Frequently Asked Questions About Mortgages

Can I get a mortgage to purchase a home?
How much can I afford to spend on a home?
What is a down payment?
What is the minimum down payment needed to purchase a home?
What is a conventional mortgage?
What is a mortgage loan insurance?
What is a pre-qualified mortgage?
Can I use gift funds as my down payment?
How can you use RRSPs to help buy your first home?
What are the costs associated with buying a home?
What should the length of my mortgage term be?
What are the monthly costs associated with owning a home?
Should you go with a short or long-term mortgage?
What is a fixed rate mortgage?
What is a variable rate mortgage?
How can you pay off your mortgage sooner?
Should I wait for my mortgage to mature?
How does bankruptcy affect qualification for a mortgage?
How will child support affect mortgage qualification?
What is a home inspection and when should I get one?
What is Land Transfer Tax?

Can I get a mortgage to purchase a home?

Obtaining a mortgage requires each borrower to go through a qualification process. Several factors are considered by lenders including income, credit history, and debt servicing ratios to name a few. See “How much can I afford to spend on a home?” for more info.
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How much can I afford to spend on a home?

To determine ‘affordability’ you will first need to know your taxable income along with the amount of any debt outstanding and the monthly payments. Assuming it is your principal residence you are purchasing and you have good credit history:

(1) Calculate 32% of your income for use toward a mortgage payment, property tax and heating costs. If applicable, half of the estimated monthly condominium maintenance fees will also be included in this calculation.

(2) Second, calculate 40% of your taxable income and deduct all your monthly debt payments, including car loans, credit accounts, lines of credit, personal loans, student loans etc.

The less of the first or second calculation will be used to help determine how much income may be used towards housing related payments, including your mortgage payment. These calculations are based on the lenders usual guidelines.

It is a good idea to consider your comfort level with payments. if the payment amount you’re comfortable with is less than 32% of your gross income, you may want to consider
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What is a down payment?

The down payment is the portion of the purchase price you furnish yourself. The amount of the down payment (which represents your financial stake, or 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 mortgage insurance fees will be lower over time and this will add up to significant savings.
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What is the minimum down payment needed to purchase a home?

A minimum of 5% down is needed to purchase a home, subject to certain maximum price restrictions. In addition to the down payment, you must also be able to show that you can cover the applicable closing costs (i.e. legal fees and disbursements, appraisals fees and survey certificate where applicable). Regardless of the amount of your down payment, at least 5% of it must be from your own cash resources or in the form of a gift from a family member. For non-residents, and New-comers to Canada there are additional considerations, click here for more information.

Low down payment mortgages (5%-19.99% down payment) must be insured to cover potential default of payment. The carrying costs are therefore higher than a conventional mortgage because they include insurance premium. With all low down payment mortgages, you are responsible for:

  • appraisal and legal fees
  • an application fee for the insurance
  • the payment of the mortgage default insurance premium (although this amount is usually added to the mortgage amount).

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What is a conventional mortgage?

A conventional mortgage is usually one where the down payment is equal to 20% or more of the purchase price. A loan-to-value of 80% or less does not normally require mortgage loan insurance.
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What is a mortgage loan insurance?

Mortgage loan insurance is insurance provided by Canada Mortgage and Housing Corporation (CMHC), a crown corporation, and a few approved private corporations including Genworth. This insurance is required to by law to insure lenders against default on mortgages with a loan to value ratio greater than 80%. The insurance premiums, ranging from 1.8%-3.6% are paid directly by tht borrower and can be added directly onto the mortgage. This is not the same as mortgage life insurance.
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What is a pre-qualified mortgage?

This is often the first step in the home buying process. Most successful real estate agents will want to ensure you are pre-qualified for a mortgage before taking you house hunting to ensure that they are showing you properties you can afford.

A pre-qualified (or pre-approved) mortgage provides an interest rate guarantee from a lender for a specified period of time (usually 60-120 days) and for a set amount of money. The pre-qualification is calculated on information provided by you and is generally subject to certain conditions being met before the mortgage is finalized.

Conditions would usually be things such as written employment and income confirmation, and proof of down payment from own resources.
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Can I use gift funds as my down payment?

Most lenders will accept down payment funds that are a gift from family as an acceptable down payment. A gift letter signed by the donor is usually required to confirm that the funds are a true gift and not a loan. Where the mortgage requires mortgage loan insurance, Canada Mortgage and Housing Corporation requires the gift money to be in the purchaser’s possession before the application is sent in to them for approval. Where mortgage loan insurance is provided by Genworth, that is not a requirement. See what is “What is mortgage loan insurance” for more info.
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How can I use RRSPs to help buy your first home?

With the federal government’s Home Buyers Plan, you can use up to $25,000 in RRSP savings ($50,000 for a couple) to help pay for your down payment on your first home. You then have 15 years to repay your RRSP. To qualify, the RRSP funds you’re using must have been in the RRSP account for at least 90 days, and you will also need a signed agreement to buy a qualifying home.

While using your RRSP for a down payment may help you buy a home sooner, it can also mean missing out on some tax-sheltered growth. So be sure to discuss with your financial planner whether this strategy makes sense for you, given your personal financial situation.
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What are the costs associated with buying a home?

There are several out of pocket expenses associated with purchasing a home.

  • Money for down payment – ranging from 5% or more of the purchse price
  • Money for closing costs – up to 2.5% of the basic purchase price
  • Home inspection if buying a pre-existing home – fees may vary
  • Fees and disbursements for the lawyer or notary acting for you in the purchase of the home – fees may vary so shopping around is a good idea
  • Closing adjustment costs, interest adjustment costs between the buyer and seller
  • Property insurance  must be in place by the closing date
  • Cost of moving into the new home and any other things such as appliances, furniture, etc.

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What should the length of my mortgage term be?

The length of mortgage terms vary widely – from 6 months to 10 years. As a rule of thumb, the shorter the term, the lower the interest rate; the longer the term the higher the interest rate. While 5 year mortgages are what most home-buyers typically choose, you may consider a short-term mortgage if you have a higher tolerance for risk, if you have time to watch rates or are not prepared to make a long-term commitment right now.

Before selecting your mortgage term, it might help to consider the following questions:

  1. Do you plan to sell your home in the short term without buying another? if so, a short mortgage term may be your best option.
  2. Do you believe that interest rates have bottomed out and are not likely to drop more? If this is the case, then a long mortgage term may be the right choice. Alternatively, if you think the current rates are high, you may opt for a short to medium length mortgage term hoping that rates drop by the time your mortgage expires.
  3. Are you looking for security as a first-time home buyer? Then you may prefer a longer mortgage term, so that you can budget for your monthly expenses.
  4. Are you willing to follow interest rates closely and risk there being increased mortgage payments following a renewal? If this is the case, then a short mortgage term may best suit your needs.

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What are the monthly costs associated with owning a home?

The Mortgage Payment – For most home buyers, this is the largest monthly expense. The actual amount of the mortgage payment can vary widely since it is based on a number of variables, such as mortgage term and amortization.

Property Taxes –  Property taxes are assessed by the municipality based on the current value of your home. They can be remitted in one of three ways: (1) paid directly to the municipality by you in a lump sum each year (2) paid directly to the municipality by you via monthly installments if the municipality has this type program in place. (3) paid as part of your monthly mortgage payment

School Taxes – in some municipalities, these taxes are integrated into the property taxes. In others they are collected separately and are payable in a single lump sum, usually due at the end of the current school year.

Utilities –  As a home owner, you will be responsible for all utility bills including heating, gas, water and electricity.

Maintenance and Upkeep – You will also have to cover the cost of painting, roof repairs, electrical and plumbing, walks and driveway, lawn care and snow removal. A well maintained property helps to preserve you home’s market value, enhances the neighborhood and depending on the kind of renovations you make, could add to the value of your property.
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Should you go with a short or long-term mortgage?

A longer-term mortgage is worth considering if you have a busy life and don’t have time to watch mortgage rates. This will let you take advantage of today’s rates, while enjoying long-term security knowing the rate you signed up for will not change. If, however, you want to keep your mortgage flexible right now, you can explore a shorter-term mortgage that usually allows you to take advantage of lower interest rates and save.
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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 and 10 years. This offers security of knowing what you will be paying for the selected term. See our rates page more information.
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What is a variable rate mortgage?

The interest rate on a variable-rate mortgage will fluctuate from month to month depending on the prime interest rate. If prime rate changes (up/down) you payment will also change. See our rates page more information.
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How can you pay off your mortgage sooner?

There are several ways to reduce the number of years to pay down your mortgage. Significant savings can be realized by:

  • selecting a non-monthly accelerated payment schedule (i.e. weekly accelerated or bi-weekly accelerated payment schedules)
  • increasing your payment frequency schedule
  • making principal prepayments
  • making Double-Up Payments
  • selecting a shorter amortization at renewal

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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 the rate promised well in advance of your maturity date, thus eliminating any worries of higher rates. If the rate drops before the actual maturity date, the new lender will usually adjust your interest rate lower as well.

Most lenders send out their renewal notices offering existing clients their posted interest rates. The rate you are being offered is usually not the best one, therefore it is always a good idea to investigate the possibility of a lower rate with the lender or another lender.
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How does bankruptcy affect qualification for a mortgage?

Depending on the circumstances surrounding your bankruptcy, generally, some lenders will consider providing mortgage financing.
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How will child support affect mortgage qualification?

Paid by you – generally, the amount paid is deducted from your total income before determining the size of mortgage you will qualify for.

Received by you – generally, the amount paid is added to your total income before determining the size of mortgage you qualify for, proved proof of regular receipt is available for a period to be determined by the lender.
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What is the home inspection and when should I get one?

A home inspection is a visual examination of the property to determine the overall condition of the home. In the process, the inspector should be checking all major components (roof, ceilings, walls, floors, foundations, crawl spaces, attics, retaining walls etc.) and systems (electrical, heating, plumbing, drainage, exterior weather proofing, etc.). The results of the inspection should be provided to the purchaser in written form, in detail, generally within 24 hours of the inspection.

A pre-purchase home inspection can add peace of mind and make a difficult decision much easier. It may indicate that the home needs major structural repairs which can be factored into your buying decision. A home inspection helps remove a nu,ber of unknowns and the increases the likelihood of a successful purchase.
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What is Land Transfer Tax?

Unless you live in Alberta, Saskatchewan, or rural Nova Scotia, a land transfer tax / property purchase tax will be levied on properties purchased. Depending on where you live these taxes can range from 0.5%-2% of the total property value, with many provinces having multi-tiered taxation structures. If you have more questions, please feel free to contact us.
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