Mortgage Information Vancouver Real Estate First Time Home Buyers Resource Guide

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Mortgage Information

Pre-Approved Mortgages

All buyers should get pre-approval from a financial institution BEFORE they begin their house search. It costs nothing. With pre-approval, your lender approves the amount of your mortgage and gives you a written confirmation or certificate for a fixed time period before you start looking for a home. The pre-approval term, usually lasting from 60 to 90 days, also sets the mortgage interest rate the lender will offer to you. If rates go down in that period, the lender should offer you the new lower rate. Make sure that they do! Pre-approval gives you a head start on house hunting, but your final approval is still subject to a bank appraisal of the value

of the home.

What a Lender wants from you

Lenders want plenty of financial information about you and your spouse to assess your ability to repay the loan. This ability is based on your gross income and also on your assets, liabilities, earnings, employment history and your past record of repaying loans. Specifically, your lender may want the following:

Personal information – age, marital status, dependents;

Details of employment including proof of income (T-4 slips, personal

income tax returns or a letter of verification from your employer);

Other sources of income i.e. pensions or rental income;

Current banking information;

Verification of your down payment;

Consent to run a credit investigation;

A list of assets, including property and vehicles;

A list of liabilities i.e. credit card balances, car loans – the total amount you owe

and your monthly payment amounts;
If you are getting the down payment from someone (i.e. your parents), then the bank will want a note from them saying that the monies are a "gift." If you have to repay this money, it is considered a liability not an asset.

Conventional Mortgage

This mortgage is for an amount which does not exceed 80% of either the appraised value of the property or the purchase price, whichever is lower. Your down payment is a minimum of 20% of the purchase price.

High-Ratio Mortgage

With this type of mortgage, your down payment is less than 20% of the cost of the home to as little as 5%. A high-ratio mortgage requires mortgage loan insurance. CMHC or GE Mortgage Insurance offers it for a percentage of the mortgage amount. This premium can be added to your mortgage payments and amortized over 25 years or paid in full on closing.

For more information see CMHC

Types of Mortgages

Open Mortgage

This means you can repay the loan, in part or in full, at any time without penalty. Interest rates are usually higher on this type of loan. An open mortgage can be a good choice if you plan to sell your home in the near future. Most lenders will allow you to convert to a closed mortgage at any time. Many experts suggest taking an open mortgage for a short term in times of high rates and converting to a longer term when rates fall.

Closed Mortgage

A closed mortgage usually offers the lowest interest rate available. It's a good choice if you'd like to have a fixed rate to work your budget around for a few years. However, closed mortgages are not flexible and there are often penalties or restrictive conditions attached to prepayments or additional lump sum payments. If you move before the end of the term, you most probably will have a "payout" penalty.

Variable Rate Mortgage

If you want to take advantage of potential declining interest rates then consider the advantages of a variable rate mortgage. Your interest rate will fluctuate with the prime rate each month meaning that the portion of your monthly payment that goes towards interest may go up or down each month. However, your total monthly payment will probably stay the same. Variable rate terms are open and may be repaid in full or converted to a closed mortgage without penalty (a small bank fee may be charged though). Usually, you will have your choice of payment frequencies. Obviously, one has to be astute and “lock in” before interest rates become too high if you favour this option.

Rate of Interest

This is the percentage interest that you pay on top of the loan principal. For example, you may take out a mortgage of $100,000 at a rate of 6%. Your monthly payments will consist of a portion of the original $100,000, plus 6% interest.

Term

The term of a mortgage is the length of time that you will pay a set interest rate. Terms usually last anywhere from six months to ten years. At the end of the term you either pay off your mortgage or renew it at current interest rates.

Amortization

This is the amount of time over which the entire debt will be repaid. Most mortgages are amortized over 15, 20, 25, 35 or 40 year periods. The longer the amortization, the lower your scheduled mortgage payments, but the more interest you pay in the long run. You don't automatically qualify for a shorter amortization period – this will depend on your gross income. If you qualify, think about selecting a shorter amortization at renewal.

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