The Ultimate Guide to Home Financing

So you’re ready to buy a new home? Whether you’re a first time home buyer or you’re looking to upgrade or downsize, the first step in the home buying process is financing. In Canada home buyers need to have a minimum of a 5% down payment but there’s a lot more to know when it comes to financing your home. In this guide, we will cover the main three steps in the home financing process:

1. Choosing a mortgage lender
2. Getting pre-approved for a mortgage
3. Making important home financing decisions

Step 1 – Choose the right mortgage lender for you

There are a lot of options out there when you are choosing a mortgage lender. We recommend that you talk to a couple of different mortgage lenders to see what they offer and to make sure that their communication style works for you. There are three main categories of mortgage lenders.

1. Banks
2. Credit Unions
3. Mortgage Brokers

We compiled the pro’s and con’s of each type below:

Canadian Banks 

The major banks in Canada are nicknamed ‘The Big Five’. This includes the following banks: Scotiabank, TD Canada Trust, Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC), and Bank of Montreal (BMO).

 

Pros of lending from a Bank:

1. It’s familiar -  If you normally deal with a bank, you will likely be familiar with your lending representative and depending on your length of time at the bank, and your assets in your account, they may offer you special rates and options. 

2. You trust the brand -  The big banks offer the security of a major organization and brand recognition. Major banks are seen as being more “safe” in the long term. 

3. Keep it simple -  You might find it more convenient to have all your financial products including savings, chequing, investments, and mortgages with the same financial institution. 

Cons of lending from a Bank

1. Higher Rates - Rates at the banks are sometimes higher than the lowest rate available from a different provider. If you are unable to negotiate a discount with your regular bank, you may end up paying more over the term of your mortgage.

2. No shopping around -  A bank representative will offer their in-house lending products when offering you a mortgage. By going with a bank, you won't be able to compare rates across different lenders.

3. They won't negotiate for you -  Sometimes your bank representative won’t immediately offer you the best interest rate because they want to make the highest commission on the sale. You may have to negotiate with them for the best deal.

4. Harder to get approved - Your bank may have more strict rules in place for approving mortgages. If you don't have an extensive credit history, your credit score is poor or you are working with a low income, you may get approved easier with a credit union or a broker.

Provincial Credit Unions

Credit unions are similar to banks in many ways. They are both financial institutions, but the main difference is that credit unions are owned by their members instead of shareholders. This means that their primary goal is not to seek a profit, it is to serve the best interest of their members.

Pros of lending from a Credit Union

1. Easier to get Approved - A credit union may be more willing to lend to people with poor credit scores, low incomes and less cash for down payments. 

2. Customer Service - Credit unions’ top priority is to serve their members. Because of this, you may find the lending process to be more catered to your needs, and be more comfortable overall. 

3. Lower Rates & Fees - Credit unions generally take any profits they earn and invest it back into their products and services, This is why they can sometimes offer lower interest rates for loans, and charge less fees.

Cons of lending from a Credit Union

1. Membership Required - You must become a member of a credit union to access their products and services. Each credit union has different fees & requirements to join. 

2. Fewer locations - In general, Credit unions typically have fewer branch locations than the banks. Although, some of the larger credit unions have merged over the years and have branch locations across the province. 

3. Dated Technology - Credit unions have the reputation for being a bit behind when it comes to technology. Although, recently we have seen that they are catching up to banks with mobile apps and other digital services, so this might not be a con depending on the credit union. 

At Tait Real Estate, we have had many happy clients use Hilary Maugham from Affinity Credit Union. 

Name: Hilary Maugham
Company: Affinity credit union
Email: hilary.maughan@affinitycu.ca
Phone Number: +1 (306) 260-3931

Mortgage Brokers

Pros of lending from a mortgage broker

1. Save Time and Effort -  Brokers have access to a variety of different lenders including banks, private lenders, and other financial institutions. They will do the hard work for you and shop around for the most competitive rates. 

2. More options for getting approved - Mortgage brokers generally have lots of knowledge, tools and options at their disposal to help you find the right mortgage. They often can find a mortgage solution even if you have poor credit, or a low income. 

3. Service - You should expect them to assist you with completing your application, provide helpful advice and keep in touch throughout the entire process. 

Cons of lending with a mortgage broker

1. Less standard terms and conditions - Mortgages also come with terms and conditions including prepayment terms, porting rules, payment deferral options, penalty clauses, etc. The lowest rate a broker can find may not come with the best terms and conditions which could end up costing you more down the road. Make sure you ask lots of questions and understand exactly what you are getting yourself into. 

2. Commission conflict of interest - Sometimes mortgage brokers deal with a potential conflict of interest based on commissions. For example, if a specific lender pays the broker more commision based on the number of sales they make, that broker may push their clients towards that lender more often. 

3. Access to non-broker lenders - Some banks do not pay mortgage brokers a commission. A mortgage broker would therefore not have any incentive to check for the best rates with this lender. If this lender happens to have the best rate, you could potentially be missing out.  

At Tait Real Estate we really enjoy working with Deb Murdoch from TMG, The Mortgage Group.

Name: Deb Murdoch
Company: TMG, The Mortgage Group
Email: mortgages@debmurdoch.com
Phone Number: 306-222-7900
Website: https://www.debmurdoch.com

Step 2 – Get Pre-Approved for a Mortgage

Once you’ve determined which lender you want to use, the next step to buying your home in Saskatoon is to find out how much budget you have to work with. Whichever lender you choose will look at your income, your debts and the cash you have available for a down payment. You will have to provide documentation to prove your income and credit history. Your lender will provide you with a mortgage pre-approval in writing (generally valid for 90 or 120 days) and will generally include an interest rate guarantee.

We highly recommend getting pre-approved for a mortgage before you even start your house hunt, to ensure that you don’t fall in love with a house that is over your budget. This will help you determine your price range of homes you should be targeting in your search. 

Step 3 - Make important Mortgage Decisions

Buying a home is a big step, and getting a mortgage can seem intimidating. There are quite a few decisions you will have to make when you are applying for financing: Mortgage term, amortization, interest rate, type of mortgage and terms and conditions. We’ve outlined each of these terms below to help you make the best mortgage decisions. 

Mortgage term

The mortgage term is the length of time that your mortgage agreement is in effect at your agreed upon interest rate. This is typically between 6 months to 5 years. When the initial mortgage term is up, you are responsible for renewing your financing, or paying for the remaining balance in full.

There are a few things to consider when you are choosing a mortgage term. For example, If you were to choose a short term, like 6 months to a year, and interest rates increase drastically in that time frame, would you still be able to afford your mortgage payments when you finance for a new term at a higher rate?

Or conversely, if you were to choose a longer term, like 4 or 5 years, and interest rates decrease significantly in that time frame, will you regret having locked in your rate and paying more overall?

Amortization

The amortization period is the length of time it will take to pay off your entire mortgage loan amount. Most people cannot afford to pay off the entire principal of a large mortgage in a single mortgage term. To reduce monthly payments, lenders amortize the mortgage payments over a much longer time, often as long as 25 years. Most people will renew their mortgage several times during the amortization period.  Down the road, if you decide you want to pay off your mortgage sooner or later than you originally thought, you have the option to alter the amortization depending on the market and your financial situation. The longer the amortization period, the lower your mortgage payments will be. But you also need to remember that the longer the amortization, the more you’ll pay in interest overall.

Mortgage Payments

Each time you make a mortgage payment you are paying a portion of the principal and a portion of the interest owed on the mortgage. At the beginning of your mortgage term, you will likely pay more towards interest than principal each month. Over time, you will pay more towards the principal balance and less towards interest. The faster you can pay down the remaining principal balance, the less total interest you’ll pay. 

You should also note that If you make a down payment of less than 20%, you will be required to take out mortgage insurance, which increases your monthly payment. 

There are several ways you can pay down your mortgage faster:

1. Change your payment schedule - For example consider paying biweekly instead of twice a month or monthly. 

2. Make pre-payments - If your mortgage terms allow for lump sum pre-payments, consider making them whenever you have a bit of extra cash laying round. 

Interest Rates

Interest is the cost of borrowing money. It is one of the biggest factors in determining how much you will pay per month and over the lifetime of your mortgage. Interest rates fluctuate with the economy. There are two types of interest rates used in mortgages: fixed-rate and variable-rate:

1. Fixed-rate mortgage – A fixed mortgage rate is one that stays the same throughout the duration of your mortgage term. This means your interest rate will not change for the term of your mortgage. With this option, you lock in how much of your monthly payment goes to the principal vs. going to interest. Fixed-rate mortgages are good to consider when interest rates are likely to go up, as you eliminate the risk of paying higher interest rates.

2. Variable-rate mortgage – There are two types of variable-rate mortgages. The first one is attached to the banks Prime interest rate, which means your interest rate and your payment will fluctuate if the Prime rate goes up or down. The second one has a consistent payment – BUT the amount that goes towards repaying the principal (vs the interest) part of your mortgage floats in relationship to the bank’s prime interest rate.

Types of Mortgages

1. Conventional mortgage – A conventional mortgage is a loan for no more than 80% of the purchase price (or appraised value) of the property. You generally need to come up with the other 20% as a down payment.

   
   

2. High ratio mortgage (the most common type of mortgage) - If you don’t have enough cash on hand to cover at least 20% of the cost of your home for a down payment, you will need to consider a high ratio mortgage. With a high ratio mortgage, your lender will advance you 95% of the home’s purchase price. High ratio mortgages must be insured by the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada or CanadaGuarantee. The cost of the mortgage insurance can be a few percent of the mortgage amount, and is added to the mortgage principal. Your lender will likely handle the mortgage insurance application for you.