Buying a home in Canada is downright expensive, especially when many urban areas have seller’s markets. Meanwhile, many millennials are leaving urban zones for more quieter lives far from the hustle and bustle, driving up the cost of properties in the suburbs. So, if you plan on buying a new home some time soon, you are going to need to save money somewhere along the line. Turns out, you can get yourself a better mortgage rate, making your home cost less in the long run.
Here is what you need to know about mortgages and how to get the best deal on a new home in Canada:
What is a Mortgage?
Whenever you set out to buy or sell a home in Canada, you are either accepting or giving a purchase price. For those buying, the amount you can pay at the time the house is signed over to you is known as a down payment. Any remaining costs are going to be covered by a lender, such as a bank. The loan is your mortgage.
In other words, a mortgage specifies how you will pay back the cost of your new home or condominium. Basically, the lender will have a legal right to claim your property if you do not repay the loan.
Here are some defining characteristics of a housing mortgage:
- The loan is secured by real estate
- You may still have a balance at the end of the initial contract
- You will have to renew multiple times before repaying the mortgage in full
- If you break the contract, you pay a penalty
- You need a down payment
- You need to meet certain qualifications before mortgage approval, including a stress test
- A mortgage loan is typically hundreds of thousands of dollars
Am I Eligible for a Mortgage?
The only way you can purchase a house in Canada is if you can afford the upfront costs—the down payment on the mortgage, the closing costs, the financing options, and so on. Once you have found a house that you would like to purchase and submit the application, your work is not over. You need to find out if you are eligible for a mortgage for that property.
In Canada, banks look over your employment history, credit score, existing debts, and determine what to offer you from there. They will also determine if your current income is going to be enough to support your life while repaying the loan. Should everything check out, you will be approved for the mortgage.
You can do this before speaking with a real estate agent and viewing homes, too. Some banks and lenders have a pre-approval process. You can get pre-approved then go shopping for a new home. Closing the deal will be faster.
Know Your Mortgage Terms
No, we are not talking about terminology! What we mean is the length of time it will take for you to pay off the balance for your new home. In Canada, people can pay off their mortgage within 6 months or 20 years. You should be prepared for the whole process when looking for a new home in Canada. This means signing the initial mortgage loan, renewing, refinancing, or paying off the mortgage.
Keep in mind that you have a mortgage term and an amortization period, or the gradual write off of an initial cost. An amortization is longer that mortgages—usually around 25-30 years. Shorter ones are available, however.
Terms are generally the same for most mortgage types, such as open and closed mortgages. Conventional mortgages may run for a little longer.
Getting the Best Mortgage Rate on a New Home
Now that you know about the types of mortgages in Canada and whether you are eligible, let’s talk about something else. You obviously want to know about saving some money, or you wouldn’t be here. Well, now is the time to take some notes.
Think About The Down Payment
If you want a better mortgage rate, then you need to carefully consider the down payment. Going for a small loan or down payment will drive the interest rate on your mortgage sky high, because the lender wants the loan to be profitable. However, if you go for a much higher loan, it will be labeled “high risk” and could cost you more. Take to the middle ground. Do not borrow too much or too little.
Aim For Shorter Loan Periods
Another Mortgages way to lower your mortgage rates is to take on a shorter loan, if doable. Instead of doing a 25- or 30-year mortgage, try a 10- or 15-year loan. Not only will you pay less interest over time, but you can get yourself out of debt more quickly. While it may not be possible for those with lower incomes, if you choose a new home within your budget, you should be able to budget well enough to make it work.
Another option when buying a new home and choosing your mortgage is to go for a variable rate. As the housing market begins to see some of the lowest interest rates in years, you can save a lot of money paying off a large chunk of the loan right away.
Right now, as a result of the global pandemic, the average interest rate on a mortgage in Canada is around 3.14%. About 4% of borrowers in Canada receive an interest rate higher than 5%. For the potential homeowner seeking a new property in Canada, this is good news. You can apply for a fixed interest rate and keep that low rate for as long as the contract runs. However, if you go for a shorter period, those rates can be much, much lower.
If you want to save vast amounts of money on your housing, then it is recommended to take advantage of low interest rates.
Buying a home in Canada means shopping around for the best deals. You also need to know what to expect. You cannot expect to purchase a home if you do not have your priorities in order. Understanding mortgages, what is involved in a contract, and how those payments will affect your budget will prepare you for when it comes time to purchase a home.
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