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Mortgages are one of the most common types of installments loans that Canadians apply for. After all, the overwhelming majority of home purchases are made possible thanks to mortgages. Otherwise, homebuyers simply wouldn’t be financially capable of covering the entire cost of a home if they had to come up with the cash in full.
But there isn’t a one-size-fits-all mortgage product out there. Instead, there are variations of mortgages, each designed with a specific type of borrower in mind.
Read on to find out all about mortgages in Kitchener Ontario to help you determine which specific product is best suited for you.
Thinking about purchasing a house? Avoid these common mortgage application mistakes.
Mortgage Insurance Rules
In life, it seems as though we have to pay insurance on everything. From car insurance to life insurance, to property insurance and beyond, these extra payments for premiums can be a real nuisance.
Well, insurance may also apply to mortgages in Kitchener, too, depending on the down payment you’re able to come up with.
In Canada, homebuyers are required to pay mortgage default insurance if they are unable to come up with at least a 20% down payment toward the purchase of a home. Less than this amount requires a larger loan, which places more risk on the lender. With a higher loan amount relative to the purchase price of a home, the chance of defaulting on mortgage payments increases.
That’s why insurance is required. But while borrowers are the ones responsible for footing the bill, lenders are the ones who are protected. These payments are usually rolled into the overall cost of your mortgage and are paid little by little with each mortgage payment.
Down payments of at least 20% of the purchase price of a home do not require any mortgage insurance premiums to be paid.
How to Save Up For a Down Payment
If you can manage to save up enough money to make up at least 20% of the purchase price of your new home, you can avoid paying mortgage insurance premiums, as already noted. But even if you can’t, you’ll still be required to come up with a down payment in order to get approved for a mortgage.
The type of mortgage you take out will dictate the minimum down payment amount required, as will your financial profile and credit score. Generally speaking, however, you’ll likely need to come up with at least 5% of the purchase price of the home in the form of a down payment.
That said, the higher the down payment amount you can come up with, the less of a loan you’ll need to take out. That will translate into smaller mortgage payments and less debt overall.
Here are some things you can do to help you save for this big payment:
- Automate your savings
- Dedicate a savings account solely for your down payment
- Set aside a specific percentage or amount from your regular paychecks to put aside
- Borrow from your RRSPs through the Home Buyer’s Plan
- Borrow from family
- Cut down on spending
- Pay down your current debt to free up more money to be saved for your down payment
Credit Score Required For a Mortgage in Kitchener
One of the most important factors that lenders consider when deciding whether to approve a mortgage application or not, is the borrower’s credit score. This number tells lenders what type of borrower they would be dealing with.
A higher score usually means the borrower has been diligent and responsible with past debt payments, which means they’d be more likely to make timely payments with their newly approved mortgage.
A lower score, on the other hand, means the borrower likely has a history of missed payments and would be a higher risk to the lender. Of course, there are other factors that go into the calculation of a credit score, but payment history is a big one. Regardless, a higher score is more favourable to lenders, while a lower score will make it more difficult for a borrower to get approved for a mortgage.
In Canada, credit scores range from 300 to 900. The closer you can get to 900, the better. When it comes to getting approved for a mortgage in Kitchener, the minimum credit score needed is usually somewhere around the 650 mark (click here for more information). The exact minimum credit score required will depend on the lender, your other financial characteristics, and the type of mortgage you’re applying for.
Alternative Mortgage Options For Bad Credit Consumers
What if your credit score is less than 650? Are you doomed for rejection?
Perhaps with a conventional lender, yes. but there are alternative mortgage options that you may qualify for if a bad credit score is standing in your way from getting approved for a traditional mortgage in Kitchener.
Get a cosigner – If you know someone who is trustworthy and has a healthy credit score, they may be willing to be a cosigner on your mortgage. In this role, the cosigner promises to assume your mortgage payments in the event that you ever default.
Consider a bridge loan – Bridge loans can help you deal with any current issues you have with your credit and also have a positive effect on your financial situation. They are financed by private lenders and designed to be used as a short-term solution to boost your credit score and help you access lower interest rate mortgages.
Work with an alternative lender – Instead of applying with a conventional mortgage lender, work with an alternative lender. These lenders are accustomed to dealing with bad credit borrowers and have different criteria required for borrowers to get approved for a mortgage rather than relying so much on a good credit score.
Take time to improve your credit score – If time is on your side, make an effort to increase your credit score. That way, when it’s time to apply for a mortgage in Kitchener, you’ll have the minimum credit score needed to get approved. You can do this by:
- Paying all your bills on time
- Cutting back on credit card spending
- Paying your credit card bills in full every month rather than making minimum payments
- Taking out and using a secured credit card responsibly
For more information about buying a house with bad credit, check out this article.
Hidden Costs of Buying a House in Kitchener
Not only will you have to make your mortgage payments, but there are plenty of other costs associated with buying and owning a home that you should consider in order to budget appropriately:
- Interest costs
- Property taxes
- Land transfer taxes
- Property insurance
- School taxes
- HST (if you buy new construction, though much of this can eventually be retrieved)
- Home inspection
- Condo fees (if applicable)
- Moving costs
- New furniture and appliances
- Lawyer fees
- Underwriting fees
- Appraisal fees
- Maintenance costs
- Title insurance
- New home warranty fee (if applicable)
While not mandatory, getting pre-approved for a mortgage is a good idea. You’ll want to get pre-approved for a mortgage before you even start searching for a home, for a few reasons:
- To find out how much you can afford in a home purchase
- To be more competitive against other buyers
- To encourage sellers to look more favourably on you
- To speed up the final mortgage approval process
A mortgage pre-approval is basically a promise from the lender to loan you a specific amount of money in the form of a mortgage to finance the purchase of a home. It means the lender has checked into your financial background and credit and verified all pertinent documentation to approve a certain loan amount.
That said, a pre-approval doesn’t guarantee that final approval will be granted. Any number of things can happen from the time that you are pre-approved to when final mortgage approval is needed that can impact your lender’s decision to grant you a mortgage. But it is a good step in the right direction and can help you narrow your focus on homes that meet your budget and help speed up a sale.
Just keep in mind that pre-approvals expire after 90 to 120 days, after which they’ll no longer be valid.
Should you spend your entire mortgage preapproval amount? Find out here.
Comparing Different Mortgage Offers
To make sure you’re getting a mortgage with the best terms and lowest interest rate, you may want to shop around with different lenders and different mortgage products. When doing so, be sure to compare and contrast the following important factors:
- Interest rate
- Amortization period
- Prepayment options
- Early payment penalties
Mortgage Payment Options
A mortgage is a type of installment loan in which the full loan amount is eventually repaid through installment payments. A payment schedule will be created whereby regular payments must be made for a certain amount by a certain due date.
You have various options in terms of how frequently to make your payments, including the following:
- Monthly – This is the most commonly chosen schedule, whereby payments are made once a month for a total of 12 equal mortgage payments a year.
- Weekly – One payment is made every week for 52 weeks a year.
- Semi-monthly – Two payments are made every month for a total of 24 payments a year.
- Bi-weekly – One payment is made every two weeks for a total of 26 payments a year (note that this equates to two extra payments a year compared to a semi-monthly payment schedule).
The schedule you choose will depend on what you’re most comfortable with and what your lender is able to offer you.
Types of Mortgages Available in Kitchener
As already mentioned, there are various mortgage types available, including the following:
Conventional mortgages. A minimum 20% down payment is required for a conventional mortgage, which means no mortgage default insurance premiums will be required.
High-ratio mortgages. A mortgage with less than 20% down is considered a high-ratio mortgage, and will, therefore, be subject to mortgage default insurance because there’s a higher risk for the lender. High-ratio mortgages let you borrow as much as 95% of the purchase price of a home.
Fixed-rate mortgages. Interest rates on fixed-rate mortgages remain unchanged throughout the term of the mortgage, making the payments the same every billing period. Buyers often choose this type of arrangement if rates are expected to go up sometime soon. That way, they can lock in at a lower rate.
Variable-rate mortgages. At various intervals, the rate on variable-rate mortgages will fluctuate either up or down, making them less predictable than fixed-rate mortgages. These are more attractive to buyers who plan to sell their home before the low-rate introductory period ends and rates go up. They’re also attractive if rates are expected to go down in the near future.
Closed mortgages. These types of mortgages have a prepayment limit, meaning that you’re only allowed to pay a certain percentage of the original principal amount of your mortgage each calendar year. Otherwise, you could face a prepayment penalty.
Open mortgages. Unlike closed mortgages, open mortgages allow you to prepay any amount of your loan any time without being charged a prepayment penalty fee.
Second mortgages. Home equity loans and home equity lines of credit (HELOCs) allow you to borrow against the equity in your home. Equity refers to the value of your home minus any outstanding amount you still owe on your mortgage. You can use this money to cover various expenses, including home renovations.
Mortgage Amortization Periods Explained
A mortgage amortization period is the time period that you have to fully repay your mortgage. The longer it takes you to pay off your home loan, the more interest you’ll pay by the time the mortgage amount is fully paid off.
That said, longer amortization periods also come with smaller installments, making them more affordable for those who can’t make larger payments.
Shorter amortization periods, on the other hand, mean less interest is paid overall. Plus, the loan can be paid off sooner. However, in order to make that happen, larger installment payments are required.
Need a Mortgage in Kitchener?
If you’re planning to become a homeowner sometime soon, now’s the time to start shopping around for a mortgage. Loans Canada can make the process easier by matching you with a licensed mortgage professional.
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.