Mortgages.ca

blog, Mortgage Education

Mortgages 101: Everything a First-Time Home Buyer Needs to Know

Our job is to explain the language, the process, the players and the pitfalls, so it all goes smoothly and you become a homeowner with a minimum of stress

First-Time-Home-Buyers

By Scott Nazareth

 

Getting a mortgage is no walk in the park for first-time home buyers.

For starters, there’s a lot of new vocabulary to learn, and sometimes the terminology can be confusing.

Second, it’s a decentralized process, with many different players and many moving parts.

Further, some of the steps in securing home financing are time-sensitive. It’s a challenge staying calm when you’re depending on multiple people to do their part on time.

Simplification is possible

I believe the process can be simplified. And as a registered mortgage broker, I consider that to be part of my job, especially for people who haven’t been through the process before.

My approach to working with first-time home buyers is to get to know their needs up front, and then help them understand their choices by providing just the right information at the right time.

First things first

Before our first meeting, I let my clients know exactly what documents they will need to present in order to fill out an application:

  • Proof of income: an employment verification letter and a current paystub are usually enough, but some lenders ask for T4s
  • Identification: Two pieces of identification such as a driver’s licence, a social insurance card, a passport or a credit card
  • Financial statements: If you are self-employed, you’ll need to provide the last two years of business financials

A single credit report

At this point, I also ask for a client’s consent to pull a credit report.

When purchasers work with a mortgage broker, the report is valid regardless of how many lenders or products we explore.

That’s one benefit of working with a broker. When individuals shop around for themselves, each institution they apply to will request a credit report, but many inquiries in a short period of time can negatively affect the borrower’s credit score.

Types of lenders

When meeting with new clients, I start by explaining exactly what lenders I work with.

Here’s how working with a broker differs from working with a mortgage specialist at a bank. We work with a variety of different financial institutions:

  • Banks
  • Credit unions
  • Insurance companies
  • Monoline lenders

 

After that, we talk about the basic terminology of mortgages.

Fixed vs. variable

Fixed mortgages lock an interest rate for a set period of time, so a borrower knows exactly how much their payments will be, no matter what happens to interest rates.

Fixed mortgages have significantly larger prepayment penalties than variable mortgages.

Variable mortgages allow your rate to fluctuate, so there is a risk your rate could increase over a five year period. Variable mortgages typically offer lower rates than fixed mortgages.

Short term vs. long term

The term is the length of the commitment lenders and borrowers make to a certain agreement.

Fixed rate mortgages can have terms between one and 10 years, and variable rate mortgages can have either three or five year terms. At the end of the term, a borrower negotiates new terms, and the new terms will reflect current interest rates.

When rates are expected to drop, borrowers benefit from choosing a shorter term so that when they renew, they’ll be paying a lower rate.

When rates are expected to rise, clients usually choose a longer term to lock in at the current rate.

Open vs. closed

Almost all mortgages are closed. Many people are under the assumption that an open mortgage is an option available to them, but it’s a bit of a myth. In most cases, open mortgages are not available.

 

Determining affordability

By referring to the documents my clients provided up front, and by discussing their risk tolerance and financial goals, we determine how much they can afford to borrow.

Considering options

After the basics have been established, we begin to narrow down the options to find a mortgage that works for each client’s unique lifestyle and financial goals.

I offer my detailed knowledge of each option, helping them understand the most important factors to consider in their choice.

Applying for pre-approval

Once we’ve chosen a lender, we submit an application to a corresponding lender.

Typically, we wait about 24 hours for an approval. When it arrives, we go over the conditions of the approval on the phone, to make sure they’re what we expected.

If it’s what we expected, we set up our clients with the opportunity to sign with an e-signature, so they can sign their documents from home, rather than having to travel to our offices.

Inevitably, there are questions. And that’s okay. First time home buyers usually have a lot of questions, and, as a registered broker, I’m prepared to answer them. It’s just part of the process.

My goal is to make the process of buying a home as smooth as possible for first-time home buyers. Here’s how I do it:

Getting organized

Some people have the perception that getting a mortgage is a difficult process. It is an organizational challenge, but I simplify the process for my clients by providing checklists for all the things that need to get done on the way to making a home purchase.

Accessing the right information at the right time

I try not to overwhelm clients with masses of information, but rather, provide the necessary facts and nothing more, at exactly the right time in the process.

For example, I always let first-time buyers know they can email me MLS listings as they’re looking for a home. I provide sample mortgage payments for each listing, so they have a good idea of how much their monthly payments will be for the different price points.

I take into account how payments can vary according to maintenance fees and property taxes, so that you understand the payments involved with each property you’re looking at.

And of course, because I know fast action is sometimes required, my replies are always timely.

Staying steady

As my clients get closer to making a purchase, my job is to help them stay calm through the emotional moments that inevitably arise.

My experience means I can help clients take rational action even when they’re on the emotional roller coaster of falling in love with a potential home and then facing obstacles along the way to purchasing it.

Solving problems

If there are obstacles, we face them head on, and sometimes even with humour. I believe it’s possible to make the process of buying a first home both enjoyable and efficient.

I love it when clients tell me they thought getting mortgage was going to be more difficult than it turned out to be.

When they don’t have to sweat the details of their mortgage, they can focus more on the fun parts of buying a house, like shopping for furniture or throwing a house party.

That’s what I aim for.

To make it just a little easier for first-time clients to understand the process of borrowing to buy a home, I’ve prepared a FAQ document that breaks it all down:

 FAQs Answered

FAQ

What documents do I need to apply for a mortgage?

You’ll need to provide:

  • Proof of income: an employment verification letter and a current paystub are usually enough, but some lenders ask for T4s
  • Identification: Two pieces of identification such as a driver’s licence, a social insurance card, a passport or a credit card
  • Financial statements: If you are self-employed, you’ll need to provide the last two years of business financials
  • Consent for your mortgage broker to request a credit report

 

What’s a downpayment?

A downpayment is an amount of money a purchaser gives to a home’s seller. It represents a portion of the total purchase price. The rest is paid by the purchaser’s mortgage.

 

How much downpayment will I need?

In Canada, the minimum downpayment required is determined by the price of the home.

For homes priced at less than $500,000, the minimum downpayment is five per cent.

For homes priced between $500,000 and $1 million, the minimum downpayment is five per cent of the first $500,000 and 10 per cent for the rest.

For homes priced at more than $1 million, 20 per cent of the purchase price is required.

 

What’s a pre-approval?

If you plan to buy a home soon, a pre-approval can help smooth the process. A letter from a lender specifies the type and amount of loan you qualify for. This smooths the process because you’ll know the price range you can afford, and you’ll be seen as a serious buyer by sellers and their agents.

 

What are terms?

Terms are the amount of time that the rate, lender and legal terms of your mortgage are in effect. Terms vary from x to y years and should not be confused with the amortization period of a mortgage.


What’s amortization?

An amortization period of a mortgage is the amount of time it will take a borrower to pay back the full amount of a loan. Most mortgages in Canada have an amortization period of between 25 and 30 years and and should not be confused with the terms of a mortgage.

A term is a shorter-term agreement made between a borrower and a lender, usually for between one and 10 years. At the end of the term, the borrower negotiates new terms at current interest rates.

 

What are prepayment penalties?

Prepayment penalties are fees charged by the bank if you break your mortgage or pay your mortgage down early. The amount can vary, depending on how much you owe, how much you want to prepay, how much time is left until the end of your term, and the method your lender uses to calculate prepayment penalties. Be sure to understand the fine print of penalties because the fees can be significant.

 

What are e-signatures?

We allow clients to use electronic signing services. Clients can tap and sign documents without the hassle of printing and scanning.

Coupled with that, we work with Nexera Law, an innovative real estate law firm in Ontario. A Nexera notary will visit a home buyer’s house for the closing process, and Nexera offers services in the evenings and on weekends, making it more convenient for the purchaser.

 

What special programs are first-time buyers eligible for?

First time home buyers are eligible for certain programs that can reduce the total purchase price.

  • Land Transfer Tax Rebates

At closing, your lawyer will inform you of the provincial and municipal land transfer tax rebates you may qualify for. You can use our residential land transfer calculator to estimate how much those rebates will add up to on your purchase.

  • RRSP Home Buyers’ Plan

The Home Buyers’ Plan (HBP) allows buyers to withdraw up to $25,000 from an RRSP to buy or build a home. Couples can withdraw up to $50,000 and the best part is that you are not taxed on the withdrawal as you normally would be. However, you must repay this money into your RRSP within 15 years. To qualify, neither you nor your spouse can have occupied a home as your principal residence in the past four years.

  • First-Time Home Buyer Tax Credit

Since 2009, first-time home buyers may be eligible to receive the First-Time Home Buyer Tax Credit (HBTC), a non-refundable personal tax credit based on $5,000 for first time home buyers. It’s calculated by multiplying the lowest personal income tax rate for the year by $5,000. For example, if it was 15 per cent, the credit will be $750.

  • New to Canada program

Genworth’s New to Canada program is for people who have immigrated within the last five years. They may not have established much credit, so alternative sources are used to determine worthiness, which may include, for example, a letter from a landlord confirming timely rent payments for a period of 12 months, or a 12-month payment history of a utility bill.

 

How will I know whether I can afford the monthly payments on a particular home?

We provide immediate feedback for buyers on the hunt for a home. Feel free to email MLS listings to us. We’ll provide sample mortgage payments for each listing, so you’ll have a good idea of how much your monthly payments will be. Keep in mind that even among properties that have a similar list price, payments can vary depending on maintenance fees and property taxes. We take all of that into account.

 

When I pick a mortgage, how do I know I’m getting the best rate possible?

Of course, getting the lowest rate possible is important. But there are other factors to consider when choosing a mortgage product that’s right for you.

For example, purchasers should consider factors such as the length of the term, whether a rate is fixed or variable, the level of risk they can tolerate, whether they intend to make prepayments, and what kind of institution they want to work with.

We factor in these many aspects of what our clients feel is important, and we get them the most competitive rate to meet their goals.

 

How will I manage the transaction? It’s so confusing!

We’ll provide the information and guidance you need, when you need it. Our job is to help you make sure everything gets done right — and on time.

 

What’s a conditional offer?

An offer can include conditions that allow the purchaser to back out of an agreement if their conditions are not met. Main conditions include: finance conditions, status conditions, and home inspection conditions. The period of time is typically five days. Once the stipulated conditions have been met, the buyer cannot back out of the deal because of that issue.

 

What’s a finance condition?

When making an offer, a finance condition allows you to back out of the purchase transaction if you are unable to arrange a mortgage to your liking.

We always recommend finance conditions when an offer is made.

 

What’s a status condition?

A status condition allows you the ability to back out of a purchase transaction based on you or your lawyer reviewing a status certificate from a condominium corporation.

This certificate outlines the financial accounts — how they’re managing condo fees and maintenance fees, if there are pending lawsuits, defects in the building, or special assessments.

We always recommend status conditions when an offer is made.

 

What’s a deposit?

When you buy a property and the seller accepts the price you’ve made as your bid, a deposit is due immediately.

It doesn’t have to be your whole downpayment. It’s usually between two per cent and five per cent of the purchase price.

That amount is provided in trust to your agent to the listing brokerage to be held in trust until the transaction closes.

 

Got more questions? Let’s talk.

blog, Mortgage Education, Mortgage Refinance

Mortgage Tip: Don’t Sign That Renewal Letter Just Yet!

Mortgages.ca broker James Harrison breaks down common borrower mistakes when it comes to mortgage renewal letters

Did you know: Over 80% of borrowers will sign a mortgage renewal letter that they received in the mail without a second thought? These rates are typically over half a percent higher than the going rate.

A 5-minute conversation with a trusted mortgage professional can potentially save you tens of thousands of dollars! Take your renewal letter to a Mortgages.ca broker and get the assurance you deserve.

blog, Mortgage Education

Everything You Need To Know About Purchase-Plus-Improvements

By rolling the costs of renovation into a purchase-plus-improvements mortgage, you can make a good house GREAT

Photo Credit: Mark McCammon

By Steve Harrison
Mortgages.ca

Looking at buying a home that could use an update? A purchase-plus-improvements mortgage might be exactly what you need.

These amazing customized mortgages allow you to make home improvements as soon as you move into your new house, rolling into your mortgage the costs of value-enhancing changes. That means you could replace the floors, update a bathroom, or replace old electrical such as knob and tube — whatever improvements an almost-perfect property needs to make it even more beautiful right now.

Affordable financing

We recommend purchase-plus-improvements mortgages to our clients because, while there are limits on what you can do, these loans are the most affordable way to finance a renovation — and you get to live in your upgraded home right away.

One of our clients, Brian, bought a place in Oakville and decided to utilize the Purchase Plus Improvements Mortgage.

“The best part of financing through this option was the ease of use and the ability to do a major renovation by adding a small amount to each mortgage payment,” Brian wrote in an email recently.

A purchase-plus-improvements mortgage means that home buyers are free to fall in love with a home that has almost everything going for it. An extremely dated bathroom or a roof that needs replacing doesn’t have to be a dealbreaker.

We decided to buy a home we knew we would need to do a significant amount of work on because of the option to do mortgage plus,” said Brian.

They redid their kitchen with new cabinets, flooring, lighting, plumbing, and electrical, as well as their basement, with new flooring and a four-piece bathroom, plus new bay windows and smart home upgrades. Pretty sweet.

This approach makes perfect sense because of today’s historically low mortgage rates. A mortgage is the cheapest way to borrow. An additional $40,000 on your mortgage will cost you far less than borrowing $40,000 on a line of credit — a common financing option you might consider if you decide to put the renovation off until later.

The 90- to 180-day timeline on these mortgages means you and your contractor must be prepared to finish renovations promptly. But the timeline is partly what makes it so awesome: You improve the value of your home and you get to live in it right away.

The exact timeline will depend on your lender, and a mortgage broker can help you navigate the options.

Brian notes that planning and communicating was important in the process. “It was important to let the contractors know the timelines, so everyone is aware of expectations,” he said.

The maximum amount you can borrow for improvements can vary, but for most home buyers, $40,000 is the base amount. In some cases, a knowledgeable mortgage broker may be able to help you get approval for more.

Here’s how it works

First, you’ll work with a broker to be pre-approved for your maximum amount.

After you find a home and your purchase offer is accepted and the mortgage is approved, you’ll get estimates for improvements you want to make. Your broker can pass the estimates to your lender for approval.

Photo Credit: Pixabay

If your lender agrees that your planned renovations will indeed improve the value of your home, they’ll send your broker an approval for the revised amount of your mortgage — the purchase price, plus the costs of renovations.

On your closing date, the amount approved for your renovation will go to your lawyer, to be held until you’ve completed the proposed renovations. You’ll receive the funds when your renovation is complete.

That means you must pay up-front costs of your renovation from your pocket. Some of our clients have used a credit card or a line of credit to get through the period of renovation.

After an appraisal confirms that your renovations were completed within the agreed upon amount of time, your lawyer can release the funds to you.

It’s important to note that your minimum down payment will be calculated based on the total amount of your home’s assessed value — the purchase price plus the price of the approved renovations.

Types of improvements that are likely to be approved by lenders:

  • Roof
  • Flooring
  • Wiring
  • Windows and doors
  • Energy efficiency
  • Basement
  • Kitchen
  • Bathroom
  • Living room

Purchase-plus-improvements mortgages are the most affordable way to finance home improvements. That’s why we love them, and why you should, too!

 

blog

Everything You Need To Know About Monoline Lenders

These mortgage-only credit companies offer lower rates and better terms than big banks

Monoline lenders via Mortgages.ca

Monoline lenders only offer their services through licensed brokers

By Scott Nazareth
Mortgages.ca

At mortgages.ca, we work with a variety of types of lenders, including banks, credit unions, trust companies and monoline lenders.

Never heard of monoline lenders? That’s no surprise. Also sometimes known as non-bank lenders, they work exclusively through mortgage brokers and don’t typically market themselves to consumers, so their names may seem unfamiliar at first.

What is a monoline lender, exactly?

These lenders only deal in mortgages. They don’t offer other services or types of credit. Nor do they maintain physical branches, instead offering service online or by phone.

What’s so great about them?

Because they have low overheads and streamlined business models, monoline lenders can usually offer lower rates than the big banks. That’s why mortgage brokers like them, and you should, too.

One other major factor that sets monoline lenders apart from big banks is their penalty structure on fixed rate mortgages. Monolines use a different formula than banks to calculate exit penalties.

So if you end up breaking your mortgage, the penalty on a monoline mortgage can be thousands of dollars less than that of a mortgage with a bank.

You may not plan to break your mortgage, but unexpected life events can get in the way of plans. According to this Globe and Mail article, about 70 per cent of borrowers must make changes to their five-year fixed rate mortgages before maturity because rates have dropped, or they’re moving to a bigger house, or their financial situation has changed.

Have I heard of these companies?

Probably not. That’s because they market themselves to brokers, rather than consumers.

Perhaps you’ve heard of First National, Canada’s largest monoline, and MCAP, the second largest. But you’ve probably not heard of RMG, CMLS, or some of the smaller lenders we work with.

Still, that doesn’t mean they aren’t reputable. Many have been around for decades, and a bit of internet research will reveal their legitimacy.

Secure monoline lenders via Mortgages.ca

A bit of internet research will reveal that monoline lenders are strictly regulated, just like the big banks.

Are they secure?

Yes. Just like the big banks, monoline lenders are strictly regulated. In fact, they’re required to follow the same lending guidelines as the majors.

They’re not in the business of giving loans to high-risk borrowers. In fact, all monoline lenders secure their mortgages with insurance from one of Canada’s three mortgage insurers.

That low-risk business model means there’s little risk to the borrower if a monoline lender were to cease operation. As when Scotiabank took over ING Direct in 2012, another lender could simply take over the purchased company’s insured mortgages. There would be no impact on borrowers.

Is it right for me?

Some borrowers prefer to work with big banks and trust companies because they’re familiar with a company’s name and reputation. That’s understandable.

But if you’re interested in finding the best mortgage for your needs, you’ll need to open your mind to borrowing from a lesser-known lender. This may require a bit of research, as well as independent advice from a mortgage broker, who can help you understand how each product’s terms may affect you.

You’ll need to read the fine print on penalty calculations, portability, refinance limitations and more. The strings attached to some monoline mortgages can be onerous, but that’s true with loans from banks, credit unions and trust companies as well.

Want to learn more?

The mortgage landscape can be confusing. As independent mortgage brokers, it’s our job to educate you about the many options offered by the many lenders in Canada. We work with home buyers and major lenders to find our clients perfectly matched mortgage products.

Ready to get started? Go to our online application form.