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If you’re planning to buy a home in London in the near future, now is the time to start shopping around for a mortgage. Preparing yourself for mortgage approval and selecting the right mortgage product for you is a crucial step in the home buying process and can help you secure a home loan that is affordable and suits your budget.
Let’s dig deeper into mortgages in London to help you get more familiar with how these types of loans work and help you determine which mortgage product is most suitable for your financial situation.
To learn more about the mortgage stress test, check out this article.
Mortgage Insurance Rules in London
In London and Canada in general, mortgage default insurance is required on all high-ratio mortgages, which are those that involve a loan amount that is over 80% of the purchase price of a home. That means that if you need to take out a loan for more than 80% of what you agreed to pay for a home, you’ll have to pay for mortgage default insurance.
Also referred to as CMC mortgage insurance, this type of insurance is meant to help people in London and Canadians in-general buy a home even if they are unable to come up with a high down payment amount. It’s also meant to help protect lenders against the higher chances of delinquent borrowers in the event that mortgage payments are not paid.
Without this type of insurance, mortgage interest rates would be higher, which would make it much more difficult for buyers to realize their dreams of homeownership.
In order to avoid paying mortgage default insurance, borrowers must be able to come up with at least 20% of the purchase price of the home as a down payment. Otherwise, the minimum down payment amount for high-ratio mortgages is 5%, in which case mortgage default insurance would have to be paid.
For even more information about high ratio mortgage insurance, click here.
How to Save For a Down Payment in London
As already mentioned, a down payment is required to secure a mortgage in London, the minimum amount required is 5%. But even 5% can be a hefty amount given the home prices in London and in other cities across Ontario and Canada. In London, the average price of a home is $405,186, and 5% of that would be $20,309.
That’s a lot of money for the average consumer to be able to pay upfront in one lump sum without having had the time and made the effort to save up. As such, it’s important for homebuyers to give themselves some time and take certain measures to save up for a down payment long before they start their search for a home.
Some ways to save for a down payment in London may include:
- Dedicating a savings account specifically for your down payment
- Having a certain amount or percentage of your paycheck automatically deducted and deposited into your down payment savings account
- Paying off high-interest debts as quickly as possible to free up more money
- Cutting back on frivolous spending
- Creating a reasonable budget
- Selling or downsize your car
- Borrowing from family or friends
If possible, consider trying to save more than a 5% down payment. There are some good reasons why a larger down payment amount is helpful:
- Avoid paying mortgage default insurance
- Take out a smaller loan and owe less to the bank
- Make smaller loan payments every month
- Potentially get a lower interest rate as a result of a smaller loan amount
Interested in how to borrow money for a down payment? This article is for you.
Credit Score Required For a Mortgage in London
When you apply for a mortgage, your lender in London will look at a variety of factors before deciding whether or not to approve your application. And one of the more important aspects of your financial background is your credit score.
While different lenders in London may have their own minimum credit score required before they issue mortgages, the minimum score typically required ranges anywhere from 650 to 680. A high credit score gives lenders some assurance that the borrower they are considering lending to will be more likely to make all payments on time and in full each month.
A borrower in London with a low credit score, on the other hand, is considered a risky consumer and is less likely to get approved for a home loan. That’s because a lower credit score makes a consumer more likely to default on their loan payments, which is exactly the opposite of what lenders in London are looking for.
The higher your credit score, the better the odds of getting approved for a mortgage. Not only that, but a higher score will also afford you with a lower interest rate, which will make your mortgage more affordable over the long run.
Check out this infographic for more information about credit scores.
Alternative Mortgage Options For Bad Credit Consumers in London
Applying for a mortgage with a bad credit score may set you up for disappointment if you apply with conventional lenders in London. As already mentioned, traditional lenders typically prefer to work with consumers with a decent credit score of no less than around 680. If your score is under that mark, you run the risk of your mortgage application being turned down.
That said, there may be other alternatives besides applying with a conventional lender if you have a bad credit score:
Bad credit loans. Rather than applying for a conventional loan with a traditional lender, consider seeking a mortgage in London with an alternative or “bad credit” lender. There are many private lenders available who deal specifically with bad credit borrowers.
Rather than placing much of the emphasis on credit scores, these lenders in London will look more closely at your income, assets, and most recent payment activity when gauging whether or not to extend a mortgage. That said, it should be noted that such loans will more likely come with a higher interest rate compared to conventional mortgages.
Cosigners. If you’re unable to secure a conventional mortgage because of a low credit score, perhaps someone close to you with a high credit score may be willing to cosign on the loan with you. In this case, the cosigner would help you get approved for the mortgage and promise to take over the mortgage payments in the event that you are no longer able to make the payments yourself.
Waiting and improving your credit score. If you’re not in a rush to buy a home, consider waiting and taking the time to improve your credit score first. Rather than searching for a bad credit loan in London and paying a higher interest rate, you can secure a conventional home loan at a lower rate if your credit score improves at some point in the near future.
Some ways to improve your score include:
- Making all bill payments on time
- Spending no more than 20% to 30% of your credit card limit
- Making more than your minimum credit card payments each month
- Not taking out any additional loans or credit lines
Bridge loans. A bridge loan is a type of loan that’s generally taken out for a short period of time until the arrangement for a larger loan is made available. They’re basically temporary loans that are secured by your home and are named as such because they essentially “bridge” the gap between the sale of a new home and a new mortgage. In other words, you’re actually borrowing your down payment on your new home.
Learn how to negotiate the best mortgage contract based on your needs.
What Are the Hidden Costs of Buying a House in London?
It’s important for all homebuyers in London to understand that mortgage payments are only part of the financial equation. There are plenty of other costs associated with buying a house in London, including the following:
- Closing costs. These can include, lender fees, appraisals, title fees, lawyer fees, escrow fees, and mortgage interest.
- Home inspection. All buyers should include a home inspection condition in their purchase agreement which gives them the chance to scope out the condition of the home before buying.
- Property taxes. Depending on your exact postal code, the rate of property taxes that you have to pay every year will vary.
- Home insurance. Your mortgage won’t be approved unless you’re able to show proof that your home is insurable.
- Utility bills
- Maintenance and repairs
For a comprehensive list of Ontario closing costs? Take a look at this article.
How To Get Your Finances in Order Before You Apply For a Mortgage in London
Before you even speak with a mortgage broker and start your house-hunting search, take some time to get your finances in order first. To do this, consider the following steps:
- Pull your credit report to see where your credit score is at
- Look for errors in your credit report and have them investigated and fixed
- Take steps to improve your credit score if necessary (with the tips mentioned above)
- Find out what the current mortgage interest rates are
- Be realistic about what you can afford
- Start saving for a down payment
- Cut back on spending
- Make all efforts to whittle down your debt as much as possible
Mortgage Pre-Approvals in London
Before you start looking at new homes, speak with your mortgage broker first to get pre-approved for a mortgage London. A pre-approval is basically a promise letter from your lender that you can be approved for a specific loan amount at a certain interest rate based on your current financial situation.
Keep in mind that this doesn’t guarantee final mortgage approval, especially if some things change with your situation before the closing of the home. Further, pre-approval letters expire after 90 to 120 days, after which they’re no longer valid.
While mortgage pre-approvals are not mandatory, they’re a good idea to get. For starters, they’ll help you determine exactly how much you’d be able to afford. There’s no sense in looking at homes that are far out of your reach. Knowing what you can afford will help you focus on properties that match your budget.
Being pre-approved for a mortgage will also help to strengthen your position in the eyes of sellers. This is especially helpful if it’s a seller’s market and the competition with other buyers is rather fierce. In this case, you’ll stand a better chance at winning a deal with a seller for a home that you love.
Should you spend your entire mortgage pre-approval amount? Find out here.
Mortgage Payment Options in London
A mortgage is a type of installment loan, which means that the full loan amount is paid back in regular installments. When it comes to mortgages, you have some options in terms of the frequency of your payments:
- Semi-monthly/Bi-weekly (payments are made twice a month)
- Accelerated bi-weekly (payments are made every two weeks)
Interested in how much it costs to buy a house in other parts of Canada? Click here.
Types of Mortgages Available in London
There are different types of mortgages in London that are available for you, including the following:
Fixed-rate mortgages – These are commonly-chosen mortgages among borrowers in London because the payments are more predictable and easier to fit within a budget. As the name suggests, a fixed-rate mortgage means the interest rate associated with the loan does not change throughout the term.
That means the mortgage payments stay the same, with slightly less being paid toward interest and slightly more being contributed to the principal portion with every payment, though the entire payment amount doesn’t change. Fixed-rate mortgages give borrowers in London some assurance that they have locked in at a good rate if it’s anticipated that rates will increase in the near future.
Variable-rate mortgages – Interest rates with variable-rate mortgages will fluctuate throughout the mortgage term. The initial rate offered is usually lower than that of fixed-rate mortgages during the “introductory period.”
When this period expires, however, the rate will change and can either go up or down depending on the prime rate stipulated by the Bank of Canada. The rate will change periodically throughout the term at specific intervals as well.
Some borrowers in London choose this type of mortgage because of the lower rate at the onset of the term. And if they plan to sell before the introductory period ends, they don’t have to worry about what rates will do. Further, if rates are expected to decrease at some point in the near future, borrowers with a variable-rate mortgage can take advantage of lower rates and therefore some savings.
Conventional mortgages – A conventional mortgage is one that requires a minimum of 20% down payment and does not require mortgage default insurance.
High-ratio mortgages – If less than a 20% down payment is made, the mortgage is considered a high-ratio one. These mortgages require a minimum down payment of 5% and mortgage default insurance premiums.
Second mortgages – If you already own a home in London, you may be able to borrow money against it. In this case, you would be taking out a “second mortgage,” or a “home equity loan.” To get approved for a second mortgage, you’ll need to have at least 80% equity in the home, which is basically the value of your home minus what you still owe on your current mortgage.
The lowest mortgage interest rate might not be what you need. Learn more here.
What is a Mortgage Amortization Period?
An amortization period refers to the entire life of the loan and the time period that you have to pay off the entire loan amount in full. A longer amortization period means that you have a longer amount of time to pay off the loan, and therefore your installment amounts would be smaller. However, the mortgage would cost more over the long run because of more being paid towards interest.
Shorter amortization periods, on the other hand, mean that the mortgage would be paid off faster. As such, less would be paid towards interest, making the mortgage cheaper overall. That said, the monthly payments would be higher in an effort to pay off the mortgage in a shorter time frame.
How long should you amortize your mortgage for? Click here.
How to Compare Mortgage Offers in London
Every lender in London has their own specific mortgage products, so it’s important that you take the time to compare these products before choosing one that’s most affordable and more suitable for you. The things that you should be comparing include:
- Interest rate
- Term (the length of time that the mortgage has legal effect, after which it would have to be renewed, refinanced, or paid in full)
- Amortization period (the entire amount of time needed to repay the loan amount in full)
- Prepayment options
- Early payment penalties
- Variable versus or fixed rate
Looking For a Mortgage in London?
If you’re thinking about buying a home in London sometime soon, perhaps now might be a great time to speak with a mortgage broker. You’ll want to get your finances in order before you start house hunting, and a mortgage broker may be able to help guide you in the right direction.
Loans Canada can help you find the right mortgage broker or lender in London to work with so that you can secure the appropriate mortgage product that’s most affordable and convenient for you!
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.