New to mortgages? Have questions but not sure where to start? Here are the most frequent mortgage questions with answers:
1. What is the best interest rate I can qualify for?
Your credit score affects the interest rate you qualify for. Higher risk leads to higher rates. While the interest rate isn’t the most crucial factor in your mortgage, it is still important. However, opting for the lowest rate might mean losing pre-payment privileges or porting options. Consider your mortgage holistically, keeping your current and future needs in mind.
2. What credit score is needed to qualify for a mortgage?
If your credit score is 680 or above, you are seen as a strong candidate for a mortgage. Higher scores above 700 offer even lower rates. For those with lower credit scores, the size of the down payment becomes crucial. A sufficient down payment reduces lender risk, opening up lower rate options.
3. What happens if my credit score isn’t great?
There are five main things you can do to improve a low credit score.
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- Pay down credit cards so they’re below 70% of your limits. Revolving credit like credit cards have a more significant impact on credit scores than car loans, lines of credit, or other types of debt.
- Limit the use of credit cards. Racking up a large amount and then paying it off in monthly instalments can hurt your credit score. If there is a balance at the end of the month, this also affects your score.
- Check credit limits. If your lender is slower at reporting monthly transactions, this can have a significant impact on how other interested parties view your file. Ensure everything’s up to date as old bills that have been paid can come back to haunt you.
- Keep old cards. Older credit is better credit. If you stop using older credit cards, the issuers may stop updating your accounts. As such, the cards can lose their weight in the credit formula and, therefore, may not be as valuable – even though you have had the cards for a long time. Use these cards periodically and then pay them off.
- Don’t let mistakes build up. Always dispute any mistakes or situations that may harm your score. If, for instance, a cell phone bill is incorrect and the company will not amend it, you can dispute this by making the credit bureau aware of the situation.
4. What’s the maximum mortgage I can qualify for?
To determine what you can afford, try the My Mortgage Toolbox app (https://dlcapp.ca/app/yenchifrank-feng) available on the Apple App Store and Google Play. It offers helpful calculations for finding your affordable amount, estimating monthly payments, exploring payment frequencies, and more. You can even get pre-qualified through the app, and when you’re ready to shop, follow up with a proper mortgage pre-approval. This will help you establish your budget and gain clarity on your mortgage expenses.
5. How much money do I need for a down payment?
The minimum down payment required for purchasing a home is as follows:
- Purchase price $500,00 or less: 5% of the purchase price
- $500,000 to $999,999: 5% of the first $500,000 of the purchase price and 10% for the portion of the purchase price above $500,000
- $1 million and over: 20% of the purchase price
It is advisable to aim for a 20% down payment to avoid mortgage default insurance and, in certain situations, secure a more favorable interest rate.
6. What happens if I don’t have the full down payment amount?
It can be hard to put together a down payment. Fortunately, there are many programs available that will allow you to utilize different forms of down payments through First Time Home Buyer Program, RRSP withdrawal or gifting from an immediate family member.
7. Should I go with a fixed- or variable-rate mortgage?
The answer to this question depends on your personal risk tolerance. If you are a first-time homebuyer or have a defined budget for your mortgage, it is wise to choose a fixed mortgage with predictable payments over a specific period. However, if you can handle the fluctuations of a variable-rate mortgage, it may save you money in the long run. Alternatively, you can opt for a variable rate but make payments based on what you would have paid with a fixed rate.
8. How much will my mortgage payments be?
Your monthly mortgage payment depends on various factors including your mortgage size, mortgage default insurance, mortgage amortization, interest rate, and payment frequency. To explore different mortgage and payment scenarios, you can use the My Mortgage Toolbox app (https://dlcapp.ca/app/yenchifrank-feng) available on the Apple App Store and Google Play. It offers a range of calculators to assist you in making informed decisions.
9. What amortization will work best for me?
The standard amortization period for a mortgage is typically 25 years, but you have the flexibility to choose a shorter or longer timeframe. Opting for a shorter amortization period has several benefits. Firstly, it allows you to become mortgage-free sooner. Additionally, paying off your mortgage in a shorter time reduces the overall interest you’ll pay. You also build equity in your home faster with a shorter amortization. However, keep in mind that choosing a shorter amortization means higher monthly payments and fewer total payments. If your income is irregular or you’re a first-time homebuyer with a large mortgage, a shorter amortization period may not be the best option as it can increase your regular payment amount and impact your cash flow.
10. How can I maximize my mortgage payments and own my home sooner?
Mortgage products typically offer prepayment privileges, allowing you to pay up to 20% of the principal per year, reducing both the amortization period and the overall mortgage length. Another effective method to accelerate mortgage payoff is by choosing accelerated bi-weekly payments instead of semi-monthly payments. With 26 payments per year, accelerated bi-weekly payments not only help pay off the mortgage faster but also result in significant long-term savings. Additionally, many lenders allow lump-sum payments of up to 20% of the original borrowed amount each year, providing further flexibility in reducing your mortgage balance.
11. Can I make lump-sum or other prepayments on my mortgage, or will I be penalized?
Before finalizing your mortgage, it is crucial to review the prepayment conditions specific to your lender and mortgage product. While many lenders permit lump-sum payments and increased mortgage payments up to a certain limit per year, “no frills” mortgage products with the lowest rates typically do not allow prepayments. Additionally, some lenders may restrict lump-sum payments to the mortgage’s anniversary date, while others allow spreading them throughout the year, up to the maximum allowed yearly amount.
12. If I have mortgage default insurance, do I need mortgage life insurance?
Yes. Mortgage life insurance is a life insurance policy on a homeowner, which will allow your family or dependents to pay off the mortgage on the home should something tragic happen to you. Mortgage default insurance is something lenders require you to purchase to cover their own assets if you have less than a 20% down payment. Mortgage life insurance is meant to protect the family of a homeowner and not the mortgage lender itself.
13. Is my mortgage portable?
Fixed-rate products usually have a portability option as lenders utilize a “blended” system where your current mortgage rate stays the same on the mortgage amount ported over to the new property, and the new balance is calculated using the current rate. With variable-rate mortgages, however, porting is usually not available. This means that when breaking your existing mortgage, a three-month interest penalty will be charged. This charge may or may not be reimbursed with your new mortgage. While porting typically ensures no penalty will be charged when you sell your existing property and buy a new one, it’s best to check with your mortgage professional for specific conditions before making any changes.
14. If I want to move before my mortgage term is up, what are my options?
This will depend greatly on your particular lender and the type of mortgage you have. While fixed mortgages are often portable, variable are not. Some lenders allow you to port your mortgage, but your sale and purchase have to happen on the same day, while others offer extended periods. As long as there is not too much time between the sale of your existing home and the purchase of the new home, as a rule of thumb most lenders will allow you to port the mortgage. In other words, you keep your existing mortgage and add the extra funds you need to buy the new house on top. The interest rate is a blend between your existing mortgage rate and the current rate at the time you require the extra money.
15. How much will I have to pay for closing costs?
As a general rule of thumb, it is recommended that you put aside at least 1.5% of the purchase price (in addition to the down payment) strictly to cover closing costs such as: property transfer taxes, lawyer/notary fee, survey costs, appraisal fee, title insurance, and a home inspection.
16. How do I ensure I get the best mortgage product and rate upon renewal at the end of my term?
The best way to ensure you receive the best mortgage product and rate at renewal is to enlist your mortgage professional to review your current mortgage product, financial situation and shop the market for you. A lot can change over a single mortgage term, and you can miss out on a lot of savings and options if you simply sign a renewal with your existing lender without consulting your mortgage professional.
Still have more questions? Reach out to your mortgage expert for the advice and expertise to ensure you get the best mortgage questions answered.
