A mortgage is a type of loan you can use to purchase a home. Establishing a mortgage is a key piece in the homebuying process, and OJO is here to help you navigate it. As you begin to shape your game plan, understanding the basics and nuances of mortgages will equip you with the confidence you need to get started. We’ll explore home financing tips and help you establish the kind of mortgage you may qualify for. We’ll also talk about benefits, key terms, and give you insight into how mortgage payments work. Finding a mortgage plan that feels comfortable will allow you to enjoy your new home for years to come.
How does a mortgage work?
A mortgage loan allows you to purchase a home without paying the full cost at one time. Mortgages are paid back with interest, and mortgage plans vary in the type and degree of interest you’re required to pay back.
The monthly payment you make to your lender will include two parts:
- The first part goes toward the principal; this is the amount of money you borrow to buy your home.
- The second part of the payment goes toward the interest payment, which is essentially the fee you’re paying in order to borrow the money.
Homeowners are required to make regular payments toward their mortgage. If mortgage payments aren’t made, the lender can take possession of your property; so it’s essential to choose your mortgage plan thoughtfully and to ask the right questions along the way.
Before we offer some home financing tips to make the most out of your money, let’s outline two basic mortgage types:
- An open mortgage offers flexibility, so you can make large payments without a penalty. If you suddenly come into some money and want to pay off a large sum, an open mortgage will let you do so. But open mortgages may also involve fluctuating interest rates, and often involve higher interest, so these factors are worth weighing to find the best solution for you.
- A closed mortgage offers a consistent, predetermined interest rate. You’ll know what you’re paying for a set period of time, but if you end up paying off the loan fully before the end of the term, you may be charged a penalty fee. With a closed mortgage, you’ll have options like adjustable or variable rates so you can still shape your payment plan based on what suits your financial situation.
- Hybrid mortgages and reverse mortgages are other options to consider with your mortgage professional.
The mortgage process
Anticipate your mortgage rate
If you’re self-employed or have a low credit rating, you might need to offer a bigger down payment. Establish your credit score using a credit bureau like TransUnion or Equifax. A poor credit score might mean you have to pay a higher interest rate, so doing a credit check well in advance will give you time to plan ahead and weigh your options.
Preapproval and pre-qualification
Before you apply for a mortgage, it’s important to get a preapproval or pre-qualification. This will help you when you start looking for homes because you’ll be clear on what’s in your price range, and where your limits are.
A preapproval will generally guarantee a rate for 90 days; so you’ll know how much your mortgage will be when you’re looking at the price of a potential home.
A pre-qualification doesn’t require a hard credit check, so it’s a good way to get a sense for what you can afford before you’re ready to lock in a rate. Keep in mind that pre-qualification won’t guarantee a rate. You may also want to consider whether you’ll need a guarantor to offer additional security for the lender.
Establish how much of a down payment you’ll need
A down payment is the sum of money you put toward the purchase of your new home. Your lender then covers the rest of the payment. The minimum down payment, or amount of money you’ll need to pay upfront, varies based on the price of your home. For example, a home that’s $500,000 or less only requires a down payment of 5% of the purchase price, while a home over $1 million requires a down payment that’s 20% of the purchase price.
Figure out if you need mortgage loan insurance
If your down payment covers less than 20% of the price of your home, you’ll need to purchase mortgage loan insurance. This protects the lender in the event that the loan can’t be paid. This is another reason that it’s advantageous for you to put down a bigger down payment if you can.
Important mortgage tips to consider
Your mortgage needs are as unique as you are, so trust your instincts and choose a mortgage professional who allows you to feel comfortable asking questions. Here are some basic tips to reference in your initial conversations and planning talks.
1. The larger the down payment, the less you’ll pay over time.
A bigger down payment means you’ll pay a lower interest rate, because you’re borrowing less money. The trick is to find the right mortgage for you, so that your down payment suits your budget. Pay a bigger down payment upfront, and you’ll reduce the amount of time you need to pay your mortgage – leaving you with more money for other essentials and extras.
2. Optimize your mortgage payments once you own a home.
Once you own your home, pay attention to changing factors and payment options to maximize your money and save wherever you can.
- When you’re initially establishing your mortgage, ask your specialist about the flexibility of your plan. Consider the mortgage type that best works for your big picture.
- Pay special attention to interest rates, especially when you’re first establishing your mortgage rate and when it’s time to renew your mortgage. If interest rates have decreased when it’s time to renew your mortgage, you can keep your payments the same but put more money toward your principal (the amount of money you borrowed to buy your home).
- Double or increase your payments whenever you can. Increasing payment amounts (when you’re allowed to without penalty) can help your financial situation. Increased mortgage payments go toward your principal and will save you money.
3. Shorten your loan time
If you can comfortably pay a higher mortgage payment with a shorter loan time, you’ll pay less interest over time. Ask your mortgage professional to demonstrate how different loan periods would affect your total payment amounts. Think about how long you’ll be living in this home, and go back to your budget when you’re considering how long it will take to pay off your loan.
4. Think ahead and budget thoughtfully
When you’re discussing your down payment and mortgage options as a first-time homeowner, step back to look at the big picture so that your numbers are based on the reality of your financial situation:
- How much can you afford, and which baseline and extra costs are important to your quality of life?
- Can you comfortably afford your mortgage? Consider potential surprises down the road and work with your mortgage professional to customize a plan that will be sustainable.
- How much of your yearly income do you need to cover your mortgage costs?
Don’t forget about closing costs! It might feel like a dream to imagine the day you’ve paid off your mortgage, but you’ll want to plan ahead for potential closing costs. Mortgage closing can involve costs you may not anticipate, like home inspections, appraisals, or notary and administrative fees.
First-time homebuyer benefits and programs
If you’re a first-time homebuyer in Canada, consider these benefits and programs for first-time homeowners:
- The First-Time Home Buyer Incentive is a shared-equity program with the Government of Canada. This incentive offers 5 or 10% of a home’s purchase price toward your down payment. This program is available to first-time Canadian homebuyers who make a yearly income of less than $120,000.
- The Home Buyer’s Amount gives eligible individuals a $5,000 non-refundable income tax credit amount on a qualifying home purchased during that tax year.
- The Home Buyer’s Plan (HBP) allows eligible Canadians to withdraw up to $35,000 per year from their registered savings plans (RRSPs) to buy or build a qualifying home for themselves or for a relative with a disability.
- The Canadian Mortgage and Housing Corporation (CMHC), Canadian Guaranty, and Genworth Canada offer assistance for first-time homebuyers who require support in making a down payment.
- Some individuals may qualify for a rebate for part of the GST or HST that you paid to purchase, build, or renovate your new home. Check out the GST/HST New Housing Rebate to learn more.
Let OJO help you navigate the homebuying process to find a home that’s a great fit for you. Feel confident in your options with a tailored search experience based on the features and details you care about most. Our comprehensive experience lets you search for a home that matches your vision.