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No matter where you live in Canada, most homes don’t come cheap. Luckily enough, the province of Quebec, as well as its most populated city of Montreal, generally enjoy some of the lowest housing prices in the country. Nonetheless, it’s uncommon for any Montrealer to be able to afford a home without the help of a mortgage.
In fact, a mortgage is beneficial in more ways than one. Interested in knowing more about the home buying process in Montreal? Keep reading for all the information you need.
How Can a Mortgage Help Me?
For any Montrealers who haven’t looked into the process, a mortgage is a type of loan that you can apply for through a lender or a mortgage broker and is meant specifically to purchase houses and other real estate properties with. Since most houses in Canada, even fixer-uppers, can cost well over $100,000, the vast majority of people cannot afford one right off the bat. Instead, they need to finance their home over time through a series of installments, thus making it more affordable.
What Type of Mortgage Can I Apply For?
Another good thing about mortgages in Montreal is that there are several types, all catered toward different kinds of home buyers. Generally speaking, however, the more common mortgage types include:
Otherwise known as “low-ratio”, a conventional mortgage applies to any homebuyer who’s making a down payment equal to 20% or more of the home’s purchase price. Since the buyer is making a larger down payment, it’s usually because they are a stronger and less risky borrower. As such, interest rates are often lower than other mortgage types and default mortgage insurance, which protects lenders/brokers when borrowers cannot make their mortgage payments, will not be required.
Read this to discover the difference between a conventional and a collateral mortgage in Montreal.
When a home buyer makes a down payment of less than 20% of the home’s purchasing price, it’s known as a “high-ratio” mortgage. The buyer will be required to purchase mortgage default insurance through the Canadian Mortgage and Housing Corporation (CMHC), Genworth Financial, or Canada Guarantee.
Why do different lenders offer different mortgage rates? Click here for the answer.
With an open mortgage, a home buyer is permitted to pay off their mortgage whenever they want, without set payment amounts, and won’t incur any penalties for it. Therefore, open mortgage terms are generally shorter, while interest rates are higher. However, terms can also be longer and have variable rates, depending on the homebuyer’s financial requirements and the lender’s policies.
Unlike an open mortgage in Montreal, rates and payment amounts for open mortgages are fixed, meaning they cannot be changed during the mortgage term, at least without the buyer incurring a penalty. Prepayments, renegotiations, and refinancing are not permitted until maturity has been reached. “Maturity” refers to the final date when the last of your mortgage principal and any remaining interest must be paid in full.
If you want more information about open and closed mortgages, try reading this.
Mortgage Term vs. Amortization: What’s the Difference?
Before we delve any further into mortgages in Montreal, let’s discuss an issue that sometimes confuses first-time home buyers. Your mortgage payments can actually be broken down into two categories, known as your mortgage “term” and your mortgage “amortization”, and each has a different meaning.
This refers to a specific period within your mortgage, wherein you’ll work with the same lender, pay the same rate, and follow the same policies listed within your original mortgage contract. In Canada, your term can last anywhere from 6 months to 10 years. When your term ends, your contract will be up for renewal, meaning you can renegotiate the conditions of your mortgage with your current lender or, if you prefer, apply with another lender in hopes of securing a better one.
Click this link to learn more about short-term mortgage financing and bridge loans.
On the other hand, your amortization period refers to the total amount of time that you’re mortgaging the property for. The more payments you make, the shorter your overall amortization will be. Typical amortization lengths can last 20-35 years, although longer and shorter periods are possible, given the conditions of your contract and your lender’s policies regarding prepayments, extensions, accelerated payments, etc.
For a more detailed explanation of mortgage terms and amortizations, read this.
What Are Mortgage Rates?
With any loan or credit product, your lender will charge a certain percentage in interest, the fee they add on to your payments in order to make a profit. In Canada, there are two types of mortgage rates that adhere to the various mortgage options above.
When an interest rate is “fixed”, it’s locked in and won’t change over the course of your mortgage term. While fixed rates can sometimes be higher than variable rates, they do offer some peace of mind when it comes to budgeting, since an unchanging rate will help you calculate your mortgage payments easier. Once again, when your term is up for renewal, you may be able to negotiate a better rate for your next term.
Also known as “adjustable”, this means that your interest payments may fluctuate during your mortgage term in accordance with the Bank of Canada’s prime rate, which is the country’s market rate for lending. In this case, your lender will reevaluate your mortgage periodically. If the prime rate changes, your payment amounts, and amortization length may also fluctuate, and your lender will adjust your payment plan accordingly.
Here’s what to do if mortgage rates increase while you’re trying to buy a house.
What Are My Mortgage Payment Options?
When you’re approved for your mortgage in Montreal, you’ll be faced with several payment options. Again, ask your lender about their policies, as some lending sources won’t offer every option. However, each payment type may be suitable for different homebuyers in different financial situations, so consider them carefully before you make a final decision. The most common mortgage payment options include:
- Monthly – 1 payment per month, for a total of 12 payments per year. The most common mortgage payment option, each installment will be automatically deducted from your bank account at the same time every month.
- Weekly – An average of 4 payments per month, for a total of 52 payments per year. Generally more affordable for those with higher incomes, this will make your amortization period slightly shorter, saving you some money in the long run.
- Bi-weekly – 1 payment every 2 weeks, for a total of 26 payments per year. Your amortization may be a bit longer, but your payments are also a bit more affordable, especially if your income is received on a bi-weekly basis.
- Accelerated bi-weekly – This involves paying half your monthly mortgage payment every 2 weeks. While you’ll still be making 26 payments per year, this results in a slightly larger payment each time.
- Accelerated weekly – Here, you’ll take your monthly payment and divide it by 4. You’ll once again end up with 52 payments per year, but they’ll be slightly more expensive than traditional weekly installments. With both accelerated options, by making larger payments, you’ll effectively be reducing your amortization and saving on interest in the process.
Credit Score Needed For Mortgage Approval In Montreal
When it comes to any kind of credit product in Montreal, mortgages included, your credit score, which ranges from 300-900, can have a significant effect on the way your approval odds and interest rate are calculated. The closer your score is to 900, the better your approval odds and the lower your interest rate will be.
Normally, a score of 650 or higher signals that you have decent credit, giving you the best approval odds and lowest mortgage rates. However, new Canadian mortgage rules have stated that a borrower must have a minimum score of 600 to qualify for a mortgage of less than $1 million. If you’re borrowing money for a down payment as well, many lenders will raise that credit bar back up to 650 or higher.
Need to borrow money for a down payment? Here’s how you can do it.
Mortgages With Bad Credit
Unfortunately, if your credit score drops below the 560 mark, you’ll have entered the area of bad credit, wherein your chances of approval will be slim and your interest rates higher, assuming you’re approved at all. Bad credit often means that you’ve had trouble keeping up with credit product payments in the past or, even worse, that you may have experienced some kind of delinquent event, like a bankruptcy.
As such, your lender would be taking a much bigger risk by letting you borrow such a significant amount of credit from them. If you default for too long and they’re forced to go through the foreclosure process, they could potentially lose a lot of money. All this to say that while having bad credit will not automatically get you rejected, it may result in much less affordable interest rates and far stricter mortgage payment conditions. Make sure to fix or improve your credit score as best you can prior to applying for a mortgage.
Look here to find out how you can buy a house in Canada with bad credit.
Looking for a Mortgage In Montreal?
If so, then Loans Canada is the right source for you. Apply with us today to be swiftly connected with the best mortgage lenders in your area. Remember, we’re here to help you buy the home you want!