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The ABCs of mortgages 

What is a mortgage? What kinds of mortgages should you be getting? We have some tips and tricks to help get to the facts of the matter.

click to enlarge mortgage-app.jpg
A mortgage is, basically, a loan for the use of purchasing property. Think of it like you would with payments for a car, or any other item that requires financing rather than outright purchasing. The majority of people who buy their first homes have to get a mortgage in order to get them, as very few people have the cash to buy a home outright.

The average price of a house in Halifax as of September 2010 was $240,000.

Are you ready to own a home?
The purchase of a home is probably the single largest investment you will ever make, and your mortgage provider is going to be looking at several factors. These vary depending on which institution your using.

But ask yourself: Will you be living in this community for awhile? Do you have secure employment? Why do you want to own property? Are you ready to have less disposable income? And be ready to provide: Proof of steady income over two years or more (especially if self-employed). It’s a good idea to bring in documents to show your credit rating, as well as pay stubs, T4s, business licences, bank statements, RRSP statements, et cetera.

A good strategy to use is the affordability rule: Your monthly housing costs, including mortgage payments, condominium fees, property taxes and incidental utilities shouldn’t be more than 32 percent of your monthly income.

How much to apply to a down payment?
The minimum down payment on a home is approximately five percent of the cost---depending on which bank or mortgage product you use---which is the bare-bones option and will require added costs for insurance purposes. These will be harder to find, since the federal government changed many of its mortgage regulations. (More on that later.)

“When you put less than 20 percent down, that mortgage is required to have default insurance,” says Scott Bentley, a senior mortgage consultant. “The insurance is built-in and capitalized into the mortgage loan and not paid out of pocket separately. It’s designed to protect the lender in the event of a default.”

This insurance is applied through a federal program called the Canada Mortgage and Housing Corporation.

A new mortgage has to be paid off within 30 years (until recently it was 35). This will lead to higher monthly payments, or you will need a higher initial down payment.

Bentley says few people actually end up paying until the final year: “That doesn’t have a huge impact, roughly another $100 in payment.” Paying more for fewer years can also add up to quite a bit in savings when the mortgage is finished.

Bentley says people shouldn’t try to get the highest mortgage and biggest home they possibly can, but rather should try to find a loan that would fit comfortably in their budget so they don’t end up being “house poor,” or finding that your monthly costs are way over 32 percent of your income. 

Mortgage Broker or Bank?
Both institutions will work to get you a mortgage that suits your needs---that’s how they get paid. However, a mortgage broker is paid a fee to bring lenders and borrowers together, but is not limited to one source. They can access mortgage products from a range of banks, credit unions and other institutions. A mortgage broker is not paid by you, the borrower, but rather from the institution, so no need to worry about extra fees.

So, who’s better? On the one hand, a loan officer from a bank may know the local situation much better, such as heating systems, private septic systems and other matters of local context and therefore may have more knowledge about your particular situation. But a mortgage broker has many more resources available at his/her disposal, so they may end up providing a better deal than what your bank may offer.

   Mortgage broker Bentley offers this bit of data on the matter: “A recent Bank of Canada study has found that the average impact of a broker is a reduction in a client’s rate by 0.175 percent, which is a substantial difference, in addition to the ability to access to many more mortgage options for true comparison.”

Fixed or Floating Interest?
Almost all borrowers will have to pay interest on their loans, and often there are two options for that interest---fixed and floating.

Fixed meaning the rate of interest remains the same throughout a term of the mortgage (usually five years until renegotiated), floating meaning the interest rate can go up or down depending on the Bank of Canada. A fixed rate can benefit a borrower who is looking for a secure established interest rate, not looking for any fluctuation. If it seems like interest rates may lower in the next few years it can be advantageous to take that route. But keep in mind that is a riskier proposition as interest rates can rise just as easily as they can fall.

What can you afford?
Website mortgagebrokers.com is a great source for potential home buyers and offers an in-depth calculator to determine whether or not you’re financially ready to take the plunge. The site has a graph listing household income, minimum down payment and maximum cost of new home based on a set interest of eight percent and average Canadian tax and heating costs. a

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Vol 24, No 28
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