Home buyers in Canada are required to make a
down-payment of at least 5% of the purchase price of the property. But
remember, anyone that has less than 20% down-payment is required to pay a CMHC
Premium, which is the cost of insuring your new mortgage against default
(non-payment of the loan). With only 5% down, the CMHC Premium will be 4% of
the total loan amount. For a $300,000 mortgage, that would be a $12,000 premium
(https://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm).
So, what’s the upside of paying for this premium? It usually results in the
home buyer having a lower interest rate on the loan, which could save them
money over the long-term.
The
right type of mortgage:
When speaking about mortgage rates, most people in
Canada refer to the 5-year fixed rate. Currently, the Bank of Canada quotes the
5 year mortgage rate at 5.14% (https://www.bankofcanada.ca/rates/daily-digest/),
even though most Canadians can negotiate lower rates than this from a lender.
Borrowers are free, however, to negotiate a range of mortgage terms, including
anywhere from an “open” mortgage, which allows the borrower to pay off the
balance of the loan at any time, to a 10 year mortgage, which locks in the
client’s interest rate for 10 years, but with the consequence that should the
client choose to pay off the balance of the mortgage before that time is up,
they would have to pay a penalty. For borrowers that believe market interest
rates might stay the same, or even drop, a variable rate mortgage might be
appropriate. Variable rate mortgages allow borrowers to borrow money at a lower
rate than the current 5 year fixed rate, but with the condition that if market
rates rise, so will the interest rate of the client’s mortgage.
The
importance of an underwritten pre-approval:
With all of the recent changes to mortgage rules in
Canada (https://globalnews.ca/news/3897942/new-mortgage-rules-2018-canada-guide/),
it is important for home buyers to carefully obtain the right pre-approval
before agreeing to buy a home. An underwritten pre-approval means that a
professional took the time to ask for, and validate, several key documents that
lenders and the government require from borrowers before they can grant them a
mortgage loan. These documents might include employment letters, pay-stubs,
credit reports, savings account statements, and even Notice of Assessments from
Revenue Canada. These documents are meant to ensure that borrowers have
consistent and stable income, that they can afford the mortgage over the
long-term; they now even seek to ensure that the borrower could continue to pay
the mortgage if interest rates rose a couple of percent. Many lenders will
issue pre-approvals without asking for key documents, and this could leave the
client open to the risk of not actually being able to obtain the mortgage later
in the process once the key documents are properly reviewed.
Matthew Clarke.
BA (Hons.), B.Ed., MBA.
Mortgage Agent and Financial Consultant serving
Ontario since 2007.
