 Mortgages - A Few
Basics to Help You Make the Best Choice
By Rose Simard-Bachand of the Mortgage
Alliance Company of Canada Buying a home usually means taking
out a mortgage. That means you borrow
money to buy a home, using that home as collateral for the loan. The amount of mortgage
you can afford depends on your income, the down payment, current mortgage rates, and the
amortization period you choose. Most lenders want borrowers to keep a
gross-debt-service-to-income ratio of 40% or less, coupled with a housing-cost-to-income
ratio of 32% or less. You may be able to purchase a home with a down payment as small as
5%. First-time home buyers may also be eligible to withdraw up to $20,000 tax-free from a
RRSP.
Mortgage payments are made up of a principal sum (amount borrowed) and
interest (cost to you of borrowing money). Most mortgages have some form of prepayment
clause in them that will allow you to pay down your mortgage with a lump sum or extra
payment, without penalty.
Portability means you can transfer the terms and conditions to your
next home without a penalty.
Assumability means you may be able to take over the existing mortgage
on the property. It may have attractive features such as a lower interest rate than the
prevailing market. In turn, an assumable mortgage may be a selling feature when you decide
to move on in the housing market.
Interest is the cost of borrowing money and is paid to the lender.
Mortgage interest rates are affected by the prevailing market interest rates. Mortgage
rates are either fixed or variable. A fixed rate is locked in so that it will not rise for
the term of the mortgage. A variable rate will fluctuate. The rate is set each month by
the lender, based on the prevailing market rates. Your monthly payment is fixed to be the
same each month for the term of the loan, only the percentage of each payment that goes
toward the interest and the percentage that pays down the principal, changes.
The term of a mortgage is the length of time that certain factors, such
as the interest rate you pay, is set, and usually lasts anywhere from six months to 10
years. Many experts suggest you select a long term if interest rates are rising. If rates
are falling, you may want to select a short term, and then lock in the rate when you think
they won’t go any lower.
Amortization is the amount of time over which the entire debt will be
repaid. Most mortgages are amortized over 15, 20 or 25-year periods. The longer the
amortization, the lower your scheduled payments, but the more interest you will pay.
A mortgage loan is repaid in regular payments, which could be monthly,
biweekly or weekly. The more frequently you make your payments, the more principal you
repay in a year, and therefore, lower the overall interest you pay.
A mortgage approval should take only a few days, but it’s probably
best to allow up to two weeks. During this process, the lender will do a credit check and
spot-check other information you have provided. In addition, an appraisal of the value of
your home may be obtained.
A pre-approved mortgage is very common. With a pre-approval, your
lender approves the amount of your mortgage and gives you a written confirmation, usually
lasting from 90 to 120 days. It also sets the mortgage rate the lender will offer to you.
Pre-approval gives you a head start on house hunting, but your final approval is still
subject to an appraisal of the value of the home and a credit review of your finances.
Reference: CMHC Homebuyng Step-by-Step Workbook
Rose Simard-Bachand is a Mortgage Agent, licensed with The
Mortgage Alliance Company of Canada. Call Rose at 403.561.2441, or email rose.sb@mortgagesandmore.ca
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