Allow me to shed some light on mortgages.
A general rule of thumb is that a mortgage is the cheapest form of debt. Some clients want to pay off their mortgage as soon as possible and become mortgage free while others want to acquire more properties to receive rental income and have their tenants pay down their mortgage debt.
A pre-approved mortgage means a lender has made a commitment to loan you money based on your overall financial status at no obligation BUT subject to conditions. This is NOT an approval.
To obtain a pre-approval, you will need to fill out an application and provide documents that confirm your employment, income, credit etc.
Try my mortgage calculator to estimate your payments. It’s a planning tool, not a pre-approval.
Mortgage pre-approvals will protect you against interest rate increases for usually 90 to 120 days while shopping. Your mortgage broker will explain the various mortgage options:
fixed vs. variable rate
varying interest terms
payment options
amortization
down payment required
conventional vs high ratio etc..
The lender will approve the mortgage only upon verifying the supporting documents and the appraised value vs. the purchase price before advancing the loan.
To qualify, buyers must pass the mortgage “stress test”: you need to show you could afford your payments at the higher of 5.25% or your contract rate plus 2%.
Many millennials overwhelmed with the idea of a down payment should know there are several creative ways to leverage money to make home ownership tangible.
Utilize home equity lines of credit (HELOC)
Rent out rooms or the basement for money to go toward the mortgage
Co-sign with a parent or trusted family member
The down payment required is usually between 5% and 20% of the purchase price of the property:
In Canada, you must put down a minimum of 5% as a down payment for homes less than $500,000
For homes priced between $500,000 and $1.5 million, you’ll need 5% on the first $500,000 and 10% on the portion above $500,000. Since December 15, 2024, this applies to all buyers, not only first time buyers.
For houses over $1.5 million, the minimum down payment is 20%
If your down payment is coming from the sale of your home, you will have to provide a firm agreement of purchase and sale and the current mortgage statement.
If all, or part of your down payment is coming from a gift, a letter must be provided to the lender.
Mortgage insurance protects against default and is required if you are putting less than 20% down, but this can either be paid up front or added to the amount you borrow.
Mortgage default insurance, also sometimes known as CMHC Insurance (although CMHC is just one of three mortgage default insurance providers in Canada), may seem like a strange concept, but it’s relatively straightforward.
If you have a down payment of less than 20% of the home’s value, you must purchase mortgage default insurance. But this doesn’t act as insurance for you. Rather, it protects your lender in case you don’t make your mortgage payments. It’s designed to make financial institutions comfortable with lending to individuals who don’t have a large down payment.
Mortgage insurance is calculated as a percentage of the value of the mortgage amount, and , as of December 15, 2024, also depends on the length of your amortization.
It’s recommended to have 1.5% of the purchase price available to cover closing costs on top of Land Transfer Tax. Try this land transfer tax calculator to estimate yours.
With the federal government’s Home Buyers’ Plan, you can now use up to $60,000 in RRSP savings ($120,000 for a couple) to help pay for your down payment on your first home.
The funds must have been in the account for 90 days. You then have 15 years to repay your RRSP.
Want help building your budget? I can connect you with mortgage brokers I trust.
This info is not to be construed as expert legal advice, tax advice, advice on zoning changes, engineering or environmental advice. Please seek independent professional advice on any of the above matters and concerns.
