Buying a home is exciting. Trying to make decisions regarding your new mortgage can feel overwhelming.
I like to have time to work with my clients before we sit down with an accepted offer, to make sure they have a solid understanding of the decisions they will be making.
This isn’t always how things go, so as we move through the process I make sure they know how important it is to ask questions and understand what it is they are signing.
Over the last few weeks, I’ve had people ask questions about a couple of things I feel are important to share.
The first point is the minimum down payment you need to buy a home.
For your primary residence, the minimum down payment is five per cent. When this program was first introduced, only first-time home buyers were able to buy with five per cent down.
Now, anyone can take advantage of this option.
The second question came from a client who is upsizing to a larger family home. When we talked about a 30-year amortization, he said he thought that the maximum now was 25.
For people who have more than 20 per cent down, most lenders offer the option of 30 years. There are a few lenders that offer 35 years as well.
For people buying with less than 20 per cent down, the maximum amortization is 25 years.
Below are some of the common terms you are likely to hear.
If you are meeting with your mortgage specialist and you are not clear about the discussion, I can’t stress enough how important it is important that you ask for explanations.
INSURED (previously known as high ratio):
When you put down less than 20 per cent of the purchase price, you will have to pay an insurance premium (mortgage loan insurance. You may hear this referred to as a CMHC or Genworth premium.
This premium is calculated on a sliding scale depending on how much you put down on your mortgage. Most home buyers choose to add this amount to their mortgage.
Regulations under The Bank Act prohibit lenders from providing mortgages in excess of 80 per cent of the purchase price or the appraised value of a property without obtaining Mortgage Loan Insurance.
INSURABLE (previously known as conventional):
A mortgage for up to 80 per cent of the purchase price of a property with an amortization of 25 years or less is considered an insurable mortgage. Mortgage insurance is available to lenders for mortgages that fall in this category.
What this means for you as a client is (in most cases) slightly better rates than if you opt for a 30 year amortization, which puts you in the category of uninsurable mortgages.
With mortgage rule changes over the last few years, a third category has been added.
Over the last few years several major changes were introduced that affect borrowers and rates. Mortgage insurance is no longer available (for lenders) for refinances and purchases of rental properties.
What this means for you as a client is higher interest rates for refinances and rental properties, and in some cases stricter lending criteria. Lenders now require 20 per cent down for all rental purchases.
For refinances, you can only refinance up to 80 per cent of the value of your home.
MORTGAGE LOAN INSURANCE:
High-ratio mortgages must be insured through CMHC (Canada Mortgage and Housing Corporation), Genworth Financial Canada or Canadian Guarantee. CMHC, Genworth and Canadian Guarantee provide default or high ratio insurance to the lenders protecting them against the risk of lending to homebuyers who have less equity in their homes.
An insurance premium is paid by the borrower on behalf of the lender. The insurance premium that is paid to the mortgage insurer is to protect the lender in the event that the mortgage is not paid. This is not to be confused with life, disability, or job loss insurance.
Amortization refers to the length of time it takes to completely pay off your mortgage. For insurable mortgages, the maximum amortization allowed is 25 years, and for conventional mortgages this extends to 30 years.
It is to your advantage (in most cases) to choose the shortest amortization you are comfortable with as you will pay less interest in the long run.
The actual length of time money is loaned at a contracted rate. Most clients opt for a five year term. At the end of the five year term, your mortgage will come up for renewal. At that time, you will meet with your mortgage provider to choose a new term, or possibly a new lender.
Most borrowers only have one mortgage on their property, but in the event of default or other collection actions, the first mortgage holder has priority over any other claims.
A higher interest rate loan that provides borrowers with additional financing if the first mortgage does not meet their total financial requirements. Second mortgages are generally expensive to set up and charge very high rates of interest.
With this type of mortgage, the entire principal or any part of it can be prepaid to the lender at any time without having to pay any penalty or bonus interest to the lender. The length of the term is generally six months to one year, although some banks have introduced five-year open terms.
HOME EQUITY LINE OF CREDIT:
A Home Equity Line of Credit (HELOC) is a revolving line of credit that is secured by your home. As the line of credit is secured by your home, the risk of repayment to the lender is reduced and reflected in the rate.
A HELOC interest rate will be much lower than a personally secured loan.
The maximum amount for a HELOC is 65 per cent of your home’s value. When this is combined with a fixed portion of your mortgage the total loan-to-value cannot exceed 80%. With a HELOC mortgage product you can draw on the funds at any time and repay them at any time without penalty.
These types of mortgages have a fixed term. If you were to pay out your mortgage before the mortgage maturity the lender would charge an early payout penalty. The amount of this penalty will vary, but generally it is 3 months interest or an interest rate differential calculation, whichever is greater.
VARIABLE RATE MORTGAGE (VRM):
A variable rate mortgage has an interest rate that fluctuates with the prime rate. The prime rate is a suggested rate by the Bank of Canada and is largely affected by the bank rate.
A variable rate will be presented as a discount or premium to the prime rate. This rate can fluctuate monthly, but is most likely to fluctuate quarterly as a result of the Bank of Canada announcing the Bank Rate.
VRMs are handy mortgages when rates are falling because those rate breaks get passed along quickly as rates are adjusted. The majority of variable rate mortgages are considered convertible.
At any time during the term you can convert to a fixed rate mortgage provided it is the same or longer as the original term.
These definitions are intended to give you basic information; there are more important details for you to know depending on your personal situation.
It is really important that you make decisions based on your personal circumstances. Taking the time to educate yourself upfront may save you thousands of dollars over the long run.