Do you want a mortgage loan that both meets your needs and lets you pay the least amount of interest? Are you looking to avoid hefty penalties for breaking your mortgage before the term is up?

Here’s what you need to know.

If you’re a first-time home buyer, you should do your homework before choosing a mortgage loan, so you can make good decisions and avoid costly errors.

Whether you use a broker or not, it is helpful to know the differences between traditional and umbrella mortgages, the features of mortgage loans, the penalties for breaking your mortgage before the term is up, and some money-saving tips.

Lender requirements

Before lending you money, lenders want to make sure you’ll repay the loan within the time specified in the contract. There are several ways a lender can do this.

The mortgage

As a condition for lending you money to buy a home, the lender will retain a right in the property until the loan is repaid in full. This right is called a mortgage, which is why the loan is called a mortgage loan. If you don’t repay your loan, the mortgage allows your lender to repossess your home in order to try to recover the amount you owe.

Your financial record

In order to obtain a complete picture of your financial situation, your lender may:

  • require proof of your employment and income.
  • check your credit report.
    Ask your lender to show your credit report to you and make sure it doesn’t contain any errors. You could also check your credit report beforehand to avoid unpleasant surprises when you meet with your lender. You can obtain your credit report at no charge from Equifax This link will open in a new window or TransUnion This link will open in a new window. Be careful! Find out how to get a free credit report from whichever agency you choose, as some of the products and services offered by these two agencies are provided at a cost.
  • ask you for the recent statements of account for your investments and debts.
  • ask you about your other significant assets, such as vehicles and real estate, and the associated debts.
  • ask for confirmation that you have sufficient funds to cover the down payment on the home and purchase-related fees (notary, transfer taxes, etc.). The lender will perform financial tests using your financial information to determine whether you qualify for the loan you applied for.

Financial institutions use two key ratios to determine the maximum amount they will 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.
The GDS and TDS ratios must fall within a certain range. For example, if your loan is covered by mortgage loan insurance, the maximum GDS ratio could be between 32% and 39% and the TDS ratio could be between 40% and 44%, depending on the insurer. Financial institutions can further limit the ratios they consider to be acceptable.
These ratios give you an idea of the maximum amount a financial institution might lend you. It’s easy to find calculators on the web that can be used to determine your GDS and TDS ratios and the maximum amount you could borrow.
However, the amounts resulting from these ratios are used as an indicator by your lender; you shouldn’t use them to determine the maximum amount you can borrow. For example, they don’t consider the current and future size of your family. They also don’t consider the fact that your income could decrease in the near future. These ratios attempt to determine if you’re already carrying too much debt or are heading in that direction. Using your entire borrowing capacity represents a significant risk as it would leave you without any leeway to respond to unforeseen events.
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Mortgage pre-approval

A mortgage pre-approval is a confirmation from a financial institution of the maximum mortgage amount offered to you by the institution for the purchase of a home.

Be careful! It isn’t necessarily in your best interests to borrow the maximum amount.

Make sure to leave yourself some financial flexibility so you can repay your loan more quickly, pay less interest, find extra cash more easily or save or spend any extra cash as you see fit. For example, you may need to do urgent home repairs or build a cushion for an eventual interest rate increase or in case you have a child, suffer a disability, lose your job or decide to increase your standard of living or take early retirement. Also, a more affordable home could be perfect for your needs.

Even if you’re pre-approved for a mortgage, the financial institution could refuse to grant you a loan, especially if you want to buy a home that is priced above market value or your financial situation has changed since the pre-approval.

Mortgage insurance

Mortgage insurance is protection your financial institution requires if your down payment is less than 20% of the purchase price of the property and also in some exceptional situations where the down payment is more than 20%.

Mortgage insurance protects the lender. The insurer will cover a portion of the lender’s financial losses if has to repossess your home in order to get its money back. Although the lender is the one protected by this insurance, the borrower (you!) usually pays for it.

Mortgage insurance doesn’t entitle you to any benefits, because your lender is the beneficiary. However, it may help you get a mortgage loan. Also, since your financial institution is protected, it may offer you a rate discount.

Death, disability, critical illness insurance or insurance in the event of loss to your home

A lender may require you to buy certain types of insurance in order to protect itself. It cannot, however, force you to buy the insurance that it offers. You can therefore shop around. Refer to our insurance section for help in choosing the types of insurance that are right for you.

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Plan for the other costs involved in buying a home

Plan for the other costs involved in buying a home, such as moving expenses; the cost of window treatments, a lawnmower, a ladder, and work to be done; the welcome tax; and school taxes. Also, expect the purchase of your home to come with major long-term expenses such as re-roofing the property, replacing the windows, and installing a new water heater.

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Use the checklist to help you choose a mortgage that’s right for you.

You already have a mortgage loan? Your experience can be come in handy when it’s time to renew. Take the opportunity to review your needs by asking yourself the following questions:

  • Is your financial situation sound enough to enable you to repay a portion of the borrowed amount in order to save on interest you would otherwise pay?
  • Would it better, instead, to increase the loan amount so you can repay more costly debts, such as a credit card balance or a personal loan?
  • Are the current mortgage and mortgage features still suited to your needs?
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Do you need a death, disability, critical illness insurance or insurance in the event of loss to your home?

A lender may require you to buy certain types of insurance in order to protect itself. It cannot, however, force you to buy the insurance that it offers. You can therefore shop around. Refer to our insurance section for help in choosing the types of insurance that are right for you.

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Shopping a mortgage requires good thinking. Read the Checklist for choosing your mortgage to help you choose a mortgage that’s right for you.

The best posted rate differs from the best negotiated rate

Be careful! If you wait until the end of your mortgage term to renew, you may get your financial institution’s official posted rate. However, this rate can generally be negotiated. If you have a good credit report and a good history with the lender, you can often get a much lower rate.

Don’t be fooled if you’re told that you’ll get the best posted rate without negotiating. Yes, you’ll get the best posted rate, but that rate may be higher than the best negotiated rate.

See our money-saving tips for more details.


Should you shop for a mortgage loan on your own or with a mortgage broker?

If you want advice and don’t want to shop for a mortgage loan on your own, you can deal with a mortgage broker. Mortgage brokers act as intermediaries between borrowers and lenders. They can analyze your financial situation in order to find the best mortgage solution for your needs. Ask them how many lenders they do business with and whether they plan to present you with different options from several financial institutions.

Remember you don’t have to pay brokers anything for their services. The financial institution you choose will compensate them.

Before dealing with a broker, check his or her record with the Organisme d’autoréglementation du courtage immobilier du Québec This link will open in a new window (OACIQ).

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Did you know?

Some real estate brokers are also mortgage brokers and can offer mortgage loans.

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