Mortgages It pays to do your homework!
Whether you’re shopping for or renewing a mortgage, it’s important to choose a product that meets your needs while keeping the amount of interest paid to a minimum.
Here are the main things you need to know in order to make an informed mortgage decision.
Take some time to become informed before you choose a mortgage loan. Doing your homework beforehand can spare you costly mistakes and help you make beneficial decisions down the road.
Whether you use a broker or deal directly with a lender, it’s essential to clearly understand the differences between traditional and umbrella mortgages. You also need to understand the features of mortgage loans and the penalties you may face if you pay the loan off early (pre-payment).
Before putting in an offer on a home, find out how much money you will be able borrow to finance the purchase. You can do this by either pre-qualifying or getting pre-approved for a mortgage.
Lender requirements
Before the lender grants you a mortgage loan, it will want to make sure that you will be able to pay the loan back within the time period indicated in the contract. Here are things lenders may do to assess your repayment ability.
The mortgage
When you borrow money to buy a home, the lender retains a legal claim on the property until the loan is paid off. The legal claim, called the “mortgage” (a term often also used when referring to the mortgage loan), gives the lender the right to repossess your property for the purpose of recovering the amount owed if you fail to repay the loan.
Your financial record
To develop a comprehensive picture of your financial situation, your lender may:
- Require proof of employment and income.
- Examine your credit report. Have the lender show the credit report to you so you can check it for any errors. Better yet, check it in advance to avoid unpleasant surprises later. You can get your credit report for free from Equifax
This link will open in a new window and TransUnion This link will open in a new window. Be aware that some Equifax and TransUnion products and services are not free, so inform yourself first. - Ask you for recent account statements related to your investments and debts.
- Ask you about other property you own, like vehicles or real estate, and any debts associated with it.
- Require confirmation that you have sufficient funds to cover the down payment and the costs associated with the purchase, such as notary fees or transfer taxes. The lender will use your financial information to analyze your situation and determine whether you qualify for the requested loan.
Financial institutions primarily use two ratios to determine the maximum amount they will agree to lend you: the GDS ratioThe GDS ratio is the percentage of your annual income that is required to cover annual housing expenses. Annual housing expenses include mortgage payments, school and municipal taxes, heating costs and 50% of your condo fees (if applicable). and the TDSThe TDS ratio is the percentage of your annual income that is required to cover annual housing expenses and other financial obligations. “Other financial obligations” include credit card payments, car loan or rental car charge payments, and line of credit payments..
Lenders are required to apply a “stress test” to make sure you will be able to continue to meet your monthly mortgage payments if interest rates go up. Since June 1, 2021, they have done these tests using the highest of the following two interest rates:
- The interest rate you negotiated with your lender plus 2%
- 5.25% (this rate will be reviewed periodically to ensure it is aligned with market conditions)
You can use our calculator to estimate what your mortgage payments would be if these rates were in effect.
Mortgage insurance
Your financial institution will require mortgage insurance if your down payment is less than 20% of the property’s purchase price.
In some situations, mortgage insurance may be required even if the down payment exceeds 20% of the purchase price. If the lender needs to seize your home in order to pay itself, this insurance will help cover a portion of its financial losses. Although the insurance coverage benefits the lender, the cost of the insurance is usually borne by you.
While the fact the lender is the beneficiary means you can’t receive any benefits under the mortgage insurance, having mortgage insurance can make it easier to obtain a mortgage loan. Also, because your financial institution is protected, it may feel more inclined to offer you a discount on the interest rate.
Insurance in the event of death, disability, critical illness or loss home
Lender’s right
A lender may require that you get insurance coverage to guarantee repayment of the loan in circumstances including job loss, disability or death.
Find out from your lender about the types of insurance it requires (life insurance, disability insurance, job loss insurance, etc.).
Borrower’s right
While a lender may offer you insurance, buying the insurance it offers is optional. You can also opt to:
- Obtain the insurance from another insurer
- Provide proof of an insurance you already hold
For help in choosing the right insurance for your needs, see our section on insurance.
Review the initial costs involved in buying a home
When buying a home, it’s important to budget for other additional costs such as moving expenses, window treatments, a lawnmower, a ladder, tools and potential maintenance work. Don’t forget about the “welcome tax” and municipal and school taxes. Also, remember that purchasing a home comes with some significant long-term costs, such as replacing the roof, windows or water heater.
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You’ve already obtained a mortgage? The invaluable lessons you learned from that experience can help you when it’s time to renew it. Use that time to reassess your needs by asking yourself:
- Based on my financial situation, can I afford to pay back a portion of the borrowed money to reduce the amount of interest I have to pay?
- Would I benefit from increasing the loan amount in order to repay more costly debts, such as a credit card balance or a personal loan?
- Are the features of my current mortgage loan still in line with my expectations and suited to my situation?
The best posted rate may be different from the best negotiated rate
Be aware that If you wait until the end of your mortgage term to renew, you could end up with your financial institution’s official rate. However, this rate is usually negotiable. If you have a good credit report and a good history with the lender, the chances of getting a much lower rate are also good.
Don’t listen to anyone who tells you you’ll get the best posted rate without negotiating. The best posted rate can actually be higher than the best negotiated rate.
To find out more, see our 8 tips for saving money on a mortgage.
Do you need insurance in the event of death, disability, critical illness or loss?
While the lender may need you to have certain types of insurance in order to protect itself against loss, you’re not under any obligation to take the insurance offered by the lender. You can therefore compare the different options available for meeting the lender’s insurance requirements. See our section on insurance for help in choosing the right insurance, whatever your needs.
Is it better to shop alone or with a mortgage broker?
Using a mortgage broker gives you the benefit of professional advice and avoids the hassle of shopping for a mortgage loan on your own. The broker acts as an intermediary between you and the lenders. They can analyze your financial situation and propose, when possible, a mortgage loan in line with your needs. Feel free to ask the mortgage broker how many lenders they do business with and if they plan to present you with different options from more than one financial institution.
Before doing business with a broker, check the Register of firms and individuals authorized to practice or contact our Information Centre to make sure the firm and the person with whom you are dealing are authorized to act as mortgage brokers.
Did you know?
Some real estate brokers also hold the title of mortgage broker and are therefore allowed to help you find a mortgage loan.
End of the insight