Arranging Your Mortgage for Mississauga Real Estate
Buying a home usually means taking out a mortgage. that means you borrow money to buy a home, using that home as collateral for the loan.
The amount of mortgage you can afford depends on your income, the down payment, current mortgage rates, and the amortization period you choose. Most lenders want borrowers to keep a gross-debt-service-to-income ratio of 40 per cent or less, coupled with a housing-cost-to-income ratio of 32 per cent or less.
You may be able to purchase a home with a down payment as small as 5 per cent, thanks to CMHC’s Insurance program. First-time home buyers may also be eligible to withdraw up to $20,000 tax-free from an RRSP to use as a down payment. The funds must be repaid within fifteen years. Lenders can provide you with a preapproved mortgage that shows approximately what mortgage loan you can afford.
Make sure you have a mortgage you can live with. There are lots of options available that let you customize your mortgage to suit your financial goals and needs.
Mortgage Basics
Mortgage payments are made up of a principal sum (the amount borrowed) and interest (the cost to you of borrowing money).
The best plan for any type of mortgage is to minimize the amount of interest you pay — and lenders offer several ways to help do this:
- A larger down payment means your home ultimately costs less because a smaller mortgage means less interest.
- A shorter amortization, the period over which a loan is repaid.
- A weekly or biweekly payment schedule, instead of monthly.
- Additional lump sum payments.
You don’t have to get your mortgage from the same place you have your savings or chequing accounts. Also, at the end of each term, you may be able to change the options of your mortgage, such as the payment schedule, the term, the rate, even who holds the mortgage.
Mortgage Features
Prepayment
Ensure that you have some form of prepayment clause in your mortgage that will allow you to pay down your mortgage with a lump sum, or an extra payment, without penalty.
Portability
This means you can transfer the terms and conditions of your mortgage to your next home. For example, this may allow you to keep a low interest rate if you sell one house and buy another.
Assumability
This means you may be able to assume (take over) the existing mortgage on the property. It may have attractive features, such as a lower interest rate than the prevailing market. In turn, an assumable mortgage may be a selling feature for you when you decide to move on in the housing market.
Expandability
This lets you expand the principal on a first mortgage at the lenders agreed-upon rate of interest. This can be a cost-effective way to finance a home renovation.
Types of Mortgages
Conventional Mortgage
This mortgage is for an amount which does not exceed 75% of either the appraised value of the property or the purchase price, whichever is lower. Your down payment is a minimum 25% of the purchase price.
High-ratio Mortgage
With this type of mortgage, you contribute less than 25% of the cost of the home as a down payment and as little as 5%. A high-ratio mortgage requires mortgage loan insurance. CMHC offers Mortage Loan Insurance for a premium of between 0.5% and 3.75% of the mortgage amount. This premium can be added to your mortgage payments or paid in full on closing.
Second Mortgage
This usually has a higher interest rate and shorter amortization than a first mortgage. Secondary financing is often used to make renovations to a home. You can achieve mortgage freedom sooner by increasing the frequency of your payments. By making payments every two weeks, instead of monthly, a 25-year mortgage can be reduced to 20 years.
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Please note: The above is a guideline and you should always contact a qualified Mississauga Real Estate Agent for any questions or concerns relating to arranging your mortgage.
