Mortgages for Dummies: Home Finance

Many new residents dream of being able to home finance and own a residence in Canada. However, buying is a huge investment, unlike buying other smaller assets.

You may have a few questions regarding the process of home finance in Canada, once you arrive. To help make the process of buying a home easier, this article will walk you through the basics of securing a mortgage, general advice, budgeting tips and any hidden costs that you should keep in mind.

Mortgage Definition

A home loan from a lender or bank is referred to as a mortgage. With it, a potential home buyer doesn’t have to pay the full home purchase amount in order to buy a property or home. While there are some limitations, 95 percent is the highest mortgage offered by banks.

Variable Versus Fixed Mortgage Rates

Borrowers are free to choose between two main types of interest rates when securing mortgages in Canada. The options include:

Fixed Interest Rate

Set for a pre-determined period referred to as a term, a fixed interest rate does not fluctuate. Five years is the most popularly chosen term.

Variable Interest Rate

Basically influenced by the BoC (Bank of Canada) policy interest rate, a variable interest rate normally fluctuates based on the prime lending rate. When it comes to setting interest rates for variable lines of credit and loans, the country’s major financial institutions and banks normally rely on the prime lending rate. It may be possible for you to move to a fixed interest rate from a variable one for free, depending on your lender or home finance institution. Remember to seek clarification from your lender of any changes in payments as a result of review of all potential risks and the prime rate.

Home Finance In Canada With This Simple Five Step Process

1.Contact A Home Finance Expert

Reaching out to a lender or home finance institution that offers mortgages is the first step in purchasing a property or home in Canada. They will consider your unique situations and guide you appropriately.

As part of a mortgage application, you are generally required to fulfill three major requirements.

The Down Payment

This is the portion of money that you cover towards buying the property or house in question. The least amount you can pay towards the purchase of your home or property is generally set at 5% of the total cost – taking the total cost to be a maximum of 500,000 CAD. However, this is dependent on a variety of factors, such as your income, assets you own as well as you Canadian status – student, temporary foreign worker or permanent resident among others. You would need to pay at least 10% for homes worth between 500,000 and 999,000; and at least 20% for homes worth more than 1,000,000 CAD.

Credit History

You need to provide a credit history spanning an entire year, from your home country or Canada, as a borrower. However, if you provide a significantly large down payment, the credit history requirement may be waived. Your other personal assets in the country may be considered in such a scenario. You should start building a good credit history as soon as you arrive in Canada, as it takes time.

Mortgage Repayment Assurance

The means through which you would be able to repay your loan will be evaluated by the lender of home finance institution you are dealing with. During the approval of a mortgage application your potential to earn an income in Canada and your existing income sources – coupled with a history spanning 90 days – will be considered.

Required Documents

You may be asked to provide your credit history for 12 months from your home country, investment record, bank statements and proof of income from past employers, depending on the amount of time you have been in Canada.

It is preferable to have two credit histories in Canada. Having separate transactions, showing another loan or holding two credit cards are all great ways of obtaining two credit histories.

Make sure that each individual has their own credit reports, if there are two or more borrowers on one application.

2.Secure Pre-approval And Budget For The Home You Wish to Finance

Getting mortgage pre-approval is the next step in this process of home finance. To demonstrate that you have satisfied the primary requirements, such as income, credit history and down payment among others, for getting a mortgage, you need to be pre-approved. In addition to outlining the down payment, the bank will also inform you of the maximum buying price, as part of the process of pre-approval.

Pre-approval can be provided in no time, after all the necessary documents have been provided.

3.Consider Taking Advantage Of The First-Time Home Buyer Incentive

To help individuals across the country buy their first home, the Canadian government provides the First-Time Home Buyer Incentive. To help cover the down payment, the government provides an interest-free loan that is 5% (or 10% for new homes) of the property’s total buying price. This program makes homeownership easier by lowering the buyer’s carrying costs. Within a 25 year period or when you sell your home, you are required to pay back a similar percentage of your home’s value.

4.Find A Home You Want To Buy And Submit A Mortgage Application

It could take up to a week for you to complete the final approval process, if your mortgage application had been pre-approved. Fortunately, your application will be processed with the goal of meeting the financing condition stated on your purchase contract as a priority, meaning that there will be no need to worry.

Your application can still be processed in the same amount of time, provided that you submit all necessary documents in a timely fashion, even though you did not have pre-approval. To make sure that you have time to put all the necessary documents together, and prevent any delays in the home buying process, buyers are encouraged to secure pre-approval before finding a property or home they want to buy.

5.Mortgage Repayment

A 25-year repayment period is chosen by most borrowers taking up a mortgage. To reduce the mortgage duration as well as amortization, you are normally allowed to make extra payments.

You potentially risk losing your property if you fail to make a mortgage payment, and continue to do so.

In the event that you choose to sell the property while the mortgage amount is still outstanding, the proceeds from the sale will be used to cover the outstanding amount on the mortgage, with any remaining funds passing on to you as your equity.

Home Finance Just Months After Your Canada Arrival

If you are able to demonstrate a steady income, asset ownership/credit history and can meet the basic down payment requirement, you may, within the first few months of your arrival in Canada, qualify for a mortgage to buy a property/house. You will be required to show proof of a minimum of 3 months of full-time employment in the country, if your chosen down payment is below 20% of the property’s price.

It can be challenging to meet the demanding financial requirements of buying a house. It is essential for you to ensure that you have a knowledgeable and seasoned mortgage or financial advisor who knows the ins and outs of the real estate buying process – especially if you are a first time home buyer in Canada. Considering that you are entering into a long term investment, remember to peruse through all the details with a reputable financial advisor, after finding the property or home you intend to buy.