Welcome back to my 7 part home buyer's guide designed to teach you everything that you need to know about buying a home in Vancouver.
Whether you are purchasing your first home or your third, this series will help you to navigate the complexities and financial implications of your purchase. Part 1, Are Financially Ready, can be found here. In order to get this information to you more quickly, I have included Parts 2, Consider Mortgage Options and Part 3, Mortgage Default Insurance in this newsletter.
Part 2: Consider Mortgage Options
Most people know that a mortgage is a loan used to buy a property. Your monthly payments depend on how much you borrow (or the principal), the interest rate, and how long it takes you to pay it back (or the amortization period).
It is important to negotiate interest rate and mortgage terms with various lenders. Talking to more than one lender helps you make an informed decision and get the best interest rate. The mortgage business is almost more competitive than the real estate business :)
What type of mortgage is best for you?
• Fixed rate mortgages: Your interest rate is locked in for a specified period called a term. Your payments stay the same for the mortgage’s term so you will not pay more if interest rates increase over time.
• Variable rate mortgages: Rate of interest you pay may change if rates go up or down.
• Conventional mortgages: Require a down payment of more than 20% of the property’s value. You are not required to get mortgage default insurance with a conventional mortgage.
• Closed mortgages: The mortgage cannot be paid off early without paying a prepayment charge.
• Open mortgages: A mortgage that can be paid off at any time during the term, without having to pay a charge. The interest rate for an open mortgage may be higher than for a closed mortgage with the same term.
What mortgage features are best for you?
• Portable mortgages: If you sell your existing home, you can transfer your mortgage to your new home while keeping your existing interest rate. You may be able to avoid prepayment charges by porting your mortgage.
• Prepayment privileges: You can make lump-sum prepayments or increase your monthly payments without having to pay a charge. This can help you pay off your mortgage quicker and save on interest charges.
How often can you make your payments?
• By switching from monthly payments to accelerated weekly or biweekly payments, you can pay off your mortgage faster. Explore your options for mortgage payments and see how much interest you could save by using my mortgage calculator.
What types of mortgage charges might you have to pay?
• You may have to pay charges if you prepay large portions of your mortgage early or if you break your mortgage due to unforeseen life changes, such as marital breakdown, death of a spouse or relocating for a job.
• It is your right to know how lenders calculate prepayment charges. Read your mortgage contract carefully and make sure you understand how charges will be calculated before you sign.
How much do you need for your down payment?
A down payment is the portion of the property’s price not financed by the mortgage. You will need a down payment of at least 5% of the purchase price of the home. For example, to buy a home for $800,000, you will need at least $40,000 as your down payment. If your down payment is less than 20%, you will need mortgage default insurance.
Part 3: Mortgage Default Insurance
When you buy a home with less than a 20% down payment, the mortgage needs to be insured against default. This type of insurance protects the mortgage lender in case you are not able to make your mortgage payments. It does not protect you. If you require mortgage default insurance expect to add 0.5% to 3% to the cost of the mortgage depending on the total amount borrowed.
Mortgage default insurance enables you to purchase a home with a minimum down payment of 5% (10% for multi-unit dwellings) with interest rates comparable to those of a conventional mortgage.
Major providers of mortgage default insurance include Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada, and Canada Guaranty Mortgage Insurance Company.