Mortgage Information for Home Buyers

 

There are several different types of mortgages:

Pre-approved Mortgages: Pre-approval means that you as a buyer, have qualified in advance for a mortgage of X dollars, contingent upon the lender approving the property. Many financial institutions offer pre-approved mortgages, with your interest rate guaranteed not to rise for a certain period.

Conventional Mortgages: Most banks and trust companies offer standard loans using the property as security and require you to make a monthly blended payment including principal and interest. Conventional mortgages require at least 25 per cent of the purchase price as a down payment.

High-ratio Mortgages: If your down payment is less than 25 per cent, you may still qualify for a mortgage, but you will need mortgage insurance. Canada Mortgage and Housing Corporation (CMHC), a federal crown corporation, and GE Capital Mortgage Insurance Company, a private company, provide insurance for high-ratio mortgages.

Vendor Take-Back Mortgages: The seller underwrites part of the purchase, as a loan to be repaid by the buyer. These are often used as second mortgages, to bridge any gaps or to make the property more attractive to the buyer. In some provinces, the seller may also transfer the mortgage to the buyer.

Open and Closed Mortgages: Open mortgages allow you to make extra payments on the principal, reducing your borrowing costs. Because of this flexibility, interest rates for open mortgages are a little higher. Closed mortgages have no flexibility; you must wait until the term is up to pay your mortgage. However, interest rates for these mortgages are generally lower. In the middle, are the partially open mortgages that have some of the characteristics of both open and closed mortgages.

Just as there is a range of mortgage types, there is also range of repayment schedules. As well as the traditional monthly payment plan, there are now semi monthly, biweekly and even weekly payment schedules. Accelerated repayment options speed up the process even more, paying down the mortgage faster and spending less on interest charges. You may also opt for a shorter amortization period, or mortgage “life”. It raises your monthly payments in the short-term, but saves you in the long-term, on the interest you pay.

Those Extra Expenses: You should plan on a few extra expenses. In some provinces, you may have to pay a land transfer tax (a sales tax on property).

You may also have to pay:

  • a mortgage broker’s fee (as much as one per cent on the principal);
  • an appraisal fee
  • surveying costs (if the seller couldn’t come up with a current survey); and,
  • a high-ratio mortgage insurance premium.

You also face a possible interest adjustment. Mortgages are normally calculated from the first of each month: if your closing date is the same as the beginning of your mortgage, there will be no adjustment. However, if your closing date is July and you move in on June 15, those last 15 days are the interest adjustment period. Your lender will expect you to cover the cost of the interest during that time.

You’ll also have to reimburse the seller for the unused portion of any prepaid property taxes or utility bills. As well, you must also pay any legal fees, and, if applicable, any REALTOR® fees. Be prepared to furnish proof to your lender that you have insured your new house… that will cost, as well.