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When shopping around for a new home, the first question you should ask yourself is how much can you spend? If you are like most of us, you may have to look at borrowing money to finance the purchase of a home or commonly called “applying for a mortgage”………here is some important information on getting a mortgage or at least getting ready financially to apply for a mortgage……..

Qualifying interest rates for mortgages

To qualify for a mortgage loan at a bank, you will need to pass a “stress test”. You will need to prove you can afford payments at a qualifying interest rate which is typically higher than the actual rate in your mortgage contract.

Credit unions and other lenders that are not federally regulated may choose to use this mortgage stress test. They are not required to do so.

The qualifying interest rate your bank will use for the stress test depends on whether or not you need to get mortgage loan insurance.

If you need mortgage loan insurance, the bank must use the higher interest rate of either:

If you don’t need mortgage loan insurance, the bank must use the higher interest rate of either:

Who needs insurance? For example, say you apply for a mortgage at a bank and that you have a down payment of 5% of the value of the home. You’ll need to get mortgage loan insurance since your down payment is less than 20%. If you have 20% or more for your down payment on the home, you will not need mortgage insurance.

Assume that:

  • ​the interest rate you negotiate with your lender is 3.00%
  • ​the Bank of Canada’s conventional five-year mortgage rate is 5.34%

You’d need to qualify at the higher of the two interest rates, which is the Bank of Canada’s conventional five-year mortgage rate, even if you’ll be paying the lower interest rate in your mortgage contract.

Calculate your gross debt service and total debt service ratios

Use the Mortgage Qualifier Tool​ to see if you can qualify for a mortgage based on your income and expenses.

The maximum amount you calculate may actually overestimate what you can really afford. Also think about the extra costs associated with buying a property, such as closing costs, mortgage loan insurance premiums, moving costs, unexpected expenses, maintenance costs and major home repairs.

Compare the result with the estimated costs for the home you’d like to buy. If the total costs you estimate are lower than the maximum amount you calculated, you’ll probably qualify for a mortgage with the lender.

If you find that your debt service ratios are too high, consider:

  • buying a home in a lower price range
  • saving for a larger down payment
  • reducing your debts

Questions to ask when shopping for a mortgage

Compare the whole package offered by each lender.

Ask about:

  • the interest rate
  • the term
  • the amortization period
  • the fees you have to pay
  • your payment options
  • your prepayment options
  • ways you can save on interest
  • penalties if you sell your property before the end of your term
  • options if you want to pay your entire mortgage off early
  • transferring the remaining amount of your mortgage and the terms to a new property without paying a penalty if you sell your home
  • registering the mortgage with a standard or collateral charge

Negotiate your mortgage contract

Once a lender decides to lend you money, you’ll have to negotiate the terms and conditions of the mortgage, such as:

  • the amount
  • the amortization period
  • the term
  • how often you’ll make payments
  • the interest rate
  • if it’s an open or closed mortgage

Consider your options and choose a mortgage that is right for you.

Read your mortgage contract carefully and be sure to ask about anything you don’t understand.

Federally regulated financial institutions, such as banks, must clearly give you key details about the loan agreement in an information box at the beginning of your contract.

Know your rights and responsibilities when getting a mortgage.

Hopefully this can be of some value to you and if you have any questions about getting a mortgage don’t hesitate to give us a call!

Thanks for reading

regards,

Tamara & Shannon

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