Everything you need to know about mortgages

Everything you need to know about mortgages

Many Canadians share the dream of owning a home. Saving for a home purchase can take years of hard work and determination, and buying a home is often the biggest purchase of a lifetime. A mortgage is a financial tool that helps Canadians make that dream come true.

Whether you’re looking to buy a home for the first time in your life or thinking about buying a second property, you must understand what a mortgage is, how it works and what options are right for you.

How do you get a mortgage loan?

A mortgage is a loan that a bank, credit union, or private lender can give you to finance the purchase of a home. It can also allow you to leverage the earned value of your home for other purposes. It is a contract between you (the borrower) and the lender. A mortgage sets out the terms of your loan, including your monthly mortgage payments, loan term, and interest rates.

I am looking to buy a house. Where do I start?

When shopping for a mortgage, you can compare the different options available to you from various lenders. In addition to loans offered by banks and credit unions, you can get a mortgage from insurance companies, mortgage companies, trust companies, or private lenders. Your choice will depend on the type of mortgage that suits you best; in addition to the mortgage rate, consider the loan term and payment frequency that best suits your financial strategy.

After choosing a lender, you will need to obtain a mortgage pre-approval to determine your eligibility for a loan. Eligibility criteria vary from lender to lender, but the pre-approval process usually includes assessment of the following:

  • Assets – What do you own (cars, properties)?
  • Income – Do you have a stable source of income and how much can you borrow?
  • Debt – What is the nature and amount of your debt?
  • Credit History – Are you paying your bills on time?
  • Down payment – ​​How much money have you saved for a down payment?

Before making a decision, take the time to talk to several lenders to make sure you get the mortgage that’s right for you.

Looking for expert mortgage advice? Choose the right mortgage with advice from our experts

Mortgage Solutions

Before you apply for a mortgage, find out what types of mortgages might be right for you. Here are some options:

CIS. The Scotia® Embedded Credit (CIS) program is a flexible borrowing solution backed by the equity in your home. You can choose from different types of Scotiabank credit products (mortgages, lines of credit, credit cards, and more) depending on your needs, all in one simple application. Ask about the  CIS *.

A mortgage loan with variable maturity (open). An open mortgage loan allows prepayments at any time, without penalty (although overhead charges may apply). This solution could be suitable for borrowers looking to pay off their mortgage as quickly as possible. The interest rate on a variable term mortgage is usually higher than that of a closed mortgage.

Mortgage closed. With a closed mortgage, you may be charged a prepayment fee if you pay off your mortgage before the end of its term. Some closed mortgages allow you to prepay a certain portion of the original loan amount each year. Usually, the interest rate for a closed mortgage loan is lower than for an open mortgage loan.

Transferable mortgage loan. A portable mortgage can be transferred from one property to another; this solution may allow you to keep the interest rate and terms of your current loan. It could be right for you if you plan to move within the next five years.

Mortgages can be backed by a low or high ratio. A low-ratio mortgage comes with a down payment of 20% or more of the purchase price. Usually, a customer does not have to purchase mortgage default insurance for this type of mortgage. With a high-ratio mortgage, the down payment is less than 20% of the purchase price. This type of loan requires the borrower to take out mortgage insurance in the event of default.

Mortgage rate

The mortgage rate represents the cost a borrower has to pay the lender on the funds they borrow. The higher the interest rate, the higher the monthly payments. The interest rate is determined based on many factors, including:

  • type of lender (e.g. bank, mortgage company)
  • the lender you select
  • the current mortgage interest rate posted by your lender
  • the term of the mortgage
  • the type of interest (e.g. fixed or variable rate)
  • your credit history
  • the fact that you are self-employed

When you apply for a mortgage, you will be offered various types of interest rates, including a fixed rate or a variable rate.

What is the difference between a fixed-rate mortgage and a variable-rate mortgage?

By choosing a mortgage, you can opt for a fixed interest rate or a variable interest rate.

With a fixed-rate mortgage, your interest payments will remain the same for the life of the loan. Fixed interest rates are sometimes higher than variable interest rates, but allow borrowers to benefit from a stable payment schedule.

With a variable rate mortgage, interest rates fluctuate throughout the term of the loan based on changes in the lender’s base rate, which means monthly payment amounts could also fluctuate. Variable interest rates are sometimes lower than fixed interest rates.

What is the difference between the term of a loan and an amortization period?

The amortization period refers to the time it will take you to pay off the full amount of a mortgage loan, based on regular payments at a set interest rate. The longer the amortization period, the lower the monthly mortgage payments and the higher the cost of borrowing (the borrower will pay more interest).

A shorter amortization period will increase the number of monthly mortgage payments, but reduce the interest payable until the entire loan is paid off.

Amortization periods are usually 15, 20, or 25 years (and sometimes 30 years for uninsured mortgages). In Canada, the maximum mortgage amortization period for borrowers who must purchase mortgage insurance in the event of default is 25 years.

The term of a mortgage is the period during which the interest rate, payment amount, and other terms of the mortgage remain unchanged. The term of a mortgage usually ranges from 6 months to 10 years. The mortgage must be repaid at the end of the term unless it is renewed. The term of a loan is usually shorter than its amortization period.

Scotia Mortgage Protection

Mortgage insurance is optional protection that can help you stay on track financially in the event of the unexpected by covering the balance of your mortgage.

You have the choice between three options:

Life

Can pay off your mortgage balance if you die suddenly. 

Critical Illness 

Can pay off your mortgage balance if you are diagnosed with a covered critical illness.

Disability

Can help you make your payments for a specified period if you are unable to work due to illness or injury.

Home Insurance

Your home is probably your biggest asset. Protect it and your possessions with home insurance. Most of these insurances offer coverage for the structure of the house and your personal effects in the event of a claim, as well as liability insurance. 

Mortgage insurance in the event of default

In Canada, default insurance is mandatory for any mortgage loan over 80% of the value of the property (loan ratio over 80%). It reimburses the lender if the borrower does not make the payments on his mortgage loan. You can reduce it by paying a higher down payment or by decreasing the amortization period.

Title insurance

Title insurance is used to protect you against defects, problems, or losses in connection with the title to a property (for example, unknown defects, encumbrances on the property, or real estate title fraud).

What is the role of a mortgage broker?

A mortgage broker is a licensed professional who can help you through the mortgage process. He acts as an intermediary between you and the mortgage lenders. A mortgage broker can help you find the mortgage loan best suited to your financial situation. He can negotiate the best possible rate with a lender on your behalf, help you complete the required documentation and answer your questions.

The lender usually pays the broker’s commission, but in some cases, the buyer must pay it. Be sure to clarify this point when shopping for the services of a mortgage broker and bet on an experienced broker whose experience and knowledge meet your needs.

How can an advisor help you?

Buying a home is a complex transaction. It’s always helpful to have an advisor to explain all your options to you. Your lender may offer you the services of mortgage specialists to guide you through this process, including advisors (for example, the advisor who helps you achieve all of your other financial goals) and home finance advisors.

When you meet with an advisor, no matter where you are in the home buying process, they can help you develop a plan and guide you every step of the way. Your advisor will be able to suggest a mortgage loan suited to your needs and will help you take the pre-approval process for your loan. 

They can continue to support you once you become an owner, including helping you ensure that your ownership continues to align with your strategy as your goals evolve.  

What are the borrowing costs of a mortgage loan?

To work out the total cost of borrowing for a mortgage, you will need to determine the annual percentage rate (APR).

The APR represents the annual cost of borrowing for your mortgage; it takes the form of an interest rate. The APR does not only consider interest; it also includes other applicable fees, as well as any other related costs related to your mortgage.

Your budget will also have to take into account the various closing costs associated with the purchase of a property, which will be incurred on or after the closing date of the real estate transaction. Here are some of the most common closing costs:

  • overhead
  • legal fees
  • property inspection fees
  • cost of additional insurance (title insurance, property insurance)
  • property tax
  • moving expenses

How can I get the best rate on my mortgage?

There is no single best solution or rate, but you must find the product and rate that works best for you.

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By Michael Caine

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