Mortgages, Tell Me More?

For a vast majority of people it’s impossible to buy a home without a mortgage, mortgages make home ownership affordable 

The process to obtain a mortgage can seem complicated and overwhelming. Well lucky for you, I’m here to break it down: a mortgage is a loan to buy a home; interest is charged on the amount you borrow also known as the principal balance. Each scheduled mortgage payment has a portion applied towards the principal balance and interest.

Listed below are items to consider if you’re stepping into the housing market:

  1. Down Payment – In Canada, you’re expected to pay 20% of the purchase price up front. For example, if you’re purchasing a home for $500,000, you’d need to put $100,000 down. However, it is possible to put as little as 5% down depending on where you’re purchasing and other factors. Using the previous example of $500,000, you would only place $25,000 down; with the 5% option, you’re required to take default insurance, which protects the lender (bank) and is an additional cost to you (the mortgager). This option is attractive for first time home buyer’s who are looking to get into the housing market. It’s best practice to consult your financial advisor or lender on options. Ask your financial advisor to build a budget so you can begin saving for a down payment. Need a financial advisor? Connect with me.
  2. Pre-approval – This will give you an idea of how much you qualify for based on your income to expense ratios and additional factors. A lender will examine your financial situation and figure out the amount of mortgage you can afford. Be prepared to provide any of the following: proof of income (pay-stubs, T4’s, business financial statements for those who are self employed), proof of assets (bank account statements), information regarding your expenses and existing debts, amount of down payment + it’s source, and proof of how closing costs will be covered (1.5-4% of purchase price).
  3. Customization – Firstly, amortization is the length of time which your mortgage is paid e.g., 25 years or 30 years. The longer the amortization, the smaller the payments; however, you’ll end up paying more in interest. Secondly, you pay your mortgage balance off in terms. The term can be as short as 1 year up to 10 years depending on the financial institution you’re dealing with. Most people pick a 5 year term, at the end of it you renegotiate the interest rate. Thirdly, with regards to a payment schedule, you decide whether you’ll make monthly, semi-monthly, or bi-weekly payments. It’s important to ask your lender if you can accelerate payments, this allows you to pay your mortgage balance off faster. Lastly, there are two types of interest rates: a variable rate or fixed rate. A variable rate is based on an underlying benchmark rate, such as prime (The Bank of Canada determines prime), this means that your interest rate can fluctuate anytime during the term which is risky. Conversely, a fixed rate doesn’t change at all throughout the term offering peace of mind. 

Mortgages are my speciality, if you’re confused and don’t know where to start; connect with me so that I can clear up any discrepancies.

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