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Mortgage FAQs

Mortgage FAQs and Answers

 

Mortgage Faqs can help answer general questions, the  general chat room at Ratehouse,ca can help with more specific answer to your questions.

1. What is a pre‐approved mortgage?

A pre-approved mortgage is a loan offer based on a lender’s assessment of your finances. The offer includes a fixed interest rate which is usually valid for 120 days. Knowing how much home buyers can afford to spend helps real estate agents narrow down properties you can afford comfortably.

 

2. What is the difference between a closed and open mortgage?

 

A closed mortgage is a mortgage loan with a fixed payment schedule. Payments must remain the same over the duration of the mortgage term. If you decide to repay the loan prior to the closed term, you will be required to pay a penalty.  Closed mortgages guarantee interest rates remain the same over the course of a mortgage term. By contrast, an open mortgage has an interest rate of prime plus and therefore fluctuates over the mortgage term.  Open mortgages however, do not place restrictions on any full or partial payments towards the principle amount.

3. What is an interest rate differential?

An interest rate differential (IRD) is the difference between the current posted interest rate and the interest rate you received on your mortgage.

 

4. What happens if I pay off my mortgage early?

 

If you have a closed mortgage and wish to repay your loan early, you will pay a penalty. The most common penalty is three months interest. If the interest rate differential (IRD) is greater than your mortgage interest rate your penalty will be calculated using the IRD. The reverse is also true if IRD is less than your mortgage interest rate. Alternatively, if you have an open mortgage no penalty will be incurred for early loan repayment.

 

 5. I’m a first-time homebuyer. Am I eligible for any grants or credits?

 

As a first-time homebuyer you may be eligible for The First-Time Home Buyers’ Tax Credit. This rebate of $750 helps new home buyers save money by recovering costs from land transfer taxes and legal fees. This credit can only be claimed within the first year of home ownership and some eligibility conditions apply.

 

6. I don’t have enough money for a down payment. Can I use my RRSP?

 

Home buyers may withdraw up to $25,000 from a RRSP within a single year. However, fund payments must be made annually and the total sum repaid within 15 years. Missed or late payments will be calculated as taxable income. RRSP contributions must not be withdrawn for a minimum of 90 days in order to be tax deductible.

 

 7.  My family gave me some money as a gift. Can I use it as a down payment?

 

Most lenders will accept gifted money towards a down payment as long as a signed letter confirms it is not in fact a loan. The Canadian Mortgage and Housing Corporation (CMHC) stipulates that any gift must be in the buyer’s possession prior to the issuing of a mortgage loan.

 

8. What is a HELOC?

 

A Home Equity Line of Credit (HELOC) is a line of credit that allows you to borrow the amount of money already paid against your principal loan. The interest rate for HELOC is usually prime and is therefore subject to change. For this reason HELOC may offer convenient credit, but can also lead to increased debt. However, repayment of HELOC can be made without penalty.

 

9. What is a high-ratio mortgage?

 

A mortgage is considered high-ratio if the down payment is less than 20% of the total cost. Home buyers with high-ratio mortgages must purchase default mortgage insurance in order to protect lenders in the case of non-repayment. Down payments of 20% are considered conventional and may not require mortgage insurance.

 

10. What is mortgage insurance and do I need it?

 

Mortgage insurance is an insurance policy on your mortgage loan. Home buyers with down payments of less than 20% are required to purchase mortgage insurance in order to protect the lender in case of default. In Canada, mortgage insurance is provided by the Canadian Mortgage and Housing Corporation  (CMHC), American International Group (AIG), and Genworth Financial Canada. Mortgage insurance should not be confused with mortgage life insurance, which covers a mortgage loan in case of the borrower’s death.

 

11. How do I meet the mortgage lender’s conditions?

 

Mortgage lenders require a letter of employment, recent pay stub, and your Personal Notice of Assessment (NOA). Your banking information, including account number and up to 90 days of transaction history, will also be required. If your down payment has been gifted to you, you will need to provide a formal letter signed by the giver. The funds should be deposited into your account prior to the letter being signed. Other conditions may also apply, check with your mortgage lender for additional requirements.

 

12. Why do I need a lawyer when I purchase property?   

 

Real estate lawyers act as intermediaries between you, the lender, and the insurer. They complete the registration of purchase, pay out the vendor on your behalf, and conduct background searches on your new property. Lawyers require you provide them with the balance of your down payment, closing costs, a void check and two pieces of ID.

 

13. Why do mortgage lenders need to see my credit report?

 

Mortgage lenders are interested in your credit history. If you don’t make regular credit payments, or have too many inquiries on your report, your opportunities to borrow may be limited. Mortgage lenders want to loan money to individuals with good credit histories.

 

14. What is a mortgage renewal?

 

Mortgage renewal occurs at the end of your mortgage agreement. You can choose to renew the agreement with the same lender, or switch to a different one. Research different lenders and their rates before automatically renewing with the same lender.

 

15. Can I re-finance my home?

 

If you own your home, you can re-finance it. Regulations limit re-financing to no more than 80% of your home value and require you pay an insurance premium. Insurance premiums are paid through the Canadian Mortgage and Housing Corporation  (CMHC), Genworth Financial, or Canada Guaranty. Independent appraisals determine the value of your home and there are also legal fees associated with re-financing. Remember that re-financing does not settle your debt, it only re-structures it.

 

16. What is an amortization period?

 

An amortization period is the time it takes to pay a mortgage in full. The longest amortization period permitted is 25 years for homebuyers with down payments of less than 20%. The faster you can pay off your mortgage, the shorter your amortization period, and the more money you save.

 


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