage insurance protects the lender in the event of borrower default. The buyer is obliged to subscribe to it if he does not advance a down payment of at least 20%. Three insurers cover the market in Canada: Canada Mortgage and Housing Corporation (CMHC), Sagen (formerly Genworth Canada) and Canada Guaranty.
At CMHC, the highest premium rate is 4% of the loan amount (with 5% down payment). The premium drops with a larger down payment. Generally, interest rates are lower on insured loans.
Is the stress test mandatory?
We cannot escape it. In order to qualify for a mortgage, a buyer must meet certain debt ratios. The test in question consists of applying in the calculation a higher interest rate than that granted (+2% or 5.25%, whichever is higher). It aims to ensure that the acquirer can take a rate hike without defaulting.
Penalties, should I worry about them?
Above all, we must not minimize the importance of this element. The lender imposes a penalty when the borrower breaks the contract (known as prepayment). This usually happens when you have to part with your home, as a result of a separation, the arrival of a child or a new job.
The bill remains reasonable for variable rate mortgages (three months of interest), but can be staggering with the fixed rate mortgage. Hence the importance of understanding the penalty formula used by the lender and ensuring that the contract provides some flexibility.
Is a mortgage broker necessary?
You can do your steps without help, but the intervention of a broker often makes it possible to find a better suited loan. He has access to mortgage products from most major financial institutions and he alone opens the door to virtual lenders.
As soon as the needs present certain particularities, the use of the broker becomes essential. They are remunerated by the lenders.
Prequalification and preauthorization, are they the same thing?
The prequalification aims to estimate the maximum loan that one could obtain. It will be used before testing the market to know its purchasing capacity.
The pre-authorization goes further since the lender agrees to grant us the loan, indicating the maximum amount and the interest rate (guaranteed up to 130 days). Recommended when the hunt gets serious.
