How to get a mortgage in Canada: a complete guide

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Whether it's an inner-city condo in Toronto or a rural property up north, most people in Canada would love to own their own home. Among other things, buying real estate is a great way to provide safety for your family, improve your quality of life, and secure your financial future. However, while owning a home is a great achievement that deserves to be celebrated, the process of buying a home can be complex and fraught with danger. From assessing your individual finances and researching ownership arrangements through to securing a mortgage and placing an offer, let's take a detailed look at how to get a mortgage in Canada.

Are you ready to own a home?

Before you start house hunting or looking into mortgages, it's important to take an honest look at your finances and any lifestyle factors that may impede the process. Buying property is one of the biggest decisions you'll ever make, so it's important to do your homework and analyze your budgetary and lifestyle constraints before diving into the deep end.  

Savings and deposit

A substantial deposit is needed before you can purchase a home in Canada. While there are options out there for people who can't raise the standard 20 percent down payment, mortgages with a lower deposit are considered non-conventional and need to be insured by the Canada Mortgage and Housing Corporation (CMHC) or a similar organization. This can cost $100 or $150 per month, an amount which does add up over time. Other than the down payment, new home-owners are advised to set aside 1.5 - 4 percent of the home's selling price to cover closing costs, which are immediately payable on closing day.

Financial health and ratios

Before anyone will offer you a mortgage, they will want to take a detailed look at your financial health. While this can seem like a complex and invasive process, banks and other lenders basically want to minimize their own exposure before offering you hundreds of thousands of dollars. This is a fairly simple process in theory, so you can save yourself a lot of heartache by conducting your own financial health check before applying for a mortgage. Lenders are basically looking at the relationship that exists between your income and liabilities compared to the price of the property in question.

Two formulas are used during this process, with the first ratio called the Gross Debt Service (GDS) ratio and the second ratio called the Total Debt Service (TDS) ratio. The GDS, which is set by the CMHC, states that your monthly housing costs should not exceed 32 percent of your gross household monthly income. The TDS states that your total monthly debt load should not exceed 40 percent of your gross monthly income. While these ratios are not set in stone, they offer a very accurate and consistent way to see if you're ready for a mortgage. Other factors that may be taken into consideration include your deposit amount, additional properties and assets, and your credit score.

Credit score

Your credit score, or credit scores to be more precise, play an important role in every mortgage application. While a healthy long-term income and low debt levels will put you in the bank's favor, a bad credit score can make it incredibly difficult to access a mortgage or any other type of credit. In addition, your credit history and score can have a significant impact on the interest rate that you're offered. There are two major credit bureaus in Canada, Equifax and TransUnion, with a different credit score provided by each. To give you a rough idea, 730 or more is  considered to be "good" credit score in Canada, with an "excellent" score more like 800+. You can check your individual credit score and view sample summaries from Equifax and TransUnion.

Lifestyle factors

Along with the numerous financial factors that will influence your decision, buying a home also has an incredibly profound effect on your lifestyle. While few people would disagree that home ownership puts you in a better long-term financial position than renting, there can be a lot of stress and lifestyle compromises made in the meantime. If you want the freedom to move around from city to city, you may not be ready to own a home. If you want to live in specific parts of the city and don't want to make compromises, you may not be ready to own a home. If you don't have stable employment or your financial position is likely to get worse in the future, you may not be ready to own a home.

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What type of home do you want?

Once you've searched your soul and looked long and hard into your financial situation, the difficult part is far from over. Knowing that you want a mortgage and can afford one is one thing. Knowing what type of home you want is another thing entirely. There are lots of things to consider, including the ownership arrangement involved and price variations in different locations.

The type of home you want depends greatly on its intended purpose, with property investors needing to use different criteria than owner-occupiers. While you don't need to create a short list just yet, understanding how the property market works will help you to find an appropriate home loan for your situation.

Ownership arrangements

There are multiple ownership arrangements existing in Canada, each of which comes with its own complexities. While conventional freehold property deals represent the majority of the market, condominiums are also incredibly popular in many parts of Canada. It's important to understand the differences between freehold properties and condos, with the former giving you ownership of the home and the land where the home resides and the later giving you ownership of the home alone.

In addition to freehold and condo arrangements, which represent the vast majority of the residential market, Canadians can also purchase property with a leasehold or cooperative agreement. A leasehold arrangement gives someone the right to use and occupy a building for a set period of time without ownership. A co-op arrangement is a form of multiple occupancy where people own an individual share of the property in question.

Freehold vs condos

Choosing between a conventional freehold property and a condominium is one of the biggest decisions you'll have to make as a homeowner. There are pros and cons associated with each arrangement, and plenty of options available for both in the Canadian market. Perhaps the biggest advantage to a freehold arrangement is the freedom and control that you have over the property. There is no-one looking over your shoulder, no monthly fees to pay, and the freedom to change the exterior of the building at any time. This freedom comes at a cost, however, with maintenance fees needing to be considered along with mortgage payments.

While certainly not for everyone, condos are an increasingly popular option in the Canadian market. While you lose control over the physical land and building exterior, buying a condo can be a great way to improve your quality of life. Purchasing a condo makes it easier for people to afford central inner-city locations, access modern amenities, and manage maintenance costs. While you have to pay monthly condo maintenance fees along with mortgage payments, condos are an enticing prospect for many younger and older Canadians who want to change how they live along with where they live.  

Understanding mortgage variations

Once you know how much home you can afford and what type of home you're looking for, it's time to start researching your mortgage options. Not all home loans are created equal, with mortgages differing widely in terms of their down payment requirements, interest rates, interest rate structure, and mortgage terms. There are three primary ways to compare mortgages, with each type offering its own unique advantages.

Conventional vs non-conventional - Conventional mortgages involve a 20 percent deposit and have relatively low interest rates. Non-conventional loans normally have higher interest rates and require dedicated mortgage insurance.

Open vs closed - An open mortgage has a flexible payment schedule that allows for earlier payments, often at the expense of higher interest rates. A closed mortgage involves fixed rates and a non-flexible payment schedule.

Variable vs fixed vs convertible - Variable interest rate loans change according to wider economic conditions. Fixed rate home loans stay the same for the entire term of the loan. Convertible rate home loans are also locked in, but only for a specified period of time.  

Reverse mortgage - A reverse mortgage is unique in that it allows people to access cash from the equity they have built up in their home. This option is only available in Canada to people aged 62 and over, with a reverse mortgage a great way to finance retirement.  

Understanding interest rates

Interest rates are the single biggest factor that will affect your mortgage payments. Before signing a home loan, it's important to understand how interest rates work and how they vary over time. The difference between variable and fixed interest rates can have a huge effect on how much money you pay back over time and how quickly you pay off your home loan. In addition to variable and fixed interest rates, some lender also offer convertible home loans, which start off as fixed and change to variable some time down the track.

Variable rates offer more flexibility and lower costs if rates decrease in the future. However, they can also be more expensive if rates rise in the future, lead to more stress due to uncertainty, and make it harder to create a budget. Fixed rates offer more stability and consistency, which makes it easier to budget and avoid late payment penalties. However, fixed rates can end up being more expensive if rates decrease in the future. Like many things in life, the decision to choose variable or fixed interest rates is based on timing and wider market conditions.  

Understanding mortgage terms

Along with interest rates and interest rate structures, it's also important to analyze the terms of a home loan and what this means for your bottom line. The mortgage term is the length of time that the borrower is committed to a particular interest rate or lender. During the mortgage term, the mortgage holder is unable to change the conditions of the loan or interest rate structure.

In Canada, terms differ widely between lenders and products, with typical examples lasting anywhere from six months to ten years. If you have a fixed rate loan, the mortgage term is the length of time that you're stuck with that particular interest rate. It's important to distinguish mortgage terms from amortization, which is the length of time it takes to pay off the entire home loan.

Getting a team together

Once you understand the basic principles of the mortgage market, it's time to get a team together and start the house hunting process. While you can do most things yourself these days, having access to professional advice and services is worth its weight in gold. With the right team by your side, you're more likely to find competitive interest rates, flexible mortgage terms, and desirable properties to compare and purchase. From a mortgage broker through to a realtor and lawyer, let's take a look at the most important members of your mortgage team.   

Mortgage broker

When you're getting a mortgage, you have the choice between dealing with individual lenders directly or going through a mortgage broker. While a broker is not always desirable, experienced brokers are a great way to compare multiple lenders quickly and easily. You don't have to pay for the services of a mortgage broker, with brokers working on a commission structure and getting paid directly from the lenders. However, it's important to be aware of misaligned incentives, with some brokers unable to give you access to particular products and services if they're too dependent on competing products.

If you decide to deal with individual lenders directly, it's important to understand the differences, with conventional A-lenders such as banks competing with B- lenders who have more flexible lending criteria and conditions at the expense of higher interest rates. The new stress test in Canada introduced by the Office of the Superintendent of Financial Institutions’ (OSFI) at the start of 2018 has led to a proliferation of B-lenders, some of who are willing to lend money in a way that's risky and unsustainable.

Realtor

The real estate agent is a fundamental link in every property deal, not just presenting properties but also bringing buyers and sellers together. Realtors in Canada often become members of the local real estate board and Canadian Real Estate Association (CREA), which can be a great way to track down agents. When you're looking for a realtor, it's important to find someone who specializes in the type or property that you want. It's also important to find someone with experience in the local area and someone who you're comfortable communicating with throughout the process.

Lawyer

A lawyer is very useful when purchasing property, with a legal professional able to review paperwork, conduct a title search, register the deeds, handle the transfer of funds, and help you avoid litigation. Hiring a lawyer during the early stages can save you time and money and reduce the risks associated with your deal. Before choosing a lawyer, it's important to look at online reviews, listen to word of mouth recommendations, and check with the provincial law society in your area to ensure their standing. Other than a broker, realtor, and lawyer, it may also be important to find a property inspector, a builder, an appraiser, and a moving company.

Searching for a home

Once you understand the financial aspects of a mortgage and have build a team you can trust, you can start the house hunting process. While lots of people start searching for their new home from the outset, there is no point jumping the gun if you don't have a rough idea of how much you can afford and what type of mortgage you want. Mortgage pre-approval can play an important role, with this process giving you a maximum loan amount, available interest rate, and mortgage payment estimation. When searching for a home, it's important to research the building location, the condition of the home, and how these two things will affect your lifestyle.

Location

The location of your home will have a huge effect on how much it grows in value over time, not to mention your day-to-day lifestyle and living expenses. Property prices vary considerably across Canada based on location alone, so take some time and compare individual homes in a number of locations. This will give you a good idea of what you can afford and what compromises you need to make. Most of the time, buying property is about making careful compromises in terms of location or condition. Are you prepared to have one less bedroom if the house is in the perfect spot? Will you be happy to extend your commute time by five minutes for an extra lock-up garage space?

Condition

The condition of the property has a very real and measurable effect on its price and growth potential. When comparing properties, it's important to look at all the major factors that may cause problems down the road, including the foundations, roofing, plumbing system, electrical system, appliances, HVAC system, and wall condition. It's also important to look into any unusual factors that may highlight additional problems, including changes in temperature from room to room, unusual odors, and water leaks in the bathroom or laundry. When you are getting serious about a property or attempting to compare properties, it's always a good idea to use the services of a professional property inspector.   

Placing an offer

Making an offer on a property is part art and part science, with a lot of guess work in between. People often fall in love with a specific property and end up getting emotional about the possibility of making a purchase. While this is completely understandable when it comes to something as important as your new home, it's important to remain rational and compare properties based on specific criteria. Having people by your side during this process can be a great way to keep things in perspective.

Once you've found the perfect home, you need to make an appropriate offer after speaking with experts and comparing similar properties in the local area. If accepted, the legally binding Offer to Purchase document needs to be signed by the seller and buyer. Along with the price, the offer should include furniture and existing items, the deposit amount, the closing date, the time period, and the conditions of the offer. A good realtor is extremely important during this phase of the process.

Closing on your new home

Closing on your new home can be exciting and stressful, often in equal measure. While you will be excited about locking down the home of your dreams, you'll also need to pay the closing costs and deal with the last minutes stresses involved with home ownership. Closing usually takes one or two months and typically includes a home inspection and lots of paperwork. There are significant costs involved with closing, with new owners needing to pay the statement of adjustments, appraisal fees, mortgage insurance, property taxes, and legal fees.

When closing day comes around, you will officially take possession of your home and finalize the documentation through a lawyer. Once you provide the deposit to your attorney or notary, they will register the home in your name and give you the title deeds. Once this final hurdle is overcome, all you have to do is collect the keys and start enjoying your new home.