How to choose the right mortgage in Canada

Image credit

For many, the dream of one day owning a home is fulfilling. In addition, for many with ongoing mortgage repayments, the dream of one day burning their mortgage papers after making that final payment is very refreshing. In this article, we explore deeper into the Canadian mortgage market including the process of selecting the right Canadian Mortgage Services when navigating the home-buying process. But first, let’s define a mortgage;

What is a mortgage?

A mortgage is basically a loan you take to buy a home or property. The property bought becomes the security for the loan. The owner may seek a full mortgage or may pay a down payment then seek additional funding from the lender. The lender has the right to take over the property in case the owner defaults on payment.

Like a normal loan, a mortgage has a term limit that ranges from six months to 10 years in Canada. The most popular term limit for mortgages in Canada is five years. The loan is repaid back in the form of regular payments split between the principal amount and interest. With every payment made, the interest is deducted first before the principal amount.

The mortgage process

Many home admirers always don’t have the ready cash to acquire their dream property. This is where the issue of mortgage comes in. Navigating the mortgage process can be engaging and sometimes overwhelming. There are several steps that comprise the mortgage process ranging from pre-approval to house hunting, loan process and determination, and finally moving into your house.

There are generally two ways to approach a mortgage process. The first one is being pre-approved for the loan before hunting a house that fits into the approved amount. In this case, the value of the property is determined by the amount of the pre-approved loan. The second one would be to identify your ideal property, then approach a lender for financing. In this case, the property owner negotiates the mortgage based on the value of the property.

Types of mortgages

There are five categories of mortgages in Canada;

•         Open mortgages; open mortgages allow the holder the flexibility to make repayment at any time they want without penalties. The property owner may choose to pay a large amount of money at a given time to reduce the amount. This type of mortgage usually has a short term and attracts a higher interest.
•         Closed mortgage; A closed mortgage is one that has pre-determined interest rates and payment terms. This loan cannot be renegotiated, prepaid, or refinanced before maturity. A closed mortgage generally has lower interest rates and the borrower is allowed to make a down payment of up to 20%.
•         Convertible mortgages; this agreement allows the homeowner to change the type of mortgage during its term. With this mortgage, a homeowner can switch between open and closed mortgages. It has lower rates compared to an open mortgage and allows more flexibility.
•         Hybrid mortgage; a hybrid mortgage combines more than one mortgage in a single registration. The loan could combine a variable rate portion, a fixed rate portion, a line of credit portion, and other combinations. This type of mortgage is given different names by different providers depending on their marketing strategy.
•         Reverse mortgages; in this arrangement, a homeowner aged 55 years and above can convert their home equity into monthly cash payments or a lump sum payment.

Requirements to Apply For a Mortgage in Canada

There are several requirements that lenders expect from clients before determining whether to offer a mortgage or not.

•         Credit score; Lenders conduct a thorough evaluation of the applicant’s financial position. Credit score is one of the key elements considered when determining the borrower’s financial health.  In Canada, lenders generally accept a credit score of between 650 and 680.
•         Availability of funds; the borrower needs to prove that there are sufficient funds to make the monthly payments. When assessing the borrower’s available income, the lender considers the lender’s available expenses including pending debts and loans. Canadian Mortgage Services use the debt-to-income ratio, which measures the amount of the borrower’s income dedicated to paying debts.
•         Outstanding debts; a borrower with a huge debt load is likely to be denied a mortgage as it may be difficult to pay. Before you consider applying for a mortgage, you, therefore, need to ensure you have fewer debts. 
•         Down payment; a borrower needs to secure enough down payment to reduce the overall loan amount. This also helps to reduce the loan-to-value ratio, which is the amount available to the homeowner relative to the value of the property. Different Canadian Mortgage Services demand different amounts of down payments before granting a mortgage.

How to Choose a Mortgage

A customer chooses loan terms largely based on available income, projected short-term and long-term goals, and the level of risk tolerance. A long term may give you less interest whereas a short one allows you more flexibility but with less protection against rising interests in the future. For beginners, it is highly recommended the service of an experienced mortgage broker like Canadian Mortgage Services is used who can help find the best mortgage for your situation.

It is therefore important to negotiate a loan term that commensurate your financial position and personal circumstances. It is important to note that the mortgage term chosen affects the amount of interest you pay. Factors that borrowers consider when selecting a mortgage include;

•         Amortization period
•         The mortgagee term
•         The type of mortgagee
•         Available repayment options

 Breaking Your Mortgage Term

Due to unseen circumstances, a homeowner may need to break his mortgage terms earlier. Reasons that can warrant the need to break terms include a refinance, relocation, or other life occurrences. Breaking terms may attract an additional penalty fee and a borrower should take time to talk to the lender before determining to change terms.

As illustrated in this article, there is a lot to learn when shopping for a mortgage in Canada. The process of securing a mortgage can be engaging, stressful, and sometimes overwhelming. This is why you need to prepare well in advance to ensure that you get the right deal in the end. You need to have a full understanding of what lenders are looking for and compare the various offerings available.