The ABCs Of Canadian Mortgages – A Beginner’s FAQ

Canadian mortgages can be a complex and confusing topic for many people, especially for first-time home buyers. There are many different types of mortgages available, with varying terms, interest rates, and fees. It’s important to understand the basics of mortgages in Canada and to ask questions in order to make an informed decision when purchasing a home.

Some common questions related to Canadian mortgages include:

• What is the difference between a fixed-rate mortgage and a variable-rate mortgage?

• How much of a down payment do I need to purchase a home?

• What is mortgage default insurance and do I need it?

• How long should I choose for the mortgage term?

• How do I qualify for a mortgage?

• What is the difference between a high-ratio mortgage and a conventional mortgage?

• What is the mortgage prime rate and how does it affect my mortgage payments?

It is always recommended to consult with a financial advisor or a mortgage expert for personalized advice and to answer any questions you may have. In this article, we have covered some of the most frequently asked questions from readers. Let’s get started. 

1. What is the difference between a fixed-rate mortgage and a variable-rate mortgage?

A fixed-rate mortgage is a type of mortgage where the interest rate is locked in and does not change over the life of the loan. This means that the borrower’s monthly mortgage payment will remain the same, regardless of changes in market interest rates. This can make budgeting and financial planning easier, as the borrower knows exactly what their monthly mortgage payment will be.

On the other hand, a variable-rate mortgage, also known as an adjustable-rate mortgage (ARM), is a type of mortgage where the interest rate can fluctuate based on changes in the prime rate. With a variable-rate mortgage, the interest rate is typically set at a certain percentage above or below the prime rate. This means that when the prime rate goes up, the interest rate on the variable-rate mortgage will also go up, and the borrower’s monthly mortgage payment will increase.

The main difference between these two types of mortgages is that with a fixed-rate mortgage, the interest rate and the monthly payment remain the same, while with a variable-rate mortgage, the interest rate and the monthly payment can fluctuate.

It’s important to note that fixed-rate mortgages usually have a higher interest rate than variable-rate mortgages, but with a variable-rate mortgage, the interest rate is subject to change based on the market rates, which can also be higher or lower than the fixed rate, making it more unpredictable.

2. How much of a down payment do I need to purchase a home?

The amount of down payment required to purchase a home in Canada can vary depending on the type of mortgage and the value of the property.

For homes with a purchase price of less than $500,000, the minimum down payment is 5% of the purchase price. For homes with a purchase price between $500,000 and $999,999, the minimum down payment is 5% of the first $500,000 and 10% of the remaining purchase price. And for homes with a purchase price of $1,000,000 or more, the minimum down payment is 20% of the purchase price.

For a high-ratio mortgage, which is a mortgage where the loan-to-value ratio is greater than 80%, the minimum down payment is 5% of the purchase price. This is because these types of mortgages require mortgage default insurance, which is an insurance policy that protects the lender in the event that the borrower defaults on the mortgage.

However, it’s worth to mention that some financial institutions may require a higher down payment, and some may have different rules and requirements. Additionally, some buyers may choose to make a larger down payment in order to reduce the overall interest they pay over the life of the mortgage.

3. What is mortgage default insurance and do I need it?

Mortgage default insurance, also known as mortgage loan insurance or CMHC insurance, is a type of insurance required by the lender when the borrower has a down payment of less than 20% of the purchase price of a home. This insurance protects the lender in the event that the borrower defaults on the mortgage.

The Canada Mortgage and Housing Corporation (CMHC) is the most well-known provider of mortgage default insurance in Canada, but there are also other providers such as Genworth Canada and Canada Guaranty.

Borrowers who have a down payment of less than 20% of the purchase price of the home are required to purchase mortgage default insurance. This insurance is typically added to the mortgage and is added to the mortgage payments. The cost of the insurance is based on the size of the down payment and the purchase price of the home. The higher the down payment, the lower the cost of the insurance.

Homebuyers who have a down payment of 20% or more of the purchase price of the home are not required to purchase mortgage default insurance, but it is still an option for them, some buyers may choose to obtain the insurance for a peace of mind.

4. How long should I choose for the mortgage term?

The term of a mortgage is the length of time you have to pay off the loan. The most common mortgage terms in Canada are five years, ten years, and twenty-five years.

Choosing the right mortgage term is an important decision, as it can have a big impact on your monthly payments and the total interest paid over the life of the loan. A shorter mortgage term means higher monthly payments, but less interest paid over the life of the loan. A longer mortgage term means lower monthly payments, but more interest paid over the life of the loan.

When choosing a mortgage term, it’s important to consider your current financial situation and your long-term financial goals. If you have a stable income and are comfortable with higher monthly payments, a shorter mortgage term may be a good option. However, if you have a lower income or are concerned about the affordability of your monthly payments, a longer mortgage term may be a better option.

It’s also worth considering that, while a longer mortgage term can be less financially stressful in the short term, it may be a better idea to pay off the mortgage faster and be debt-free, so you can use your money for other things, like saving for retirement, travel, or investments.

5. How do I qualify for a mortgage?

To qualify for a mortgage, lenders typically consider the following factors:

1. Income: Lenders will want to see proof of your income, such as pay stubs, tax returns, and/or employment letters. They will also want to see that your income is stable and that you have a good debt-to-income ratio (DTI).

2. Credit score: Your credit score is an important factor in determining your eligibility for a mortgage. A higher credit score will generally result in better mortgage terms.

3. Down payment: Lenders will want to see that you have a down payment, which is typically a percentage of the purchase price of the home. The size of the down payment can affect the type of mortgage you qualify for, and whether you need to purchase mortgage default insurance.

4. Property: Lenders will want to ensure that the property you are purchasing is in good condition and that it meets certain lending criteria.

5. Other debts: Lenders will also want to know about any other debts you have, such as credit card balances, car loans, and other mortgages. They will want to see that you have a manageable debt-to-income ratio and that you have the ability to repay the mortgage.

It’s worth noting that different financial institutions have different qualifications criteria, so it’s recommended to consult with a financial advisor or a mortgage expert for personalized advice and to know the specific qualifications you need to meet in order to be approved for a mortgage.

6. What is the mortgage prime rate and how does it affect my mortgage payments?

The mortgage prime rate is the interest rate that banks use as a benchmark for determining the interest rate on mortgages. It is based on the overnight rate set by the Bank of Canada. Most of Canadian Banks use the mortgage prime rate as a benchmark to set the interest rate on their mortgages.

When the Bank of Canada raises or lowers the overnight rate, the mortgage prime rate will also go up or down. Infact, when the mortgage prime rate increases, the interest rate on mortgages will also increase, which means that mortgage payments will increase. Finally, when the mortgage prime rate decreases, the interest rate on mortgages will decrease, which means that mortgage payments will decrease.

If you have a variable-rate mortgage, your interest rate and payments will fluctuate with the mortgage prime rate. If you have a fixed-rate mortgage, your interest rate and payments will remain the same for the term of the mortgage, regardless of changes in the mortgage prime rate. However, if you renew your fixed-rate mortgage after the term, the new interest rate will be based on the current mortgage prime rate.

It’s worth noting that, the mortgage prime rate is not the only factor that affects the interest rate on mortgages, other factors like credit score, property location, down payment, and the lender’s own rate policies also play a role in determining the interest rate on a mortgage.

7. What Is A Mortgage Prime Rate?

A mortgage prime rate is the benchmark interest rate that financial institutions use as a reference point for determining the interest rate on a variable-rate mortgage. In Canada, the mortgage prime rate is based on the Bank of Canada’s overnight lending rate, which is the rate that banks and other financial institutions charge each other for short-term borrowing.

When the Bank of Canada raises or lowers the overnight lending rate, the mortgage prime rate will also change. As a result, the interest rate on variable-rate mortgages will also increase or decrease.

The mortgage prime rate is typically used as a benchmark for adjustable-rate mortgages (ARMs) also known as variable-rate mortgages, which are mortgages where the interest rate can fluctuate based on changes in the prime rate. With an ARM, the interest rate is typically set at a certain percentage above or below the prime rate. This means that when the prime rate goes up, the interest rate on the ARM will also go up, and the borrower’s monthly mortgage payment will increase.

It’s important to note that the mortgage prime rate is not the same as the interest rate on a fixed-rate mortgage, which is a mortgage where the interest rate is locked in and does not change over the life of the loan. 

8. What do you mean by a High-Ratio Mortage Rate? 

A high-ratio mortgage is a type of mortgage in Canada where the loan-to-value (LTV) ratio is greater than 80%. This means that the borrower is putting down less than 20% of the purchase price as a down payment. High-ratio mortgages are considered higher risk because the borrower has less equity in the property, and the lender is at greater risk of losing money if the borrower defaults on the loan.

Because of the higher risk, borrowers with high-ratio mortgages are usually required to purchase mortgage default insurance, also known as CMHC insurance, which protects the lender in case the borrower defaults on the loan. This insurance can add an additional cost to the mortgage and also it may require a higher interest rate.

High-ratio mortgages can be a good option for first-time home buyers or those who have a smaller down payment, as they may be able to purchase a home with less money upfront. However, it’s important to consider the additional costs associated with mortgage default insurance and the higher interest rate when comparing the cost of a high-ratio mortgage to a conventional mortgage with a larger down payment. 

9. What is a closed rate in Canadian Mortgage? 

A closed rate mortgage is a type of mortgage offered in Canada where the interest rate is locked in or “closed” for a certain period of time, typically for the entire term of the loan. This means that the interest rate will not change over the life of the loan, regardless of changes in market interest rates. This makes budgeting and financial planning easier, as the borrower’s monthly mortgage payment will remain the same.

With closed-rate mortgages, borrowers typically have the option to choose from a variety of terms, such as a 1-year, 3-year, 5-year or a 10-year term. The longer the term, the higher the interest rate, but the stability of the payments can be more appealing for some borrowers.

It’s important to note that closed rate mortgages usually have a higher interest rate than open mortgages, which is a type of mortgage where the interest rate is variable and changes with the market interest rate. 

10. What is APR In Mortgage Canada?

In Canada, the Annual Percentage Rate (APR) is a standardized measure of the cost of borrowing, expressed as a percentage of the loan amount. It’s used to compare the cost of different types of loans and credit products, such as mortgages, personal loans, and credit cards.

The APR includes not only the interest rate, but also any additional costs associated with the loan, such as origination fees, closing costs, and other charges. This makes it a more accurate measure of the true cost of borrowing than the interest rate alone.

The APR is calculated based on a standardized set of assumptions and is intended to make it easier for consumers to compare the cost of different loans. In Canada, the APR is typically used for consumer loans, like credit cards, personal loans, and mortgages.

It’s important to note that APR can vary between lenders and based on the individual borrower’s creditworthiness and other factors. 

Final Words

In conclusion, mortgages are a popular way for Canadians to purchase a home. There are two main types of mortgages: fixed-rate mortgages and variable-rate mortgages. Fixed-rate mortgages have an interest rate that remains the same for the term of the mortgage, while variable-rate mortgages have an interest rate that fluctuates with the market.

The mortgage prime rate is the interest rate that banks use as a benchmark for determining the interest rate on mortgages. It is based on the overnight rate set by the Bank of Canada. When the Bank of Canada raises or lowers the overnight rate, the mortgage prime rate will also go up or down, which can affect the interest rate and payments on mortgages.

To qualify for a mortgage, lenders typically consider factors such as income, credit score, down payment, property, and other debts. The size of the down payment can affect the type of mortgage you qualify for, and whether you need to purchase mortgage default insurance.

Choosing the right mortgage term is also an important decision, as it can have a big impact on your monthly payments and the total interest paid over the life of the loan. It’s recommended to consult with a financial advisor or a mortgage expert for a personalized advice and to know which term, type of mortgage and the qualifications you need to meet to be approved for a mortgage.