Are you thinking about buying a home? If so, you’re going to need to get a mortgage. With the average Canada mortgage rate declining over the past few months, it’s easier to get a lower rate.
However, specific requirements need to be met in order to get the best mortgage rate. A lender expects you to have the following:
Your credit score is based on several factors, including your payment history, how much of your available credit you’ve used (known as credit utilization), the length of your credit history, the types of credit you have and how often you apply for credit.
To get a low mortgage rate, you need to have good credit. This can be achieved by making at least the minimum payment on your loans on time, not maxing out your credit cards every month, having different types of credit (such as a personal loan, line of credit and a credit card), and only applying for credit when you need it. To get a good mortgage rate, you should have a score of at least 680. Those with scores lower than 680 may have a hard time getting a mortgage and won’t have access to the best rates.
A low total debt service (TDS) ratio
The TDS ratio is the percentage of your gross (before tax) salary for the cost of owning a home plus any other debt payments. These costs include your mortgage payments, property taxes, heating costs, half of your condo fees (if applicable), and other debt-related payments. This number shouldn’t exceed 44% of your gross salary.
A low gross debt service (GDS) ratio
The GDS ratio is similar to the TDS ratio, except the percentage is only for the cost of owning a home, but not any other debt payments. This number shouldn’t be more than 39% of your gross salary.
Proof of employment
Lenders will ask you to prove that you’re working before you’re able to qualify for a mortgage. In most cases, you will need to be employed for at least two years and prove that with a letter of employment or copies of your last two notices of assessment from the Canada Revenue Agency.
A down payment
To buy a home in Canada, you need to have a minimum down payment of at least 5% of the purchase price. If your down payment is less than 20%, the federal government requires that you purchase mortgage default insurance. This protects the financial institution in the event you can’t pay your mortgage. Your financial institution will choose the insurer and likely pass along the costs to you. The insurance cost can be paid for in a lump sum or added to your mortgage and included in your regular payments.
There’s a lot of jargon that gets thrown around during the mortgages process, and it helps to know what they mean.
The term is the length of time that you agree to the conditions of the mortgage. The conditions may include the interest rate, the lender, and the prepayment restrictions. The most common term is for five years, but it can vary between six months and 10 years. Once the term ends, you can renew the mortgage, refinance it, change lenders or pay off the remaining balance.
The amortization period is the scheduled length of time it will take to pay off the mortgage based on your current monthly payments. While a 25-year amortization is the most common. It’s possible to get a mortgage with an amortization of 15, 20, or 30 years. Choosing a shorter amortization allows you the pay off the mortgage faster and reduce the amount of interest charged. But a longer amortization can make the mortgage payments more affordable.
The interest rate on a fixed-rate mortgage remains constant over the entire mortgage term. Having a fixed rate means that you don’t have to worry if rates rise since your payments remain constant. Over time, a greater portion of your payment will go towards the principal (the money borrowed). A smaller portion will go towards the interest.
The interest rate on a variable-rate mortgage can change during the term if the Bank of Canada raises or lowers interest rates. If you have a fixed-payment variable rate mortgage, the payment will remain constant. However, a greater portion of your payment will be applied to the principal. A smaller portion will go towards the interest if the Bank of Canada reduces rates. But the opposite is true if the Bank of Canada raises rates.
Mortgage shopping tips
When searching for a mortgage, you shouldn’t go with the first-rate that’s offered by your current financial institution. Shopping around can help you find the lowest Canada mortgage rate. One of the best places to start is a rate comparison website to get an idea of what’s available.
In addition to finding the best rate, you should also pay attention to the mortgage features, particularly the prepayment options, and whether the lender offers a discount penalty for breaking your mortgage early. This can save you thousands of dollars down the road if the unexpected happens, and you need to break your mortgage early. Lenders will often allow you to make a lump-sum payment and increase your mortgage payment, sometimes by as much as 20% of the original mortgage amount.
Before signing your mortgage contract, ensure that you find out what the minimum and maximum prepayment amount is, when and how often you’re allowed to make prepayments, the amount you can prepay without having to pay a fee or a penalty and if any conditions apply.
There may also be restrictions if you decide to refinance the property. You will likely have to pay a penalty if you want to increase the mortgage amount before your term ends—even if it’s with the same lender.
In the event you think you’ll want to sell your property and buy another one before your term is up, find out if there’s an option to port your mortgage. This allows you to transfer your existing mortgage to the new property. It will also allow you to avoid breaking your mortgage contract and having to pay a hefty penalty.
The last word
A mortgage will likely be the largest loan you apply for in your lifetime. That’s why it’s important to know what’s required to get the best mortgage rate, the different types of mortgage options available, what prepayment options are included and what penalties you can expect if you break your mortgage early.