Frequently Asked Questions About Mortgage Services and Mortgage Features
If you’re going to be responsible for paying a mortgage for the next twenty-five to thirty years, you need a complete understanding of the subject. However, with several mortgages services available today, clients have a ton of questions but find answers difficult to come by. We want to arm you with the most accurate information available to help you find the mortgage solutions you need. To do this, we’ve answered some of the most frequently asked questions about mortgage services and mortgage features.
1. What is the Bank of Canada’s qualifying rate, and how does it affect mortgage approvals?
The Bank of Canada has a rule for qualifying mortgages so that affordability can be maintained even if the interest rates rise. Any prospective mortgage applicant must show that they can qualify for the payments on the mortgage at a rate of 5.19% (Bank of Canada qualifying rate) or two basis points above the actual mortgage rate.
For example, if the actual mortgage rate is 2.99%, the borrower must show that they can maintain payments at 5.19%. If the actual mortgage rate is 3.99%, the consumer will need to demonstrate qualification at a rate of 5.99%, (that is two basis points above 3.99%). The qualification is based on several factors, including, but not limited to income, debt levels, and credit scores. This rule will also apply if a client with an existing mortgage wishes to shop for a lender other than the one they currently have. It will not, however, apply if the client renews with the current lender.
2. How much money is required as a minimum down payment to qualify for a mortgage?
The minimum down payment required to make a purchase and secure a mortgage is 5% of the purchase price. This down payment may be received as a gift, derived from investment savings or personal savings. The funds must be available at the time of approval and a history of where the funds came from must be shown. If the funds are a gift, the purchaser will be required to show a letter from the person who gifted the funds stating that no payback is expected. Some programs will also allow the 5% to be derived from borrowed funds, therefore, opening up the possibility of securing a mortgage with fully borrowed funds.
3. What is Mortgage Default Insurance?
Mortgage Default Insurance is a premium that is added to the mortgage amount, which protects the lender in the case of payment default by the borrower. This insurance is a requirement if the down payment is less than 20% of the purchase price. The maximum amortization of the mortgage will be twenty-five years if it is insured. The actual premium will be collected in the mortgage payments, but the PST (provincial sales tax) amount of the insurance will be collected upfront as part of the closing costs.
4. Why is using a mortgage broker necessary?
Mortgage Brokers play a vital role in the mortgage industry. The Mortgage Broker must pass extensive knowledge courses as well as ongoing training. The Brokers must have a license to practice and become well versed in the ever-changing landscape of the mortgage industry. The brokers concentrate on mortgages only as opposed to everyday banking, investments, and general client care as are mandated by some mortgage advisors in large banking institutions. Mortgage advisors that are employed by large banking institutions do not generally need to be licensed by FSRA (Financial Services Regulatory Authority of Ontario). This means that they may not be required to follow the same compliance rules as brokers, just the rules of their bank. Mortgage brokers have access to many different lenders in all credit spaces as opposed to just one lender with only that lender’s choices and options. Mortgage brokers are independent business people with the client’s best interest in mind. Brokers act on behalf of the client and the lending institution but are not limited to just one lender, therefore offering more choice to their clients.
5. Is the lowest mortgage rate always the best option?
One of the problems in the mortgage industry is the way mortgages are advertised: usually by rate. If an online rate says 1.9%, chances are homebuyers are definitely going to check it out.
What many don’t realize is that lowest interest rates do not necessarily save money in the long-run, and rate is only part of the story. On a $500,000 mortgage, a rate that’s 0.10% lower does not even equate to a savings of $500 a year. The right mortgage, however, can save you much more than that.
Saving the actual cost of borrowing is the key to pounding down your debt and building your wealth. That means – yes, we look at rates – but the real savings result from the little things you don’t see with an advertised rate: like finding the right combination of options, privileges, and payment schedules to maximize your savings.
For example, drop a few hundred dollars against your mortgage principal once in a while, and you could save thousands in interest and shave years off your mortgage. That’s because if you knock down the principal even a little, every dollar you pay after that will go further.
Mortgage contracts are full of devilish details that make winners and losers of Canadian homebuyers. Rates are just the lure. Generally, the lower the rate is, the bigger the catch. Often, it is not what is in the mortgage contract that restricts you, but also what is not on the contract.
Here are some determining factors to consider before you decide that a mortgage is right for you.
The term: While most people think that five years is the best, you earn more savings by going with a shorter term, provided your situation allows you to easily refinance when the mortgage matures.
Amortization: While you may pay a premium to extend the amortization, it can help drive your monthly obligation down.
The purpose: Is the mortgage for your primary, rental, or second property? Just because you saw an amazingly low rate on the web does not mean the lenders will give that to you. Your property and its use play a vital role in determining mortgage rates as well.
Your income: Can you prove your income? If you earn an income, the lender will need to know if you’re employed with the same company for many years. If you don’t receive a stable income, you will need to mention why (for example, self-employment).
Location of the property: Not all lenders will lend anywhere just because you have AAA credit or are financially sound.
Type of property: The kind of property (for example, a high rise condo) may affect the mortgage solutions available to you.
Rate-Hold: Many lenders will charge a premium for a longer rate hold than a shorter period.
Prepayment restrictions: If you plan to make extra payments during the term of your mortgage, the lowest rate may not be an option, as they usually come with shackles that do not allow prepayment and many other options.
Portability options: The average mortgage in Canada is about three and a half years. In case you move to a new home, and you wish to keep the same mortgage, the lowest mortgage may not have that option. Therefore, you will end up paying a penalty when breaking the present mortgage to get a new one.
Refinance options: A refinance option will allow you the freedom to refinance before maturity, and yes, you will need to pay a bit more for this.
High penalty: If you break the mortgage before the maturity, a major bank, as well as some other lenders, will charge you a high penalty, often amounting to many thousands. The I.R.D. or “Interest Rate Differential” calculation is different with each lender.
Your credit: It is not only your beacon score, but also the number of credit lines, utilization, and length of history that make up your credit profile. This has a massive impact on your chances of approval.
Mortgage vs. your Property value (loan-to-value or LTV): How big is the mortgage vs. your property value (LTV)? This also has an impact on what rate you can qualify for.
Downpayment: Is the downpayment your own, or is any portion of it a gift from family? This factor can change your mortgage application itself and everything with it.
Stress-test: Can you pass the stress-test? If not, then you will have to curtail your mortgage finance expectations.
Purchase, refinance, or switch: If your mortgage is a purchase, a refinance, or you’re simply switching between lenders, it can impact the rate on your mortgage.
These key mortgage features usually don’t fit in a rate ad. This is where the rubber hits the road in building the right mortgage.
We often think of the lowest rate mortgage to something like a car. If cheapest was the only way to go, then it is our strong belief that we would all be driving Ladas, and there would be no need for any other manufacturers. The more comfort, luxury, safety, and quality we want, the more we pay as well.
A mortgage is something like that, while the lowest rate may work for some; it is not for everyone. You have to find the solution that fits your needs, lifestyle, and then get the best rate for the program which you qualify for. There is a mortgage program, and accompanying rate for everyone, take the time to find out the one that is for you.
6. How does the mortgage broker get paid?
Mortgage brokers receive compensation from the lending institution if the file is placed with an “A” type lender. There are many of these lenders, which include the large major banks. Sometimes if the file is placed with a lender that accepts riskier files, the broker may charge a fee. This fee is always disclosed upfront and is only collected when the mortgage is closed. In essence, the advice and service received by a broker are at n/c (no charge) unless the task is completed.
7. What is the difference between a Full Featured Mortgage and a No Frills Mortgage?
Sometimes lenders will offer a low rate mortgage that can be 0.05 to 0.10% lower than the most economical rates provided elsewhere on a full feature mortgage. While on the surface these mortgages may seem identical, under the hood there can be severe restrictions that make these mortgage products vastly different from the full feature mortgages.
What is a No Frills mortgage?
A No-Frills mortgage is a mortgage product that may come with limits on the following:
a. Reduced prepayment privileges.
b. Minimal top-up payment options.
c. Reduced closing deadlines often thirty to forty-five days vs. ninety to a hundred and twenty days on full feature mortgages.
d. Restrictions on how many prepayments a client can make in a year.
e. No pre-approvals.
f. Restrictions on which lender you can transfer a mortgage from and still qualify for covered legal fees.
g. Potential lack of portability.
h. Payout penalties often calculated at 2.75% or more (regardless of whether the mortgage is a fixed or variable rate product).
i. It will likely have a bonafide sales clause (meaning you cannot pay off the mortgage unless you sell the property).
Assuming a mortgage of $400,000 at 2.89% on a FULL FEATURE mortgage and a NO FRILLS mortgage at 2.79%, the payment difference on a twenty-five years amortization is only about $20 per month. On a five years mortgage, that is a total of $1200 saved by going with a NO FRILLS mortgage by having forfeited most or all of the options mentioned above. Therefore it is our advice to always ask before signing a mortgage contract so that you are aware of the benefits and risks on a given mortgage.
8. What is the difference between a Standard Charge Mortgage and a Collateral Charge Mortgage?
Standard Charge Mortgage:
Includes the specific details of a mortgage loan (including amount, term, interest rate, etc.) and is registered into the title of the property. Therefore, if you have got a mortgage for $400,000 at 3.5% for five years, that is the amount which will be registered.
Collateral Charge Mortgage:
It may not include the specifics of a mortgage loan registered into the title of your mortgage. However, it can be used to secure multiple loans with your lender. If you requested a loan for $400,000, but your lender approved you for $500,000, the lender will register $500,000. This allows them to lend to you up to $500,000 (should you need it) without having to discharge the current mortgage. However, you do need to qualify based on their requirements should additional funds be needed.
Also, as a collateral mortgage can register a higher amount than used, on paper, your overall debt servicing may show higher than reality. Which, in turn, may reduce your buying power elsewhere. A collateral charge mortgage is also generally more costly if you seek to renew or transfer the mortgage to another lender. If you have more loans with the same lender, the lender can legally use the additional approved amount to pay off any other debt you have with them. It also generally costs more in legal fees to discharge a collateral charge mortgage.
If you have any more questions about mortgage services, get in touch with Taufeeq Rahim & Victor Sodia. We are leading mortgage agents in Milton, Ontario, and we help you find the right mortgage that fits your needs, lifestyle, and future financial goals. Our mortgage solutions are not only affordable, but they also help you breathe easy with your current finances.