FAQs
Please bookmark this page and check back often as more questions are added.
Although I have tried to make this Q&A as comprehensive as possible, it’s obviously not a substitute for real-world advice.
What can a Mortgage Agent/Broker do for me?
Mortgage Agents and Brokers are provincially licensed individuals who secure mortgage loans for consumers and businesses. In contrast to bank employees who work directly for the lender (the bank), Mortgage Agents/Brokers are independent and work for a licensed mortgage brokerage. The brokerage works with a handful of mainly institutional lenders through which mortgage funds are sourced. As most brokerages have access to at least 20 different lenders offering a myriad of mortgage options, an independent agent/broker is in a more flexible position than a bank to find the most suitable mortgage based on the individual needs and goals of their client.
With a Mortgage Agent/Broker, clients don’t need to waste time applying for financing with multiple lenders. Doing so is not only time consuming but detrimental to the client’s credit profile as each lender performs a separate credit check (multiple credit checks over a short period of time will reduce an applicant’s beacon score). With an independent agent/broker, only one mortgage application needs to be completed and only one credit check is performed. The application is then structured and presented electronically to multiple lenders for consideration.
All the paperwork and disclosures necessary to provide the mortgage are prepared by the agent/broker.
Why should I get a mortgage from you instead of a bank?
The banks are perfectly fine for everyday banking. However, when it comes to your mortgage, it’s very important to maintain as much flexibility as possible given the vast amount of money that’s on the line.
While it has become very easy to shop for the best rate on the Internet, it’s virtually impossible to shop for the best mortgage and even more importantly a proper mortgage plan. There’s a huge difference between getting the best rate and getting the best mortgage. The best rate will save you money in the short-term while a personalized mortgage plan will save you money not just in the short-term but also the long-term. The objective of a mortgage plan is to save money not just now but for the entire life of the mortgage — and the savings come not only from having fully discounted rates.
On the customer service level, as a boutique mortgage firm we’re able to give personal attention to each client’s needs. It’s difficult for the banks to offer the same level of attention when they have millions of other customers to look after. Moreover, unlike the banks who offer a small selection of in-house mortgage products, we leverage our relationship with multiple lenders to secure the mortgage that’s most suitable for your objectives. The end result is a customized mortgage plan aimed at saving you money for the entire journey backed by personalized service and unmatched product flexibility.
How are Mortgage Agents/Brokers licensed?
In Ontario, independent agents, brokers, brokerages, and administrators must be licensed by the Financial Services Commission of Ontario (FSCO) if they wish to broker or administer mortgages. FSCO is tasked with administrating and enforcing the Mortgage Brokerages, Lenders, and Administrators Act of 2006. This comprehensive legislation defines the activities of each party and their responsibilities and conduct as set out in the Act. For more information about compliance and regulated activities, kindly visit FSCO’s website (above).
What is a pre-approval?
A pre-approval is a preliminary approval application. It’s a great way for purchasers to get started in their quest of buying a home. We can secure the rate for up to four months which provides homebuyers with the time to shop for a property that best meets their financial suitability. The amount you will be approved for is dependent on numerous factors including but not limited to your income, current occupation, the amount of down payment, and strength of your credit profile.
After discussing strategies and objectives with our clients, we will file a mortgage application to obtain a firm pre-approval. The entire process is performed electronically and requires only one credit check. Once the client enters an Agreement of Purchase, all that’s left is for the lender to do is issue a commitment to fund the mortgage. While a pre-approval protects the client from rising interest rates, we take it one step further by guaranteeing the lender’s lowest rate on closing.
What role does my credit history play when securing a mortgage?
Your credit history plays a very important role when it comes to securing financing at favourable terms. Having a strong credit profile means you are perceived as less of a risk to creditors. This allows you to obtain financing at lower interest rates as well as being able to qualify for mortgage products that require a higher credit score such as a mortgage for an income producing property.
In Canada, your credit profile is retained by two credit bureaus: Equifax and Transunion. Each credit bureau uses a different set of algorithms to compute a risk score. Equifax uses the FICO algorithm while Transunion uses EMPIRICA (a derivative of FICO). Credit scores range from 300 (being the lowest and highest risk) to 900 (being the highest and most creditworthy).
Over the coming years, major credit bureaus will be offering a new type of scoring system called Vantage Score which they claim is more intuitive than the current FICO system.
A FICO score of 650 is generally regarded as decent credit while great credit is having a score of 700 and above. It’s important to note that a higher credit score is required to qualify for unsecured credit such as credit cards or a personal line of credit.
If you experienced financial difficulties that lowered your credit profile, you can still secure mortgage financing at very reasonable rates. Remember that a mortgage is secured debt where the property acts as collateral. The fact that the loan is collateralized gives the lender more leeway to provide you with competitive rates while allowing you to re-establish your credit profile. We work with credit unions and trust companies that specialize in this type of financing.
If you’re required to obtain mortgage default insurance, there are minimum beacon score guidelines that you must meet to be approved.
If you are new to Canada, it is recommended that you and your spouse obtain a secured credit card (separate) to establish a credit rating before applying for a mortgage. Speak with a Mortgage Broker/Adviser for more details.
What is a private mortgage?
Private mortgages are typically provided by individual accredited investors looking to invest their capital in mortgage securities. Most private mortgages are in second or lower positions. The typical loan amount ranges from $30,000 to $125,000 albeit higher loan amounts are available depending on the circumstances.
Private mortgages are designed to be used as a short-term solution (typical term is one year) and the monthly payments are interest only. When the term matures, the entire principal is due in full. Private lenders are used when the mortgage does not fit the risk profile of conventional and self-insuring lenders. Borrower covenant is not an issue for most private lenders as they lend purely on the available equity and marketability of the property.
Would I incur any out-of-pocket fees to retain your services?
There are no brokerage fees in most residential transactions as the lender pays us a finder’s fee. There are some exceptions, however, when a fee would apply. For example, if an applicant has blemished credit, more work is required negotiating with lenders and structuring a financing plan.
The fee that we charge is based on the difficulty of the transaction and the amount of time we have to put in to see the deal through completion. In some cases, our fee can be added to the mortgage amount provided it is permitted by the lender.
We disclose all fees well in advance and prior to a mortgage commitment being issued.
What is a zero-down payment mortgage?
This is an insured mortgage where typically the lender provides the applicant with the minimum 5% down payment through the use of cash-back incentive (non-conventional down payment). It is based on a 5-year fixed rate term. It is most ideal for individuals with steady income, strong credit credentials, and little debt.
What is the Home Buyers’ Plan?
The Home Buyers’ Plan provides consumers with the flexibility to use their Registered Retirement Savings Plan (RRSP) savings to finance the purchase of a home. Contrary to popular belief, this program can be used by homeowners even if they owned property in the past. It’s not limited to first-time homebuyers.
Under the HBP, each qualified applicant can withdraw up to $25,000 from their RRSP towards the purchase of a principal residence without incurring a penalty on the withdrawal from the Canada Revenue Agency.
The withdrawal must then be repaid into the RSP over a time span of 15 years through a designated contribution. The minimum payment amount due in subsequent years is determined by splitting the amount of the withdrawal by 15 equal installments.
If the applicant wants to speed up the repayment process, he or she can do so by designating a larger portion of their contribution towards the HBP “stream”. Doing so will reduce the amount of the minimum payment required in future years.
As simple as the concept sounds, the HBP program is not so simple to understand because it’s tied to complex income tax laws. Also note that with the HBP, you can’t seek a deduction for the designated amount (you can, however, seek a deduction for a contribution that’s not part of the minimum designated payment).
For more information about the Home Buyers’ Plan, please see my HBP primer. Additional information can also be obtained from the Canada Revenue Agency.
What is the minimum down payment I have to provide when purchasing a property?
Generally speaking, applicants have to provide a minimum down payment of 20% to avoid paying a default insurance premium. If the consumer provides a down payment of less than 20%, the lender will obtain default insurance based on the nature of the application and the consumer would have to reimburse the lender for the cost. Default insurance is portable and can be added to the mortgage amount. The tax on the premium must be paid on closing.
As mortgage default insurers require that consumers have at least acceptable credit profiles, consumers with blemished credit will not be eligible for default insurance. We have lenders that self-insure and specialize in high-ratio funding for consumers who have imperfect credit.
Insurance
What is mortgage default insurance?
Mortgage insurance is required to protect the interests of the lender if the consumer defaults on the loan. Mortgage insurance is typically obtained in situations where the consumer provides a small down payment or if the down payment comes from non-conventional sources. Keep in mind that mortgage default insurance is completely different from mortgage creditor insurance.
How does default insurance benefit the homeowner?
The lender is taking significant risk when a homeowner has a small amount of equity in the property (less than 20% of the appraised value). Default insurance allows lenders to mitigate the risk of loss to a third-party insurer so that they can offer mortgages at low interest rates to consumers who haven’t built-up much equity. Moreover, default insurance provides qualified borrowers with the flexibility to purchase a home with a down payment of as little as 5% and make home ownership a reality much sooner than the time it would take to save a down payment of 20%. Under the CMHC Purchase program, for example, consumers can obtain the minimum 5% down payment from flexible sources. There are also specialized programs available for consumers who are self-employed, newcomers to Canada, second home purchases, and income-producing properties.
Who provides mortgage default insurance in Canada?
In Canada, the largest mortgage insurer is Canada Mortgage and Housing Corporation (CMHC) which is a Crown corporation. Mortgages that are insured by CMHC are backed by the full faith and credit of the federal government.
The two other insurers, Genworth Financial and Canada Guaranty (formerly AIG), are private corporations that provide insurance plans similar to CMHC and in some cases plans that cater to a niche market. Most lenders work with both CMHC and Genworth. Very few lenders work with all three insurers. The same premium is charged for plans that are identical in nature.
It is important to note that applicants who are required to obtain default insurance must be approved by the insurer before their mortgage can be approved.
For more information about the plans offered by each insurer and the required premium amount, please see:
Can I port default insurance if I move to another home?
Yes, default insurance is portable and you do not have to pay an additional premium as long as there’s no increase to the loan-to-value (LTV), mortgage amount, and amortization period. If new funds are required, you would have to pay a premium only on the top-up portion (the new money and not the entire principal).
What is mortgage creditor insurance?
This is a type of coverage that protects the homeowner in case of death. In the event of a claim, the policy would pay off the covered mortgage balance in full. Insurance plans of this nature are offered by financial institutions that provide the mortgage. It’s important to keep in mind that with mortgage creditor insurance, the lender remains the sole beneficiary – hence the name creditor insurance. The survivors of the deceased get no financial benefits except the mortgage being paid for the covered amount directly to the lender.
While mortgage creditor insurance is certainly better than having no coverage at all, consumers should be aware that these plans have several disadvantages when compared with a full-fledged life insurance policy:
- Mortgage creditor insurance is post underwritten, which means very few medical questions are asked upfront and more scrutinizing is done in the event of a claim
- The premium amount remains the same even as the mortgage balance declines
- With the exception of the Mortgage Protection Plan which is offered exclusively through Mortgage Brokers, creditor insurance is not portable
- Mortgage creditor insurance is tied to the mortgage which means the premium is calculated based on the initial mortgage amount and coverage will cease if the mortgage is collapsed. Coverage would automatically cease once the applicant reaches 70 years of age
I encourage consumers to speak with an insurance professional about a comprehensive life insurance policy instead of signing up for creditor insurance.
Required Documents
How do I apply for a mortgage?
You can apply for a mortgage in several ways:
- Online: on the website of the lender or brokerage
- In person: by visiting your bank or broker or have them come to you
- By fax: complete your written application and fax it to your mortgage professional
I recommend that new homebuyers apply in person so that a mortgage professional can go over all the details involved in the mortgage process and any related fees, closing costs, etc.
What supporting documents do I need to provide?
It depends on your personal circumstances and the nature of the application. If you are a salaried employee, you will need to provide a letter of employment preferably issued within the last 14 days, two recent pay statements, and proof of down payment such as a bank account statement where the funds are currently deposited. A Notice of Assessment from the last two tax years is used to confirm income, identification, and if any taxes are owed to CRA. Please ensure that you have these documents ready when submitting your mortgage application.
If you are purchasing a property, please provide a copy of the Purchase Agreement with all schedules as well as the MLS listing (if applicable).
If you are refinancing or transferring an existing mortgage, please provide a copy of the most recent MPAC assessment and mortgage statement.
If you’re self-employed or applying based on stated income, please contact us regarding the type of documentation you need to provide. We also have specialized “low doc” programs to provide even more flexibility.
All applicants must provide at least one government issued photo ID (driver’s license, passport, citizenship card) for identity verification.
It’s important for consumers to understand that processing all the supporting documents on the lender’s end takes time. As such, kindly make arrangements to have all the required documents ready no later than 3 weeks before the closing date. Lenders typically require to have all the documents filed 2 to 3 weeks prior to closing before they’ll instruct the lawyer. If any document is not provided on time, the closing would be delayed.
Debt Ratios
What are debt service ratios?
Debt servicing ratios are used to determine if an applicant can afford the mortgage. Generally speaking, lenders look at two different ratios when you apply for a mortgage:
- Gross Debt Service ratio (GDS): Takes into account your housing costs. It is calculated as: [mortgage payment (principal and interest) + property taxes + heat + ½ condo fees (if applicable)] divided by gross income
- Total Debt Service ratio (TDS): Takes into account your housing costs as well as other debts you may have. This includes credit card payments, car loans/leases, personal line of credit payments, other mortgages, etc. Insurance payments and registered retirement plan contributions (RSPs) are not computed in this ratio. The TDS ratio is calculated as: [GDS ratio + all other debts] divided by gross household income
Mortgage lenders look for the following debt ratios when considering your application:
- GDS: no greater than 32% of gross income
- TDS: no greater than 40% of gross income (up to 44% permitted in some cases)
Once you enter the realm of income producing properties or commercial properties, additional ratios are used to determine suitability and risk.
Valuation and Closing Costs
What is an appraisal?
In all real estate transactions, the lender requires that a comprehensive valuation report be prepared by an accredited appraiser or through an automated valuation model. The report takes into consideration a myriad of factors to determine the fair value of the property.
Although the report is ordered and retained by the lender, the homeowner is required to pay the cost. In a purchase transaction, some lenders may reimburse the cost of the appraisal after closing. If the mortgage is being transferred, the new lender typically covers the cost of the appraisal. Speak to your mortgage professional for more details.
The appraiser must be approved by the lender and can only be booked by the lender or a Mortgage Agent approved by the lender.
How much does an appraisal cost?
A full appraisal costs about $300 and is required if the property is new or if the lender insists that a full appraisal be performed. In some cases, the lender may be able to obtain the property value through an automated valuation model (AVM) where the services of an actual appraiser are not required. If a full appraisal is required, the fee must be paid directly to the appraiser at the completion of the visit.
What are some of the closing costs I can expect to incur?
The costs you will incur depend on the transaction. Purchasing a home involves more costs due to the complexity of the transaction and the different taxes and disbursements that must be paid. While closing costs vary with every transaction, they can typically be broken down as:
- Purchasing: Appraisal, strata certificate (if applicable), legal fees, inspection (optional), land transfer taxes (provincial and municipal), HST (on new homes), property tax and utility adjustments, commission to Realtor, mortgage brokerage fee (if applicable), and default insurance premium (if applicable).
- Refinancing/Equity take-out: Appraisal, legal fees, prepayment penalties (if applicable), and discharge fees.
- Transferring the mortgage to another lender: Appraisal, legal fees, prepayment penalties (if applicable), and discharge fees. Most lenders these days will cover the valuation, legal, and discharge fees on approved credit. Prepayment penalties (if applicable) and discharge fees charged by the current lender remain the homeowner’s responsibility.
The Mortgage
Should I take a fixed rate or adjustable/variable rate?
The answer to this question depends on numerous factors including current market conditions, the homeowner’s financial objectives, and personal level of risk aversion. Adjustable and variable rates typically pay off the mortgage faster but there are inherent interest rate risks that not everyone is comfortable with. Any decision regarding the rate structure and length of the term and amortization should be thoroughly reviewed with the help of a mortgage professional so that consumers can compare the advantages and disadvantages of each strategy and determine the level of risk they’re most comfortable with.
What are accelerated payments?
Consumers have the option to pay their mortgage weekly (52 payments per year) or bi-weekly (26 payments per year) instead of making monthly payments. Since we can only accelerate a monthly payment, the net effect of paying weekly or bi-weekly is one additional monthly mortgage payment at the end of each year. Keep in mind it’s the higher payment amount that pays off more of the mortgage and not how frequently the homeowner makes a payment.
Since accelerating mortgage payments has little effect on your cash flow, it’s a worthwhile strategy to consider. Individuals who are salaried and can sync their pay date with their mortgage payment are most suitable for this option. Individuals who don’t have a predictable income stream may find it more convenient to pay monthly.
What is the amortization?
This is the length of time it would take to pay off the loan at the same rate and provided no additional payments are posted beyond the principal and interest component that each payment carries.
As mortgages in Canada are based on relatively short terms, the amortization would adjust when the term is renewed. Accelerating your mortgage payments, increasing your payment amount, and making periodic lump sum payments towards your mortgage would significantly reduce the amortization period of the loan.
In contrast, extending the amortization would yield a lower payment amount but in the end the consumer pays more interest. In the world of mortgages, the amortization is essentially used as a cash-flow tool. If you want to pay off the mortgage quicker and pay less interest, take a shorter amortization. If you want to have a lower payment, take a longer amortization but in the long run you will pay more interest. The standard amortization in Canada at the onset of the mortgage is generally 25 years.
Effective March 18, 2011, CMHC would limit the amortization of insured mortgages to 30 years. Many financial institutions have subsequently announced they will stop offering amortizations greater than 30 years even for conventional (uninsured) mortgages.
What are some of the mortgage terms that are available?
Consumers can choose closed fixed rate mortgage terms ranging from 1 year to 10 years (1, 2, 3, 4, 5, 7, and 10). A variable rate mortgage is typically based on a 5-year term. If you’re looking for an open fixed rate mortgage, it’s available for a shorter term (1-year).
Do I have to pay any penalties to pay off an open mortgage?
An open mortgage doesn’t carry a prepayment penalty. However, administrative and/or discharge fees are applicable. Speak to your lender directly regarding these charges.
What affects mortgage rates?
Mortgage rates are based on many different factors that originate in the financial markets and the overall economy. Adjustable/variable mortgage rates and line of credit products are based on the lender’s prime lending rate, which itself is based on the Bank of Canada’s overnight rate target. There are many variables in the domestic and international financial markets that can affect this rate. Fixed mortgage rates are based on movements in the bond markets and track the yield for the corresponding maturity. For example, the 5-year fixed rate tracks the 5-year Canada bond yield.
What is the penalty to break a closed mortgage?
If you have a fixed rate mortgage where the term is five years or less, the penalty to discharge before maturity is the greater of 3 months interest or the interest rate differential. If more than 5 years have elapsed on the mortgage term, the penalty to discharge would be 3 months interest.
If you have a closed adjustable/variable rate mortgage, the penalty to discharge is typically 3 months interest at the lender’s prime rate. It’s important to get the penalty quote directly from the lender and as closely as possible to the payout date.
For a more thorough explanation of mortgage penalties, please see Understanding Mortgage Penalties.
What is a HELOC?
HELOC stands for Home Equity Line of Credit. This facility allows consumers to tap their equity through a readvanceable line of credit that’s secured by the homeowner’s equity in the property. It is an open facility, which means the homeowner can either pay off the balance every month or just cover the minimum interest payments. Interest charges apply only on the funds that are withdrawn. The credit limit is available at up to 80% loan-to-value minus the mortgage balance, which means the consumer must have more than 20% equity in their home to make use of a HELOC. Generally the interest rate on the revolving facility floats with prime (variable rate) but some lenders allow the structuring of several positions that include fixed and variable rates.
