What is a Mortgage?
A mortgage is a loan that is used to purchase real estate.
The property being financed serves as collateral for the loan. The mortgage provider will register a lien (a.k.a. charge) on the title of the property. This way if you decide not to make your mortgage payments, the lender can repossess the property and sell it to recover their money.
The property being financed serves as collateral for the loan. The mortgage provider will register a lien (a.k.a. charge) on the title of the property. This way if you decide not to make your mortgage payments, the lender can repossess the property and sell it to recover their money.
Mortgage Components
Below I have included a list of the different components that make up a mortgage contract. It is important that these topics are explained and discussed with a mortgage professional prior to completing a real estate transaction. If you would like to discuss any of the items listed below in greater detail, please feel free to reach out using any of the contact methods listed on the Contact page.
Down Payment
When you purchase a property in Canada, you will have to have enough money saved up in order to meet the minimum downpayment requirements. The minimum downpayment amount that is required for a purchase will fluctuate depending on the type of property and what you plan to use it for.
For example, if you are purchasing a single family home to use as an owner occupied unit (live in it), you may be able to purchase the home with a down payment of as little as 5% of the purchase price, provided you qualify. If you are purchasing a home priced higher than $500,000, then the minimum down payment is 5% on the first $500,000 and then 10% of any amount above $500,000. The same downpayment may also apply when you purchase a second home or vacation property.
However, if you are purchasing an investment property that will be rented out to tenants, the minimum downpayment increases to 20% of the purchase price. This is due to the added risk that the lender takes on when financing these types of properties.
There are a few different variations to the rules listed above. If you plan on living in the property and your credit is bruised, the property you'd like to buy is odd or if the way you earn income is unordinary, a larger downpayment may be required.
Here in Canada, we have many rules/regulations surrounding downpayment funds used to purchase real estate. First off, your downpayment can't just come from anywhere.
The three most common and acceptable sources for downpayment funds are:
In addition to having the funds to cover your downpayment, you will also need to prove to the lender where the funds are coming from. This is due to our anti-money laundering laws here in Canada.
For funds coming from your personal savings, the lender will require a 90 day transaction history for all bank/investment accounts that you'll be withdrawing funds from. If there are any large deposits going into the account(s) within the 90 day period, the lender will require a paper trail showing where the deposited money came from. If the funds are coming in the form of a gift from and immediate family member, a gift letter will need to be signed by both parties, and provided to the lender.
For example, if you are purchasing a single family home to use as an owner occupied unit (live in it), you may be able to purchase the home with a down payment of as little as 5% of the purchase price, provided you qualify. If you are purchasing a home priced higher than $500,000, then the minimum down payment is 5% on the first $500,000 and then 10% of any amount above $500,000. The same downpayment may also apply when you purchase a second home or vacation property.
However, if you are purchasing an investment property that will be rented out to tenants, the minimum downpayment increases to 20% of the purchase price. This is due to the added risk that the lender takes on when financing these types of properties.
There are a few different variations to the rules listed above. If you plan on living in the property and your credit is bruised, the property you'd like to buy is odd or if the way you earn income is unordinary, a larger downpayment may be required.
Here in Canada, we have many rules/regulations surrounding downpayment funds used to purchase real estate. First off, your downpayment can't just come from anywhere.
The three most common and acceptable sources for downpayment funds are:
- Savings/proceeds from the sale of another home (equity)
- RRSP's
- Gift from an immediate family member
In addition to having the funds to cover your downpayment, you will also need to prove to the lender where the funds are coming from. This is due to our anti-money laundering laws here in Canada.
For funds coming from your personal savings, the lender will require a 90 day transaction history for all bank/investment accounts that you'll be withdrawing funds from. If there are any large deposits going into the account(s) within the 90 day period, the lender will require a paper trail showing where the deposited money came from. If the funds are coming in the form of a gift from and immediate family member, a gift letter will need to be signed by both parties, and provided to the lender.
Closing Costs
Don't forget about closing costs!
In Manitoba, closing costs can range anywhere between 2-2.5% of the property's purchase price. Closing costs include items such as legal fees, land transfer tax, property tax adjustments, registration fees, title insurance, interest adjustments and any other adjustments that are required.
Your real estate lawyer will inform you of the remaining balance of your downpayment (minus any deposit amount) and the balance due to cover the closing costs prior to your possession date. They will arrange a meeting to finalize your transaction 5-10 days prior to your possession date at which time both balances will be due.
In Manitoba, closing costs can range anywhere between 2-2.5% of the property's purchase price. Closing costs include items such as legal fees, land transfer tax, property tax adjustments, registration fees, title insurance, interest adjustments and any other adjustments that are required.
Your real estate lawyer will inform you of the remaining balance of your downpayment (minus any deposit amount) and the balance due to cover the closing costs prior to your possession date. They will arrange a meeting to finalize your transaction 5-10 days prior to your possession date at which time both balances will be due.
Mortgage Default Insurance
Mortgage Default Insurance is an insurance policy that must be purchased if you are financing a property with less than a 20% down payment.
This insurance is paid for by the home buyer but it actually covers the mortgage lender in the event that the home buyer defaults on their mortgage. The cost of this insurance is a calculated percentage of the amount to be mortgaged (purchase price less down payment). The percentage is determined by the amount of down payment the buyer has. The more money put down, the less the insurance will cost overall.
You are not required to cover the cost of this insurance up front when you purchase a property. Instead, the insurance premium is added to the principle balance of your mortgage and will be factored into your regularly scheduled mortgage payments.
This insurance is paid for by the home buyer but it actually covers the mortgage lender in the event that the home buyer defaults on their mortgage. The cost of this insurance is a calculated percentage of the amount to be mortgaged (purchase price less down payment). The percentage is determined by the amount of down payment the buyer has. The more money put down, the less the insurance will cost overall.
You are not required to cover the cost of this insurance up front when you purchase a property. Instead, the insurance premium is added to the principle balance of your mortgage and will be factored into your regularly scheduled mortgage payments.
Amortization Period
The amortization period is the total length of time it takes to pay off a mortgage in full. The amortization period attached to your mortgage will also determine how high or lower your scheduled payments will be. The shorter the amortization, the higher the payment will be and vice versa.
If your down payment is less than 20% of the price of your home, the longest amortization you're allowed is 25 years. If your downpayment is equal to or exceeds 20%, the amortization period can be stretched out to 30 years.
If your down payment is less than 20% of the price of your home, the longest amortization you're allowed is 25 years. If your downpayment is equal to or exceeds 20%, the amortization period can be stretched out to 30 years.
Mortgage Term
As mentioned above, the amortization period refers to the total amount of time it takes to pay off a mortgage balance in full. However, the repayment process is actually broken down into smaller periods of time referred to as mortgage "terms".
A mortgage term is a predetermined amount of time in which a home buyer commits to the lender that funds their mortgage. These terms come in a variety of different options ranging from 6 months up to 10 years.
At the end of each mortgage term, borrowers have few different options. They can choose renew the mortgage with the same lender for another term, they can move the mortgage to a different lender or pay off the mortgage completely.
The borrower can also choose to end the term early by breaking the mortgage contract. However, it's important to point out that depending on what type of mortgage they have, the borrower may be subject to a financial penalty for doing so.
A mortgage term is a predetermined amount of time in which a home buyer commits to the lender that funds their mortgage. These terms come in a variety of different options ranging from 6 months up to 10 years.
At the end of each mortgage term, borrowers have few different options. They can choose renew the mortgage with the same lender for another term, they can move the mortgage to a different lender or pay off the mortgage completely.
The borrower can also choose to end the term early by breaking the mortgage contract. However, it's important to point out that depending on what type of mortgage they have, the borrower may be subject to a financial penalty for doing so.
Payment Frequencies
When signing a mortgage contract with a lender, you will be given the option to select how you would like to repay your mortgage balance. You get to choose from a variety of different options such as weekly payments, bi-weekly payments, monthly payments or accelerated payments.
Accelerated payments would operate on the same weekly or bi-weekly schedule as none accelerated payments and can drastically reduce the overall cost of your mortgage.
Accelerated payments would operate on the same weekly or bi-weekly schedule as none accelerated payments and can drastically reduce the overall cost of your mortgage.
Pre-Payment Privileges
Most mortgage contracts offer you the ability to make additional payments over and above your standard mortgage payments. These payments are referred to as pre-payments. These additional payments will be applied directly to the principle balance of your mortgage.
Making frequent additional payments on your mortgage will not only pay down your mortgage much faster, it can also save you thousands in interest charges.
Each lender will have different prepayments privileges and different rules outlining how you are aloud to make said payments. Most lenders offer a 15% pre-payment privilege which allows you to pay up to 15% of your original mortgage balance per year in additional payments. Therefore, if you started off with a mortgage balance of $300,000, you would be able to pay up to $45,000 in additional payments each year of your term.
Making frequent additional payments on your mortgage will not only pay down your mortgage much faster, it can also save you thousands in interest charges.
Each lender will have different prepayments privileges and different rules outlining how you are aloud to make said payments. Most lenders offer a 15% pre-payment privilege which allows you to pay up to 15% of your original mortgage balance per year in additional payments. Therefore, if you started off with a mortgage balance of $300,000, you would be able to pay up to $45,000 in additional payments each year of your term.
Pre-Payment Penalties
As mentioned above, if you are in a closed mortgage and break the contract prior to the maturity date, you will be charged a pre-payment penalty.
The amount of that penalty depends on several factors such as; the Lender you have the mortgage with, the type of mortgage product, the remaining time left on the term, the interest rates at the time of breaking the mortgage compared to the interest rate you're paying, and the remaining mortgage balance.
It is important to discuss your plans for the property with your mortgage specialist prior to selecting a mortgage product. This will allow you to select a product that fits your needs and reduces the risk of additional penalties and/or fees.
The amount of that penalty depends on several factors such as; the Lender you have the mortgage with, the type of mortgage product, the remaining time left on the term, the interest rates at the time of breaking the mortgage compared to the interest rate you're paying, and the remaining mortgage balance.
It is important to discuss your plans for the property with your mortgage specialist prior to selecting a mortgage product. This will allow you to select a product that fits your needs and reduces the risk of additional penalties and/or fees.
Types of Mortgages
In Canada, there are generally two types of mortgage loans; open and closed.
A closed mortgage is the most common type of mortgage loan in Canada as the interest rates attached to these products are often much lower than the rates attached to open mortgage products. However, closed mortgages cannot be paid off in full prior to maturity (the end of your current term) without paying a mortgage penalty to do so.
Open mortgages offer much more flexibility as you are able to pay off the remaining balance at anytime without being charged a penalty for doing so. But, you will receive a higher interest rate for these types of products.
A closed mortgage is the most common type of mortgage loan in Canada as the interest rates attached to these products are often much lower than the rates attached to open mortgage products. However, closed mortgages cannot be paid off in full prior to maturity (the end of your current term) without paying a mortgage penalty to do so.
Open mortgages offer much more flexibility as you are able to pay off the remaining balance at anytime without being charged a penalty for doing so. But, you will receive a higher interest rate for these types of products.
Types of Interest Rates
When you get a mortgage from a lender, you have a choice between a fixed rated mortgage or an adjustable/variable rate mortgage.
The right type of mortgage product will vary depending on your situation, financial goals and plan for the property. When the time comes we will discuss the different options, and together, we will choose the right product to fit your needs.
The right type of mortgage product will vary depending on your situation, financial goals and plan for the property. When the time comes we will discuss the different options, and together, we will choose the right product to fit your needs.
Click the button above to contact me today.
Castle Mortgage Group
100-1345 Waverley Street
Winnipeg, MB, Canada
R3T 5Y7
100-1345 Waverley Street
Winnipeg, MB, Canada
R3T 5Y7