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Fixed rate. The interest rate is set for the duration of the term. A typical fixed mortgage is 5 years and it guarantees your rate/payment during this time frame.
Variable (ARM). The rate fluctuates with prime rate, and usually with a discount below prime.
Fixed vs Variable. The majority of Canadians choose 5 year fixed mortgages. Fixed rates are typically a little higher than variable, much like an ‘insurance’ premium to give you peace of mind. Variable rates can save you money, but if prime rate goes up you may end up paying more.
Closed term. Most mortgages are ‘closed’ as the rates are lower and the only drawback is that a penalty must be paid if the term is broken early.
RRSP Program. First-time buyers can each use $25,000 tax free from an RRSP towards a home purchase. The funds are to be paid back over the next 15 years.
Insured (CMHC). CMHC insurance premiums are added to purchases with less than 20% down, which works well for first time buyers. A ‘conventional’ mortgage with 20% or more down will have no extra insurance premiums.
Penalties. These apply if a mortgage is paid out during the term. The penalty is typically 3 months interest or interest rate differential (IRD). You can port the mortgage to another property to recoup this fee. Some people choose to pay the penalty during a refinance to take advantage of lower rates, decrease payments or pull out equity.
Amortization. The number of years it would take to pay off the mortgage based on the regular payments. 25-30 year amortizations make it easier to qualify for a larger mortgages, and offer the most flexibility.
Prepayments. Most lenders will offer a 15-20% annual prepayment privilege without penalty.
Accelerated Bi-Weekly payment. This is a great option for those wanting to pay down their mortgage faster. The payment is made every two weeks at exactly half of the regular monthly installment which saves on interest. The extra payments made takes years of the amortization and reduces the principal balance quicker.
Keys to getting a mortgage.
Credit Score. Your credit report with Equifax is a very important part of getting a mortgage. If you’d like to go with an insured mortgage (i.e. CMHC), then the minimum score requirement is 600+. We pull your credit report once during the application process and can offer tips on how to improve your score. Many responsible people are penalized because they don’t have a credit history. It’s important to have at least two forms of credit (credit card, loc, etc) for two years or longer. Be sure to make payments each month, and keep balances well under limits. Paying off any collections will also improve your credit rating.
Down Payment. 5% is the minimum down payment required on principal residences. With 20% down you can avoid paying CMHC insurance premiums, as well as purchase rental properties or higher end homes. Many self-employed individuals have to put 35% down in order to get approved.
Income. Your income is really important, and we typically use your salary as indicated on job letter/pay stub. For self-employed individuals, the best way to show income is with the last two years CRA notice of assessments (NOA) and T1 generals. It is recommended you declare a reasonable income on your taxes to make it easier to get financing.
Debt Service. Debt service ratios are often overlooked and misunderstood. Simply put, your total monthly debt obligations can’t exceed about 40% of your gross monthly income. Debt servicing includes all credit cards, loans, property taxes, heat, and mortgage payments. If you keep your liabilities low you will qualify for a larger mortgage. It’s important to plan ahead and work with a mortgage professional to guide you along the way.
Property. The type of property and physical location are key factors in getting approval. Larger cities are given preference by many lenders. Detached houses, townhouses and condos in good condition are usually straightforward to finance.
Required documents. Current employment letter + pay stub. Self Employed - last 2 years CRA notice of assessment (NOA) + T1 generals. Down payment verification - 90-day online bank statements. Purchase contract + MLS feature sheet. Refinance - mortgage statement.
Mortgage Details Glossary - tips and tricks Vancouver BC