Understanding Your Mortgage as a First-Time Buyer

Understanding your mortgage is the first step to buying a home. There are a lot of things to consider when buying a home, from negotiations to paperwork, making it a complex and sometimes stressful ordeal. Your mortgage will be one of the biggest financial responsibilities you commit to in your life. So before you even start your home search, get to know your mortgage because there are many factors to consider that can optimize your financial position.

First things first, what is a mortgage?

The term “mortgage” refers to a loan used to purchase or maintain a home, land, or other types of real estate. The borrower agrees to pay the lender over time, typically in a series of regular payments that are divided into principal and interest. The property serves as collateral to secure the loan.

THE DIFFERENCE BETWEEN A MORTGAGE BROKER AND THE BANK

A mortgage broker can help you shop around for the best mortgage without the hassle of contacting multiple lenders on your own. They act as go-between to bring you and your mortgage lender together.

A bank, or direct lender, is limited to providing you with a mortgage of the financial institution they are associated with. This is the best place to start, especially if you have a strong relationship with your bank.

LENDING PRINCIPLES

Your mortgage approval amount is calculated based on two lending principles:

1. Gross Debt Service Ratio (GDSR) – your total monthly housing costs* should not exceed 32% of your gross monthly household income
2. Total Debt Service Ratio (TDSR) – your monthly housing costs* and all credit payment obligations should not exceed 40% of your gross monthly household income

Here are some pre-qualifying tools to help you get started with Canada’s top banks:

RBC

CIBC

TD

Scotiabank

UNDERSTANDING THE JARGON

Mortgages are available in a variety of types, and there are many factors to consider that can optimize your financial position. Here’s a breakdown of the most common terms used to define your mortgage.

Down payment – This is the money (cash) you put upfront when purchasing a home. If you have a 20% down payment, or more, you can save a lot on Canadian Mortgage and Housing Corporation (CMHC) insurance fees.

Mortgage term – The length of time the lender will loan you the money e.g., 1-5 years. After which time, you will have to renegotiate your financing.

Amortization – The total length in years your mortgage is based on, e.g., 20-30 years, which is when the loan will be fully paid off. There are pros and cons to shorter vs longer amortization periods; speak to your lender for advice relating to your specific situation and goals. 

Fixed rate vs variable rate – A fixed mortgage indicates that the interest rate will remain the same throughout the term of the loan. Whereas a variable mortgage means that the interest rate will fluctuate (higher or lower) based on the National base rate.

Open or closed mortgage – An Open mortgage gives you the flexibility to repay the mortgage in full or put in large lump-sum payments before your term or amortization period is up.

GET PRE-APPROVED

I can’t stress enough how important it is to get a mortgage pre-approval BEFORE you start searching for a new home. A mortgage broker will help you in understanding your mortgage options, find you the best rate and mortgage package. Your lender, together with your mortgage broker will determine how much you can afford. Getting pre-approved has many advantages, such as:

• You know in advance exactly how much you can borrow
• Makes searching for a home easier as you know your price range
• You can lock in interest rates with your mortgage broker up to 90 days while looking for a home
• Helps with negotiation as sellers see you are a prepared and serious buyer
• Half of the work is done in arranging financing once it is time to finalize your mortgage

Before you visit a real estate agent to start the home buying process, take some time to learn your mortgage. Focusing on learning about all the sections of your mortgage is important at this early stage of the game. This will help you make smart financial decisions and ensure you get into a house that is perfect for you. Bookmark this post for future reference.

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