A mortgage is a specific loan type that is taken out to purchase a home or other type of property. A mortgage allows the lender such as a financial institution to take possession of the property if the loan cannot be paid back on time—this is also referred to as collateral.
The property is the security for the loan. Normally, a mortgage is a large loan and is paid off over many years.
When you take out a mortgage, you are required to make a monthly payment to the lender. This payment covers the interest in addition to part of the principal (the money that you originally agreed to pay back). Monthly mortgage payments may include mortgage loan insurance and property taxes.
It depends.
As a general rule of thumb, the minimum down payment in Canada is 5% for properties up to $500,000. For properties over this amount, the minimum down payment is 5% for the first $500,000 and 10% for the remaining portion.
However, each client’s situation is unique. For instance, the type of property you buy will affect the required minimum down payment. So will factors like your status in Canada.
Generally, the larger the down payment, the lower the accumulated interest over time. If your down payment is more than 20%, you won’t be obliged to pay for mortgage default insurance.
Working with a mortgage broker is like working with a one-stop shop for mortgages. It sounds cheesy, but it’s true.
A mortgage broker has access to a wide variety of products from multiple lenders. When you work with a mortgage broker, you immediately gain access to all these lenders including major and virtual banks, credit unions and trust companies, all in one shot. Think flexibility.
If your financial situation is more complex, a mortgage broker will go to all lengths to find you the best possible deal. For those who are self-employed or have poor credit, a mortgage broker can sometimes leverage their relationships to secure you an approval.
Also, keep in mind that working with a mortgage broker is completely free as it’s the lender’s responsibility to pay a commission to the broker.
In contrast, working with a bank means only having access to what the bank can offer which means one suite of products and a single interest rate. There is less flexibility and less room to get creative for those who have unique financial situations.
With a fixed rate mortgage, your mortgage rate and monthly payment remain the same for the entire term of your mortgage. Thus, even if the national interest rate fluctuates, your monthly mortgage payment won’t change. Knowing your exact, monthly payment can make budgeting easier.
In contrast, a variable rate will change with the market interest rate, also known as the 'prime rate.' If you select a variable rate mortgage, your payments can fluctuate along with changes in the prime rate, or the interest portion of the payment will vary. This might make it more difficult to plan your payments over the length of the agreement.
Traditional mortgages are registered with specific ‘terms of mortgage’ that establish the principal amount owing, interest rate, mortgage terms, monthly payment amounts, etc. Should you wish to borrow additional funds, you might have to refinance your mortgage.
In contrast, a collateral mortgage is a type of ‘readvanceable mortgage’ which means that you can borrow additional funds as you pay down your mortgage or if the value of your home increases over time. To do this, your lender will utilize your home equity as a collateral asset against your line of credit. As your home equity grows, the lender can then offer you more credit through a Home Equity Line of Credit (HELOC).
Taking out a collateral mortgage allows you to use your home as security or ‘collateral’ for one or more loans. Ultimately, this type of loan provides you room for future borrowing without needing to refinance. For instance, if a home renovation project is on the horizon, a collateral mortgage can allow you access to more money (since the value of your home will increase after you complete your renovations).
It is important to educate yourself on the differences between conventional vs. collateral loans, as there are specific advantages and disadvantages to each. For example, it’s harder to switch lenders with a collateral mortgage, which limits your options come time for renewal.
First-time home buyers in Canada are eligible for benefits such as the First-Time Home Buyers’ Tax Credit (HBTC) and the Home Buyers’ Plan (HBP).
When purchasing your first home, the HBP allows you to withdraw money from your Registered Retirement Savings Plans (RRSPs) on a tax-free basis. Under the HBP, Canadians can withdraw up to $35,000 in a given calendar year.
The HBP is also available if you're trying to get back into the market. For example, if someone has not owned a property for 5 years, they are eligible to tap into their RRSPs for a down payment.
Introduced by the Federal Government, the HBTC offers up to $750 in tax relief for first-time Canadian home buyers. Since the HBTC is non-refundable, it can only be allocated to reduce the amount of tax you may owe.
When budgeting for your property purchase, it will be important to consider the additional cost of mortgage loan insurance, especially if your down payment is less than 20%. Mortgage loan insurance protects the mortgage lender in case you’re not able to make your regular payments; it’s also sometimes referred to as mortgage default insurance. Keep in mind that there are several insurance providers in Canada, the most popular being Canada Guarantee, Sagen and the Canada Mortgage and Housing Corporation (CMHC).
It depends.
If your down payment is less than 20%, you will have to pay for mortgage default insurance—in fact, it’s mandatory across Canada.
As a general rule—you won’t be required to purchase mortgage loan insurance if your down payment is 20% or more. But, there are exceptions. For instance, lenders can request mortgage default insurance when the borrower is self-employed, has a low credit score and/or short credit history.
We like to refer to amortization as the mortgage ‘pay-off’ period or the amount of time it takes to fully pay off your mortgage.
The amortization is actually an estimate based on the specific interest rate for your current term. Typically, amortization periods are 15, 20, 25, or 30 years long. If your down payment is less than 20%, you’re allowed a maximum 25 year amortization.
