Mortgages 101

There are so many unknowns when it comes to buying a home, especially as a first-time buyer. As a recent first-time buyer myself, I relied heavily on my mortgage broker to ensure I was getting the best rates that will set me up for my future.

When you are thinking of buying a home, we recommend speaking to a mortgage broker. A mortgage broker is part of your real estate team. With access to multiple lenders, they can help you secure better rates than your bank. AND, you don’t pay them. They get paid from the lenders, which means more money to put towards your down payment. 

Katie Whyte, from Illuminate Mortgage Group is one of the high-quality mortgage specialists that we work with. We recommend Katie and her team to our clients because they maintain a very high-level client experience. They are also very efficient. Usually, our clients will have their pre-approval within 4 hours of sending in all their documents! 

We checked in with Katie to get some info on the need-to-knows when thinking of buying a home.

Q: What is a pre-approved mortgage?

A: A pre-approved mortgage provides an interest rate guarantee from a lender for a specified period of time and for a set amount of money. The pre-approval is calculated based on information provided by you and is generally subject to certain conditions being met before the mortgage is finalized. Conditions would usually be things like ‘written employment and income confirmation’ and ‘down payment from your own resources, for example. Most successful real estate professionals will want to ensure you have a pre-approved mortgage in place before they take you out looking for a home. This is to ensure that they are showing you property within your affordable price range. In summary, a pre-approved mortgage is one of the first steps a home buyer should take before beginning the buying process.

Q: What is a down payment?

A: Very few home buyers have the cash available to buy a home outright. Most of us will turn to a financial institution for a mortgage, the first step in a potentially long-standing relationship. But even with a mortgage, you will need to raise the money for a down payment. The down payment is that portion of the purchase price you furnish yourself. The amount of the down payment (which represents your financial stake, or the equity in your new home) should be determined well before you start house hunting. The larger the down payment, the less your home costs in the long run. With a smaller mortgage, interest costs will be lower and over time this will add up to significant savings.

Q: Can I use gifted funds as a down payment?

A: Most lenders will accept down payment funds that are a gift from family as an acceptable down payment. A gift letter signed by the donor is usually required to confirm that the funds are a true gift and not a loan. Where the mortgage requires mortgage loan insurance, Canada Mortgage and Housing Corporation requires the gift money to be in the purchaser’s possession before the application is sent to them for approval. Where mortgage loan insurance is provided by GE Capital this is not a requirement.

Q: What is a fixed-rate mortgage?

A: The interest rate on a fixed-rate mortgage is set for a predetermined term – usually between 6 months to 25 years. This offers the security of knowing what you will be paying for the term selected.

Q: What is a variable rate mortgage?

A: A mortgage in which payments are fixed for a period of one to two years although interest rates may fluctuate from month to month depending on market conditions. If interest rates go down, more of the payment goes towards reducing the principal; if rates go up, a larger portion of the monthly payment goes towards covering the interest. Open variable rate mortgages allow prepayment of any amount (with certain minimums) on any payment date.

Q: Can I get a mortgage to purchase and renovate a home?

A: Subject to qualification, yes. In fact, even purchasers with small down payments may qualify to buy a home and make improvements to it. For high-ratio financing, both Canada Mortgage and Housing Corporation and GE Capital, insured mortgages are available to cover the purchase price of a home as well as an amount to pay for immediate major renovations or improvements that the purchaser may wish to make to the property. This option eliminates the need to finance the renovations or improvements separately. Some conditions apply.

If you have questions about mortgages or about the home buying process, please reach out!

– Parker