This July will mark the 3rd anniversary of when my husband and I bought our first home in Toronto! It all happened in a flash too (literally, it was 3 days total from viewing to closing), and if you really want to know the full story, start with this blog post for all the details.
I’m also super excited that my sister has just joined the new homeowners’ club with her husband, as they just got the keys to their new home in Vancouver. And as the annoying little sister I am, during the whole process I couldn’t help but bug her with a checklist of things she should think about.
If you’re at the beginning stages of your first-time homebuyer journey, I want to help you out too. I also suggest doing some more research after reading this post, including checking out this free interactive First-Time Homebuyer e-Book by Tangerine I wish existed when I was shopping for my home.
Since most often I’m asked about mortgages when it comes to first-time homeownership, that’s what I want to focus on in this post. And quite honestly, in my view it’s the most important aspect since we’re talking taking out loan for hundreds of thousands of dollars.
So, here are the 5 most important things you need to know about mortgages in Canada. And if you still have some questions, leave them in the comments for me to answer!
1. Mortgage Pre-Qualification vs. Pre-Approval
There’s this one billboard near my home I walk by almost daily, and it promotes getting pre-qualified for a mortgage in just minutes. To someone just passing by and not knowing any better, this sounds like you can call them up and they’ll give you a mortgage right away. That is not the case.
There is a big difference between a mortgage pre-qualification and pre-approval. A mortgage pre-qualification is the first stage of the mortgage approval process to estimate how much you can afford. In order to be pre-qualified for a mortgage, you have to work with a mortgage agent, broker or bank and they will look at your income, assets and debts to estimate your mortgage affordability. They determine this by evaluating your total debt service ratio (TDS) and gross debt service ratio (GDS). To learn more about what both of those debt service ratios mean, check out this What Are Debt Service Ratios? article and video. As you may guess, a mortgage pre-qualification will not affect your credit score and it is not a guaranteed loan.
A mortgage pre-approval will affect your credit score though, but it still isn’t a guaranteed loan. When you are pre-approved for a mortgage, what that means is a financial institution has agreed to loan you the money for your mortgage based on the information it has about your current financial situation. They will also provide you with an interest rate for your mortgage which upon pre-approval you can lock in for up to 3-4 months.
2. Mortgage Amortization Period vs. Mortgage Term
This is a fairly simple one but sometimes gets people confused. A mortgage amortization period is the total length of your mortgage, meaning how many years you have to pay off the loan completely. As of 2012, the maximum mortgage amortization period for a high-ratio mortgage (a mortgage that requires mortgage insurance) is 25 years. For a conventional mortgage (a mortgage that does not require mortgage insurance because you have paid more than 20% as a down-payment), you can find mortgages that have 30 year amortization periods, but it depends on the lender. With all this said, it’s always best to choose the shortest amortization period you can afford. The shorter the length of the loan, the less interest you’ll pay on your home.
A mortgage term is simply the length of time you commit to your mortgage lender at the rate you agreed upon. Terms can be anywhere from 1 to 10 years, but a common term length is 5 years.
3. Fixed Rate vs. Variable Rate Mortgage
When you’ve been pre-approved for a mortgage, one important thing you’ll have to decide is whether you want a fixed rate or variable rate mortgage. Fixed rate mortgages stay the exact same rate for the entire length of your mortgage term, and mortgage payments stay the same as well. This makes it easy to include in your budget and can give you some peace of mind if you’re worried about interest rates rising (which they have the past few years). That being said, they are typically higher than variable rates, so you are paying a bit extra for locking in that rate.
A variable rate mortgage is one that fluctuates because they are tied to the ups and downs of the market. If the Bank of Canada announces the key interest rate will go up, your variable interest rate will also go up (and so could mortgage payments). However, if the Bank of Canada announces the key interest rate will go down, so does your mortgage rate (which is a good thing). Although these types of mortgages can be more difficult to budget with since it won’t be one consistent rate the length of your term, they are typically lower than fixed rates and could potentially save you money if you’re comfortable with some ups and downs.
4. You Don’t Have to Renew Your Mortgage with the Same Lender
Growing up, my parents had their mortgage with the same lender for the entire length of their mortgage. I thought that’s just what you had to do. Once you chose a lender, you were stuck with them until your mortgage was paid off. That is not the case at all! You are technically stuck with your lender for the length of your mortgage term, but you are not stuck with them for the whole amortization period.
You see, as your term is about to end, you can do a few things. You can decide to renew for another term with your current lender, or you can shop around to see if another lender can offer you a lower interest rate. Just like how I always suggest shopping around when your insurance term is about to renew, I say do the same thing with your mortgage. If you can find a lender that will offer you a better rate for another 5-year term, that could save you thousands of dollars in interest!
5. Choose Accelerated Bi-Weekly Payments
If there’s one thing I think everyone should do, it’s to choose accelerated bi-weekly or weekly payments for their mortgage. I know it may be annoying if you get paid semi-monthly and all your bills are monthly, but I’m telling you it’s the easiest way to save tens of thousands of dollars on your mortgage with hardly any effort.
When my husband and I were trying out different mortgage payment calculators, we kept finding that if we did accelerated bi-weekly payments, we could knock 3 years off our 25-year mortgage. We’re 3 years into our mortgage already, so that technically means we only have another 19 years until we’re mortgage free!
For more first-time homebuyer and mortgage tips, be sure to check out Tangerine’s Forward Thinking blog: https://www.tangerine.ca/forwardthinking/
Also check out @TangerineBank’s #MortgageSavvy Twitter Chat on May 29, 2019 at 8:00 p.m. EST, featuring Mortgage Expert George Kibalian. Follow and join the exciting chat for a chance to win some great cash prizes!
Got any more mortgage questions for me? Share them in the comments!