Mortgage Questions Answered
Two types of mortgages:
High Ratio and Conventional Mortgages.
What is a High Ratio Mortgage?
A high ratio mortgage is a mortgage where the down payment is less than 20% of the purchase price. A high ratio mortgage is a mortgage with a loan to value ratio of more than 80%. With a high ratio mortgage, you must qualify for mortgage insurance.
What is a conventional mortgage?
A conventional mortgage is one where the down payment is equal to 20% or more of the purchase price; a loan to value of or less than 80%, and does not normally require mortgage loan insurance.
What is a down payment?
Very few home buyers have the cash available to buy a home outright. Most of us will turn to a financial institution for a mortgage; the first step in a potentially long-standing relationship. But even with a mortgage, you will need to raise the money for a down payment. The down payment is that portion of the purchase price you furnish yourself. The amount of the down payment (which represents your financial stake, or the equity in your new home) should be determined well before you start house hunting. The larger the down payment, the less your home costs in the long run. With a smaller mortgage, interest costs (and possibly insurance fees - for high ratio mortgages) will be lower and over time this will add up to significant savings.
Canada Mortgage and Housing Corporation (CMHC), Canada Guaranty (CG) and Genworth Canada provide the Mortgage Insurance. This insurance is required by law to insure lenders against default on mortgages with a loan to value ratio greater than 80%. The insurance premiums, ranging from 0.60% to 5.65% are paid by the borrower and can be added directly onto the mortgage amount. This insurance is known as the Mortgage Default Insurance and is not the same as mortgage life insurance.
Can I get a mortgage to purchase a home?
Yes; subject to qualification. For high-ratio financing, you require the Mortgage Default insurance provided by one of the 3 above mentioned Insurers.
Purchase plus Improvements:
This option covers the sale price of the home as well as any renovations that would increase the value of the property. This program allows homebuyers to take advantage of the historically low interest rates associated with a mortgage and pay one lump sum monthly payment. This option eliminates the need to finance the renovations or improvements separately. (Some conditions apply). Improvements cannot be strictly cosmetic in nature
The Insurer will approve a loan of up to 95% of the ‘as improved’ value of the home provided that the money you have put into the home does, in fact, improve the value.
Can I use gift funds as a down payment?
Lenders will accept gifted funds from family as acceptable down payment. A gift letter signed by the donor is required along with a snapshot of your bank account showing the deposit of the funds. Gifted down payment is a true gift and not a loan.
What is a pre-approved mortgage?
A pre-approved mortgage provides an interest rate guarantee from a lender for a specified period of time (usually 60 to 120 days) and for a set amount of money. The pre-approval is calculated based on information provided by you and is generally subject to certain conditions being met before the mortgage is finalised. Conditions would usually be things like 'an employment and income confirmation' and ‘confirmation of down payment from your own resources'. Most successful real estate professionals will want to ensure you have a pre-approved mortgage in place before they take you out looking for a home. This is to ensure that they are showing you properties within your affordable price range. In summary, a pre-approved mortgage is one of the first steps a home buyer should take before beginning the buying process.
Should I wait for my mortgage to mature?
Lenders will often guarantee an interest rate to you as much as 120 days before your mortgage matures. And, as long as you are not increasing your mortgage, they will cover the costs of transferring your mortgage too. This means a rate promised well in advance of your maturity date, thus eliminating any worries of higher rates. And if rates drop before the actual maturity rate, the new lender will usually adjust your interest rate lower as well. Most lenders send out their mortgage renewal notices offering existing clients their posted interest rates. The rate you are being offered is usually not the best one. Always investigate the possibility of a lower interest rate with your broker. Call us; we can do all the research for you!
How can you pay off your mortgage sooner?
There are ways to reduce the number of years to pay down your mortgage. You'll enjoy significant savings by:
- Selecting an accelerated payment schedule
- Increasing your payment frequency schedule
- Doubling Up Payments
- Selecting a shorter amortisation at renewal.
What is a fixed rate mortgage?
The interest rate on a fixed-rate mortgage is set for a pre-determined term - usually between 6 months to 10 years. This offers the security of knowing what you will be paying for the term selected.
What is a variable rate mortgage?
A mortgage in which payments fluctuate with the market interest rate known as the ‘Prime rate’. Typically a Variable rate mortgage offers a lower interest rate than the fixed rate mortgage.
As interest rates decline you could pay off your mortgage faster and save money on reduced interest costs.
We hope that helps, please call if you have any questions.