When considering purchasing your own home, it is essential to learn how a mortgage works in Canada, as it can be quite complicated for some.
Few people have the cash flow to buy a house with cash. This is why a mortgage is essential for the majority of people. A mortgage loan is essentially a loan more specifically intended for the acquisition of real estate.
You will likely borrow this money from a traditional bank (although other options are available). Unlike most regular loans, a mortgage is normally repaid over a much longer time (typically 10 to 25 years in Canada).
It is because of this duration and the high value of the loan that it is important to take into account several elements before applying for a mortgage loan in Canada.
Down payment requirements
The first thing to consider when getting a mortgage in Canada is the down payment and how much you need to save to get the type of property you are looking for.
The down payment on a mortgage must be paid in advance, so there is no point in looking for properties until that down payment has been set aside. This amount typically corresponds to a percentage of the total purchase price of the property.
A good rule of thumb is to aim for 20% of the purchase price of the property. It’s important to note that the down payment is based on the purchase price, not the appraisal. Therefore, if a property is slightly out of your reach, but you can get the seller to lower the price, the mortgage is on the final agreed price.
There are mortgages available with lower down payments. However, these are highly dependent on personal circumstances, as well as the current economic situation.
Getting pre-approved for a mortgage
Pre-approval for a mortgage allows you to search for properties knowing exactly how much you can spend. This means you can look at properties that you know are well within your budget, and the lender will be willing to give you a mortgage for the purchase.
When you’re looking to get pre-approved for a mortgage, the lender will likely ask you for several pieces of information and identification:
- Proof of identity (driving license, etc.)
- Address proof
- Employer contact details
- Employment history
- Proof of income
- List of debts (car loans, credit cards, etc.)
It’s important to stay on top of your debts because they can have a surprisingly big impact on the affordability of your mortgage in the eyes of a lender. Additionally, your credit history is important because it will give the lender insight into your ability to become a potential customer. Have you defaulted on loans in the past? Do you usually pay off your credit card quickly? Etc.
Choose your type of mortgage loan
As previously stated, there are many types of mortgages in Canada. Generally, the best way to approach the situation for most people is whether you want an open or closed loan. Do you plan to make extra payments and pay off the mortgage early? In this case, you’ll want an open mortgage, which will give you the extra flexibility you’re looking for.
However, if you want to keep your monthly payments low and benefit from a lower interest rate, but you are not afraid of repaying the loan over a long period, the closed loan is the one for you. This is usually a good solution for people who are purchasing their “forever home”.
The length of the mortgage doesn’t matter because they intend to live in this property forever. Just make sure this is the case before you sign your mortgage, as a closed loan usually carries significant penalty fees if you try to make prepayments and break the mortgage contract.
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