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Financing Costs

Purchases of a home are generally financed so they can be paid over time. Before you even start looking at homes it’s a good idea to look at financing and set out a budget.

Lending institutions will sit down with borrowers and determine the maximum amount of money that can be borrowed and discuss payment schedules. They may commit to a certain size of mortgage at a set interest rate. This is called a pre-approved mortgage. This assists buyers in determining their price range. Buyers also need to consider the amount of the down payment that will be required and where it will come from.

Mortgage Stress Test

When Banks are considering whether a buyer who is making a down payment of 20% or more qualifies for a mortgage the law requires them to assume that the interest rate on the mortgage will go up over the next five years. Banks must assume that mortgage rates will increase by 2% or that they will reach the Bank of Canada five-year benchmark rate, whichever is higher.

Down Payment

Generally speaking, buyers must come up with a down payment of at least 20% of the purchase price to qualify for a conventional mortgage. However, if a buyer is able to obtain mortgage loan insurance, for example through government programs such as Canada Mortgage and Housing Corporation (CMHC) or private mortgage insurers , buyers may be able to obtain a mortgage with as little as a 5% down payment. Some restrictions apply.

The down payment can come from a number of sources including savings and gifts from relatives. While it may be possible in some cases to borrow the money for a down payment, this debt will be considered by lenders in deciding whether to give a mortgage and in deciding on the interest rate.

Mortgage Insurance

If the buyer makes less than a 20% down payment, they will get a high ratio mortgage. This type of mortgage must be insured to protect the lender, in case the borrower defaults on the loan. The insurance fee is calculated as a percentage of the mortgage amount. It can be added to the mortgage and repaid as part of the monthly mortgage payments or the full amount can be paid directly to the lender.

Mortgage Application

In some cases borrowers may be charged a processing fee. For example, if the borrower applies for a high ratio mortgage, the lender may require payment of a fee to process the application for a mortgage. This fee will not be refunded even if the application is refused.

Appraisal

The lender of mortgage money may require an appraisal of the property before approving the mortgage. The lender arranges for the appraisal and the buyer will be responsible for the cost of having it done.

Home Insurance

The buyer must insure the property against loss in order to get a mortgage. Insurance must be effective on the possession date. Premiums will vary.

Mortgage Insurance

A buyer may be eligible to purchase life insurance on a mortgage. The insurance will pay the outstanding balance of the mortgage in the event of the property owner's death. If there are joint owners, insurance may be bought for one or both owners. Disability insurance may also be available. Premiums will vary.

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