How to get a mortgage in Canada: The definitive guide
25 April, 2018 / by Glenn Carter
There are few milestones in life more exciting and memorable than purchasing a home. It can be a great investment, and for many, it’s a culmination of a great deal of hard work, sound budgeting, and disciplined saving. As you approach the homebuying process, however, it’s important to understand how to get a mortgage in Canada — and everything you need to do to ensure you are making the right decisions when searching for your next real estate investment.
This comprehensive guide offers Canadians all they need to know about how to get a mortgage, helping you move into the home of your dreams.
Are you ready to buy?
Before you even look into how to get a mortgage, take some time to reflect on whether you are ready to buy a home at this time. There are a few items to pay particular attention to when making this decision, including:
Your financial health
Consider the amount of debt you have, including credit card debt and student or auto loans. If you have a lot of credit card debt, for example, you may wish to pay some or all of it down before you look into how to get a mortgage and buy a home. Or, you may be interested in consolidating those loans before acquiring a mortgage.
While it’s certainly possible to purchase a home with a small down payment, it’s often best if you can put down more than the minimum. If you can do 20%, you won’t need to pay mortgage insurance, which can run $100 to $150 per month in many cases. That really adds up in the long run. Here’s a breakdown of the insurance fees if you plan on paying less than 20% as your down payment:
Your personal goals
Will you be content living in a specific city or town for at least the next several years? Make sure homeownership fits with your short-term and long-term personal goals.
Your job security
Obviously, it will be important to have reliable income so that you can continue to make your mortgage payments without stretching your budget. While no one can flawlessly predict the future, you should be confident that you will continue to make the same or more money moving forward.
In addition, you should get a sense of the type of home you want and the neighborhood or town in which you would like to live. Having all this information prepared ahead of time will mean you’ll be ready when it comes time to make an offer on a house and get a mortgage.
Once you’ve decided to move forward, you should speak with a real estate broker about starting the home search process and how to get a mortgage. An experienced broker will ask you a series of questions to determine the type of home you should look for, examine your financial limits, consider how much you can afford and determine how much your future mortgage payments would be if you decide to purchase a specific property.
Understanding the types of mortgages
One of the first steps to take when determining how to get a mortgage is to take some time to understand the different types of mortgages available. Whether you are a first-time homebuyer or have some experience purchasing real estate in the past, this research can be of great assistance as you move forward.
Below is more detail on the most common types of mortgages in Canada:
Mortgage interest rates explained
Another important step when exploring how to get a mortgage in Canada is to gain an understanding of Canadian interest rates. Regardless of the type of mortgage you secure, your interest rate will likely play a big role when it comes to paying off the loan.
Each month, you will pay back the a portion of the loan, including part of the principal (or balance) and the interest that has accrued in the past month. The lender uses a formula to determine how much of each payment goes toward the principal versus what goes toward interest. The length of your mortgage also affects your monthly payment amount.
In most cases, having a longer-term mortgage will lead to higher interest rates. This, in turn, increases the total amount you’ll end up paying for your home, as you will pay more in total interest. Using a mortgage calculator can help you determine how your amortization period will impact the total cost of your home.
It is also important to understand that, in the first several months or years, you are likely to pay off your principal quite slowly, as a good chunk of each payment will go toward interest. In later years, you’ll find the opposite to be true—most of your monthly payment will go toward the principal.
What are mortgage terms?
The mortgage term is the length of time you have to pay off the balance of the loan. In Canada, this may be anywhere from six months to 10 years. After this initial term expires, you will need to renew, refinance, or pay in full the balance of the mortgage.
It’s important to note that the mortgage term and amortization period are two different things. The amortization period is usually a much longer timeframe — often 25 to 30 years in Canada. Shorter amortizations are available, normally in 5 year increments and going as low as 10 years.
For example, if you were to take out a $200,000 mortgage with a five-year term, you would continue to make monthly payments over the next five years. At that point, you would need to renew for another five years or renegotiate a new arrangement — if you have not paid off the balance in full.
In general, longer-term mortgages come with higher interest rates than those with shorter terms. However, if you go with a shorter term, you will need to renew sooner, and your interest rate could go up significantly as a result. In this way, the amount of interest you ultimately pay can come down to a matter of timing.
Searching for your home
Now that you understand how to get a mortgage, interest rates, and mortgage terms, you can begin searching for your new home. There are many ways to go about this, such as working with a real estate agent, browsing websites like Realtor.ca, and visiting open houses on the weekends. Many potential homebuyers use a combination of these tactics.
Viewing homes can be a challenging experience, as you often have to be on the lookout for issues that could affect each property’s value. There are a few items to which you should pay particular attention:
- Condition of large appliances and HVAC systems: Rust and other signs of damage could indicate these items are old and likely to malfunction in the near future.
- The home’s cleanliness: A messy house could be an indication that the homeowner did not properly care for the home in terms of maintenance.
- Are there nearby homes for sale?: If there are many homes in the same neighborhood that are for sale, it could be a sign of economic trouble in the area.
- Condition of the roof: Look for missing or curled shingles, which can indicate that the roof has not been cared for well.
- Temperatures in different rooms: When the heat is on, each room should be roughly the same temperature. Varying temperatures between rooms could indicate the furnace is not functioning properly.
- Crooked door frames: If some or all of the home’s door frames appear crooked, it could signal that there’s something wrong with the foundation. This is especially prevalent in older homes.
- Unusual odors: A musty or earthy smell could mean the house has mold issues.
- Leaky toilets and water damage: This is a common problem in many homes. If left unaddressed, it can cause serious damage to the floor, leaving you with costly repairs.
- Condition of electrical systems: See if you can check out how the lights in a room respond when you plug in an appliance. If the lights dim, there may be issues with the electrical system.
Before visiting a property, make a list of these items, along with any must-haves such as the number of bedrooms and bathrooms, the size of the kitchen and outdoor space. This will help ensure you don’t miss anything when considering your next home purchase.
Also, keep in mind that most homebuyers look at numerous properties — often more than a dozen — before they find the right one. To that end, finding the home of your dreams may require some patience.
Placing an offer
Once you’ve found your ideal home, it’s time to make an offer on it. This is the point in the process in which the details really matter, and you may find yourself completing a large volume of paperwork.
To start this process, you’ll first submit a written offer to the seller. The seller then reviews the offer and accepts it, makes a counter offer or declines the offer. If the latter is the case, you can make a new offer or move on and look for other options.
Your initial written offer may include a variety of information, such as the home’s address, details on the price and terms, how the title will be handled, the date when the offer will expire and how the buyer and seller will manage closing costs, taxes and other expenses.
When you submit your offer, you may also need to provide “earnest money,” which is a deposit for the seller to hold in escrow. This is usually 2 or 3 percent of the purchase price. If you back out of the deal after a seller has accepted your offer, you may need to forfeit this money.
Another likely aspect of your offer comes in the form of standard contingencies, which are actions that must happen before a transaction can take place. For example, you may include a contingency that a sale can only occur after you get approved for financing.
Closing on your new home
Once you’ve landed on a deal with the seller, you will need to close on the property. This process includes a conducting home inspection, completing more paperwork, and securing a mortgage through your lender. Closing on a home usually takes one to two months.
After all these closing-related tasks have been completed, you can move forward to closing day — perhaps the most exciting time for a homebuyer. On this day, you will officially take possession of your home and finalize all the necessary documentation through a lawyer. You will provide your down payment to your attorney or notary, who will also register the home in your name. Finally, you will also receive the deed and the keys to the property and make plans to move in.
Clearly the home buying and mortgage process in Canada can seem overwhelming. It’s important for you to have a good idea of what to expect, which is why you’re reading this article. Equally important is having a professional mortgage expert on your team to ensure you are getting the best deal and terms possible when seeking out a mortgage.