Understanding Mortgages

Get a Better Understanding on Applying for a Mortgage

Buying your first home will likely be one of the largest financial investments you will make in your life, so it’s important to ensure you are fully prepared beforehand. Familiarize yourself with the terminology that comes with buying a new home (hint: check out our glossary HERE), and then reach out to a mortgage broker or lender to help get you started. If you are unsure of who to reach out to, ask our Sales Team for recommendations as we are well versed on professionals within the homebuilding industry here in Calgary.

What is a Mortgage?

A mortgage refers to a loan that is used to purchase a home or piece of land. The borrower agrees to pay back the lender over a pre-determined amount of time by a series of regular payments with interest.

In order to qualify for a mortgage at any bank in Canada, you will need to pass the government enforced stress test. The reasoning behind this stress test is to ensure that homeowners can afford the necessary payments at the qualifying interest rate. Following recent updates to the stress test, this now means that the minimum qualifying rate for mortgages will rise to either the contracted rate plus 2% points – or 5.25%, whichever is higher.

Pre-Approval

Before beginning your search, we recommend you first take time to visit your bank or find a mortgage broker who will assist you the pre-approval process. A mortgage pre-approval will help you gain a clear understanding of the maximum loan amount you could qualify for. The approved amount will be dependent upon a few factors including how much you are willing to put as a down payment, the amount of debt you have (if any), and if you also have a home to sell.

In order to obtain your pre-approval, you will need to provide the lender with your personal identification information, employment records (i.e. T4 slips or previous notice of assessment from Canada Revenue Agency), current financial details such as any relevant debts or financial obligations (i.e. credit report and credit history, student loans, loans or credit card debt), current monthly expenses and any information on possessions that you may own such as a car.

It is important to note that a pre-approval is not the same as a guaranteed approval, which is what you will require to finalize your mortgage.

Down Payment

A down payment is the initial amount of money that you are able to put down towards the purchase of your new home. Some common sources for a down payment include personal savings, an RRSP withdrawal, a non-repayable gift, proceeds from the sale of other property, and funds borrowed against proven assets.

Typically, a minimum of 5% of the purchase price is required to be put down on a home worth $500,000 or less, and 10% is required to be put down for anything higher than $500,000. If you plan to make a down payment of less than 20% of a homes total purchase price, you will be required to get mortgage insurance. Mortgage insurance protects the lender should you not be able to make the mortgage payments on your new home. This is beneficial to you as it allows you to put a minimum deposit of 5% down and still receive a reasonable interest rate. For more information on mortgage insurance, click HERE.

Amortization Period & Open vs. Closed Mortgages

Amortization is the length of time in which you agree to pay off your mortgage by, most often this is 25 years. The amortization period has a direct correlation on how much your monthly mortgage payments will be. If you choose a shorter term, your monthly payments will be larger however you will ultimately end up paying less interest on your mortgage.

An open mortgage provides you with the opportunity to make pre-payments or lump sum payments on your mortgage throughout the amortization period without incurring any penalties. In comparison, a closed mortgage offers limited (or no) options to pay off your mortgage early however it will often come with a lower interest rate in return. It is important to talk with your lender to see what option is best for you and your future.

Types of Interest Rates

There are two main types of interest rates to consider – fixed, variable and protected (capped variable). A fixed rate mortgage is one of the most common options as the rate does not change for the term of the mortgage. This is good option for those who want to be able to predict what their monthly mortgage payments will look like. Variable rate mortgages fluctuate with market interest rates, known as prime rates. These rates tend to be slightly less expensive than fixed rates, however they can result in more unpredictable monthly mortgage payments.

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