Working with a Canadian bank when buying real estate

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Banks play an essential role in the financial dealings of consumers and corporations in economies around the world. When banks are doing well, consumers have more access to loans and financial services that allow them to build their wealth and, in turn, benefit the economy.

Here in Canada, many people partner with banks and financial institutions to make investments in real estate. Whether you are purchasing a home to flip for a profit or you want to buy a vacation property as a foreign buyer, it’s important that you know exactly what to expect from a Canadian bank and the various rules and regulations that may apply.

How Canadian banks work

In Canada, you will likely deal with one of two types of banks: central banks and chartered banks. A central bank, such as the Bank of Canada, is effectively an arm of the federal government. As a part of the government, central banks work to maintain federal monetary policies and may offer financial relief to chartered banks when it’s necessary. Additionally, central banks may also hold deposits for governments and chartered banks, and they also issue currency and may decisions on the rise and fall of interest rates.

Chartered banks are commercial financial institutions that offer a wide variety of financial services and products to consumers and businesses. They may offer consumer loans, finance mortgages, provide lines of credit, and hold money in savings or checking accounts.

So basically, if you're looking to open a bank account, whether it's a savings account or a chequing account, get a debit card or a credit card, and have access to online banking and direct deposit, you'd do that at a chartered bank. 

In addition to chartered banks and central banks, there are also other financial institutions in Canada that offer some of the same services provided by banks such as credit unions. A credit union is a financial co-operative that provides some of the banking services to its members. 

The banking industry in Canada is generally on the up-and-up. Thousands of bank branches across Canada employ hundreds of thousands of Canadians. Healthy banks make it possible for people to engage in more commerce, which leads to a healthier economy and more business for banks. For the most part, banking in Canada has a positive banking reputation around the world. It’s one of the reasons Canada was left largely unscathed during the 2008 recession.

Canadian banks do business in Canadian dollars and the exchange rate fluctuates according to the global market. 

In fact, the World Economic Forum has named Canada the world’s most stable banking system on numerous occasions over the last several years. Even during the Great Depression of the 1930s, Canada’s banks had zero failures.

Part of the reason why Canadian banks have been so successful over the years is that the government maintains up-to-date regulations through the Canadian Bank Act. This law was first passed in 1988, but it’s consistently updated every few years to account for changes in the banking industry. If you really want information about the regulations that apply to Canadian banks, it is a good idea to read up on the latest version of the Canadian Bank Act.

Canadian banks: Big Five

The top five largest banks in Canada, also known as the Big Five, dominate the Canadian business industry. These major banks are all headquartered in Toronto and have branches all across the country. These banks allow for all kinds of transactions for personal banking: wire transfers, deposits, pre-authorized debit transactions, credit and debit cards, online banking, etc. They are responsible for keeping the people's money safe and maintaining their financial well-being. 

If you’ve ever opened a Canadian bank account, or considered opening a bank account in Canada, chances are it’s with one of these banks.

Bank of Montreal (BMO)

Established in 1817, Bank of Montreal has been servicing Canadians for over 200 years. BMO is also established in the US, under the name BMO Harris.

The Bank of Nova Scotia

Scotiabank is also established in the 19th century and has locations all around the world, and in most Canadian provinces (all but Nunavut).

Canadian Imperial Bank of Commerce (CIBC)

CIBC was formed in 1961, so it may seem like it’s a relatively young bank. However, it was formed as a merger of the Canadian Bank of Commerce (founded 1867) and the Imperial Bank of Canada (founded 1873), marking the chartered bank largest merger between in Canadian history. CIBC also has international subsidiaries.

Royal Bank of Canada (RBC)

RBC is the Big One of the Big Five - the largest bank in Canada by market capitalization. It was founded in 1864 and has branches all over Canada. It also has international subsidiaries.

Toronto–Dominion Bank (TD)

Founded in 1955, by the merger of Bank of Toronto and the Dominion Bank, both founded in the 19th century. TD Bank now has branches all over the country, and international subsidiaries and partners.

How mortgages in Canada work

Now that you know a little more about Canadian banks in general, it’s time to zero in on one of the most popular products that banks offer: mortgages. Banks make it possible for people to purchase properties even if they don’t have the entire purchase amount saved.

Mortgages are loans that cover a portion, often the majority, of the cost of a home so that a homeowner only has to pay as little as 5-20 percent of a home’s value up front. A bank makes money by providing mortgage loans with an interest rate, and they insulate themselves from risk by carefully examining applications and issuing mortgage loans to candidates who are likely to make regular payments. The borrower pays back the mortgage in monthly payments that go toward the loan principal and the interest rate.

In many ways, Canadian mortgages have structures similar to American mortgages. However, there are some differences between the bank mortgages in the two countries. For one, Canada’s government does not subsidize 30-year fixed-rate mortgages. In the United States, 30-year fixed mortgages are the norm. In Canada, five-year mortgages amortized over 25 years are the standard. With this mortgage structure, an interest rate is set and the loan is refinanced every five years. During this refinancing, the borrower may see an increase in the interest rate. Where, is the United States, borrowers are typically used to enjoying the same interest rate for the entirety of the mortgage, rather than having to renegotiate every 5 years.

Even though this consistent mortgage refinancing does more for banks than it does for borrowers, there are other policies unique to Canada that offer notable benefits to mortgage holders. Canadian mortgages are portable, which means that a mortgage borrower can transfer his or her current mortgage to a new home before the five-year term ends.

Borrowers also benefit from the regulatory oversight to which the government subjects Canadian banks. While the mortgage system in the United States became largely deregulated in the 1970s, the Canadian government continues to closely oversee the banking industry and monitor mortgage terms to ensure banks are complying with all relevant regulations.

In some cases, the mortgage system in Canada allows buyers to purchase homes even if they cannot make the standard 20 percent down payment. High-ratio mortgages enable people to pay between 5 percent and 20 percent of a home’s value as a down payment. Although there are additional requirements and processes that apply, this program makes it possible for far more people to become homeowners who otherwise would not have the opportunity.

What a Canadian bank will ask of you

Perhaps the most intimidating aspect of buying a home is going through the mortgage application and approval process. Thankfully, finding out more about what is expected of you can help you feel better prepared for this part of the process. It’s a good idea to find out exactly what types of documents and information you need to provide a bank when you apply for a mortgage. Here's a quick rundown:

  • Basic information: You should expect to answer several general questions about yourself and your family. The lender will ask for your marital status, age, and the names and ages of your children if you have any.

  • Proof of employment: It’s one thing to claim a certain employment status and income level, but you will also have to back this up with written documentation. You may need to provide copies of income tax returns, pay stubs and potentially employment verification from HR personnel at your company. If you’re self-employed, you may need to supply additional information, including incorporation documents and corporate financial statements. In some cases, the lender may need to review your books, including details about profits and losses. Work with your accountant or bookkeeper to get this information ready.

  • Additional income documentation: Aside from your primary source of income, you should also prepare to supply documentation of additional sources of income, such as pensions, income from a part-time job and rental income.

  • Applicable property ownership documentation: Your lender needs to be aware of any current mortgages you have on other properties. Make sure you have a copy of your mortgage statements and copies of all property tax statements.

  • Credit check authorization: Because your approval for a mortgage is largely contingent upon a positive credit check, you will need to provide written or verbal authorization to your lender so that it can examine your credit history. You will have to provide your Social Insurance Number so that your lender can run a credit check.

  • Listing and purchasing documents: It may seem like a no-brainer, but your lender will need to see documentation of the house you are purchasing. The document that you signed to buy the home, the Agreement of Purchase and Sale, will give your lender information, including the address of the home, the agreed-upon purchase price and down payment for the home and details about what is included in the sale price.

The lending process in Canada

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Below are the steps you are likely to encounter when moving through the lending process in Canada:

Take stock of your finances

The very first step in applying for your mortgage is to assess your current financial situation. Take the time to review your credit report, determine your net worth, and add up your combined annual income. All this information enables you to figure out how much house you can afford with a mortgage. There are several online tools you can use to help you calculate how much you can afford based on the amount you have for a down payment and what your credit score and income are.

Apply for a mortgage

Once you’ve shopped around for a house and found one that fits into your budget, you will need to apply for a mortgage with a lender. You can begin this process before you find a home by applying for a pre-approval. Getting pre-approved can speed up the mortgage process along later on. You will need to provide some of the information we covered previously when you apply for your mortgage.

You can go directly to a Canadian bank if you are located in Canada. Or, you can partner with a mortgage broker in the city in which you hope on buying. We suggest the latter. Canadian mortgage brokers are in a better position to find the best lending solution for you. They can also provide you with more guidance on how to buy property as a foreign buyer.

Choose a mortgage product

It’s important to research the different mortgage products available to you and determine which one best suits your needs. Different mortgages have different interest structures that may be either fixed or adjustable. Be sure to speak with your lender or broker about your options and get a second opinion from a mortgage advisor to help you make the right decision.

Submit relevant information

Even though you may be able to start your application without having all your documents on hand, you need to provide this information to your lender before your application may be reviewed and approved. Consult the list above for details about the specific documents you need to provide your lender.

Wait for application review and approval

After your lender receives all your paperwork and you have determined which mortgage product you want, your mortgage broker submits your application for review. You will likely hear back from your mortgage broker on the same day the lender approves your application. While you wait, it’s a good idea to stay in touch with your broker in case you need to supply any additional information. You should also prepare yourself for closing by squaring away all of the fees that you will need to pay on the day of signing.

Close on your mortgage and home purchase

The meeting during which you close on your home usually involves you (the borrower), as well as the mortgage broker, your lawyer, the home seller, his/her lawyer, the real estate agent and a title company representative. Although this meeting can be long-winded and complex, you will walk away with the deed to your new home and official approval for your mortgage loan.

Canadian banking for United States citizens and other foreigners

If you are a citizen of the United States or another foreign country and a non-resident of Canada, and you are interested in obtaining a mortgage in Canada, you will have to take a few extra steps. Although Canada permits non-residents to purchase properties of any type in any amount, non-residents are subject to a Speculation Tax of 15 percent. As a non-resident, you may also have to pay more for a down payment. In most cases, non-residents must pay at least 35 percent of the value of the home in a down payment.

It comes down to lending risk. Canadian banks need to know your credit score, but as a foreigner, you don’t have a Canadian one. Your home country may have its own credit scoring system, but this is much riskier in the eyes of a Canadian bank.

Despite some of these additional costs that apply to non-residents purchasing property in Canada, they can still access Canadian mortgage products through banks and brokers. With a down payment of at least 35 percent, a non-resident can typically secure a loan that has the same interest rate as a Canadian resident has access to, as long as he or she meets the relevant eligibility requirements. However, a non-resident will not have access to some of the subsidized programs available to first-time Canadian buyers.

It is important to keep in mind that owning property in Canada does not have a bearing on your chances of being granted the opportunity to immigrate to Canada. If you are planning on immigrating to the country, it may be best to secure official residency status before buying property so that you can avoid the 15 percent Speculation Tax and the higher down payment.

If you want to pursue a real estate purchase in Canada as a non-resident, it’s best to work with a mortgage expert who has experience with non-resident mortgage applications and the various requirements involved.