Most people require a mortgage to purchase a home. This section explains the elements of a mortgage including type, terms, and how to qualify for one. In addition, choosing the right mortgage for your needs can help you retire this financial obligation sooner.

Mortgage overview

• A review of principles including interest rates, payments, amortization period, pre-approval process, and conventional and high ratio mortgages.

Choosing a mortgage to meet your needs

• This article explains the different options available, including closed, variable, assumable and vendor-buy back.

Qualifying for a mortgage

• Here's what you need to know when you apply for a mortgage. When you are prepared, and have all your documents in place, you will be approved much quicker and on your way to buying your home.

Make the most of your mortgage

• When you're shopping for a mortgage compare terms, rates and payments. Differences in these areas could save you or cost you thousands over the life of your mortgage. This article provides some suggestions on making your payments work harder for you.

Shave years off your mortgage

• This article provides you with a chart that shows how much money you'll save by changing the amortization period and increasing your payments.

Don't forget about these costs

• There's more to buying a home that simply the asking price. This article outlines fees that are your responsibility, including legal, service, insurance, inspection, appraisal, survey, moving, and interest.

Mortgage overview

Most people who purchase a home require some financial assistance. That is, they require someone to lend them sufficient funds to cover the price of a home. Most often, this financial arrangement is handled through a bank or other institution through a MORTGAGE. A mortgage is a legally binding agreement that states a certain party (mortgagor) lends money to another party (mortgagee). The mortgagee agrees to pay back the money at a certain rate, plus interest, over a certain time period.

There are two parts to this financial agreement: principal and interest. Principal is the actual amount borrowed. Interest is the lender's fee you are charged for borrowing. You also have to determine the amortization period (the length of time it will take to completely pay off the mortgage) and the term, or length of time each mortgage agreement guarantees the interest rate.

When you are considering a mortgage, you have many options to consider such as type of mortgage (closed, open, high ratio, vendor take back, convertible), payment schedule (weekly, bi-weekly, monthly) and amortization period. Before you sign any documents, shop at several institutions and compare rates and features. You could save, or lose thousands of dollars when the terms, interest rates and payment schedules are not working in your favor. These items are negotiable.

Mortgage amount
When interest rates are lower, your monthly payments are lower, so you might qualify for a larger mortgage. However, the larger the mortgage, the more you will pay in interest over the length of the mortgage. Your home will cost you more. If you can afford a bit more, without sacrificing your lifestyle, this will greatly contribute to reducing your financial obligation.

Down payment
To qualify for a conventional mortgage, you need a down payment of 25% of the purchase price. The mortgage cannot exceed 75% of the appraised value.

If you have less than the 25%, you may qualify for a high ratio mortgage. If you qualify, you can purchase a home with a minimum 5% down payment through CMHC (Canada Mortgage and Housing Corporation). Insurance, for an additional 0.5% to 3.75% of the mortgage amount, is mandatory with a high ratio mortgage. The house price may also be capped. See article in this series.

Get pre-approved prior to home shopping
House hunting takes a great deal of time and energy. And that's even with pre-approval. Before you start shopping for your dream home, go to the bank. Talk to the lending officer and review your mortgage options. Fill out he necessary paperwork (which only takes a few minutes), and you'll know within a matter of days whether you're approved for a mortgage, and for how much. You'll know what you can spend on a home before you start looking, you'll be protected against interest rate increases, and most importantly, you'll be well prepared to make an immediate offer on a home you like. A seller is more likely to consider an offer free and clear of encumbrances. With pre-approval, you are showing you are serious and ready to buy. With this simple and FREE service, you'll eliminate problems down the road.

When you're shopping for a pre-approved mortgage, here are some areas to consider:

Competitive interest rates. Check out all options and interest rates. Sometimes, flexible features may cost more.

90-day rate guarantee. You'll be protected against rising interest rates while allowing you to take advantage of falling rates.

Flexible payment options. With these areas, you can tailor the mortgage to your lifestyle. Discuss payment frequency and lump-sum payment options. Can you skip a payment in special circumstances or double-up on your payments?

Closing costs: Be sure you have a clear understanding of the fees involved.

Choose a mortgage to meet your needs

When you're buying a home, the type of mortgage you choose, the down payment, the amortization period and even the payments make a difference. To get you started, here's a review of the most common types of mortgages.

Assumable mortgage
By assuming the existing mortgage, you may be able to save on the usual mortgage fees such as appraisal and legal fees. You'll save time, since you don't have to negotiate to arrange financing from another lender and the existing mortgage on the home may be less than the current market rates. Alberta is the only province in Canada which allows for as assumable mortgage. You simply apply cash that has already been paid toward the mortgage and resume payments. Some institutions may require you to qualify.

Vendor take back
With a VTB, the vendor also becomes a lender, holding all or some of the mortgage. Sometimes the vendor will offer this loan at lower than bank rates.

Conventional mortgages
With a conventional mortgage, you need a minimum down payment of at least 25% of the purchase price. These mortgages have the lowest carrying costs, and do not have to be insured against default. You are responsible for a property appraisal and legal fees registering the mortgage and completing the purchase

Low down payment insured mortgage
Low down payment mortgages - with down payments as low as 5% - must be insured to cover potential default of payment, and their carrying costs. Therefore, this mortgage is higher than a conventional mortgage as they include the insurance premium. Low down payment mortgages are often referred to as National Housing Act (NHA) or High Ratio mortgages. Both Canada Mortgage and Housing Corporation [CMHC] or GE Capital Mortgage Insurance Company (Canada) [GE] offers default insurance. You are responsible for appraisal and legal fees and the application fee for the insurance.

Closed, open & convertible mortgages
With a closed mortgage, the interest rate is locked in for the full term of the mortgage. You must pay a fee to renegotiate the interest rate or pay off the balance before the end of the term. Closed mortgages are the most effective when interest rates may be rising and for people who are not moving in the short term. First time home buyers find them especially appealing, as mortgage payments are established for a set time frame. The interest rate for open mortgages may be lower than for open mortgages. These mortgages are available in terms from six months to 25 years.

Flexibility is a prime advantage of an open mortgage. They can be repaid either in part or in full at any time, without incurring any additional costs. This mortgage, however, is generally available for a term of six months or one year. Interest rates for open mortgages may be higher than for closed mortgages because of the added flexibility.

In these two situations, you could save a tremendous amount on interest costs: 1) when you're planning to sell your home soon without buying another, and you speculate that interest rates are falling 2) when you think you may be able to pay down a considerable portion of your mortgage debt in the near future.

A convertible mortgage is a fixed-rate mortgage that provides the same security as a closed mortgage. It can also be converted to a longer, closed mortgage at any time without cost.

Fixed or variable?
With a fixed-rate mortgage, the interest rate is locked in for the full term of the mortgage. Buyers know the payment amount throughout the entire term. Fixed-rate mortgages could be either open (could be paid off at any time without costs) or closed (costs apply if paid off prior to maturity).

With a variable-rate mortgage, mortgage payments are set for a term of one to two years or longer although interest rates may vary during this time.

If interest rates go down, more of the payment is applied to reduce the principal. If rates go up, more of the payment is applied to interest payment. Variable-rate mortgages may be open or closed. With a variable rate mortgage a buyer has the flexibility to maximize upon falling interest rates and to convert to a fixed-rate mortgage at any time.

If you suspect interest rates will rise, you may want to lock in your fixed rate for a long time. If you speculate that interest rates are headed downward, a shorter time may be a good choice.

Prior to signing any mortgage document, you'll want to ensure you understand the conditions, terms, payment schedules and consequences of non-payment. Also be sure that your lawyer, accountant, and even your realtor has reviewed the documents so you are protected against any surprises.

Qualifying for a mortgage

Applying for a mortgage is a straight-forward process. When you are prepared, it's unlikely you'll receive any surprises. A mortgage lender needs information about your work history, debts and assets to establish your credit worthiness and ability for repayment. The bank will establish your gross income and potential payments and property tax expenses to arrive at a Gross Debt Service ratio (GDS). This is usually limited to 30-35% of your gross income. Debts will be added to establish a Total Debt Service ratio (TDS), which can't exceed more than 40 percent of your gross earnings.

The lender needs to satisfy two risk requirements:

1. Can you make your scheduled monthly payments?
2. Second, if you default (don't make your payments) can the proceeds of the sale of the home cover the cost of the loan?

To answer these questions, a lender will ask about your net worth. This is the difference between the value of everything you own and your debts. They will consider your bank balance, investments, real estate holdings, vehicles, debts, and credit card balances, along with your employment history.

The lender will also review your credit history. This shows your ability to repay your mortgage, as it indicates how you have handled past debts or become insolvent (bankrupt).

You'll be asked to sign a form giving the financial institution permission to obtain information from your employer, creditors and credit rating agencies. You may want to check your credit history, yourself before you apply a mortgage. This way, any problems can be corrected and you won't be turned down for a mortgage. You can request your credit history by contacting Trans Union or Equifax, two of the major credit bureaus. You'll need to make a written request for your history. Send a letter asking for your credit history, along with photocopies of two pieces of ID with your current address, plus a photocopy of a utility bill or credit card invoice. The process takes about two weeks and you'll get a good idea of how you'll be evaluated by the banks.)

Resolve any outstanding debt issues, and ensure that any errors are corrected.

Mortgage loan insurance
If your down payment is less than 25% of the home, it is legally required that you purchase mortgage loan insurance. In Canada, most lenders are legally required to insure a high risk mortgages. If you default on your payments, the lender receives their money from Canadian Mortgage and Housing Corporation (CMHC) or other insurer. With this federal government guarantee, most lenders are confident in financing up to 90% of your purchase.

Fees for this insurance run between 0.5% and 3%, and are based on the size of the loan and value of your home. Premiums can be paid as a lump sum when you make your purchase or as part of your monthly mortgage payments. Additional fees include application and appraisal fees.

How to make the most of your mortgage

While you're shopping for a new home, don't forget about your mortgage. Take the time to shop at several institutions. Compare terms, rates and payments. Small items like terms, rates and payments can cost you or save you thousands of dollars over the life of your mortgage. The following list makes some suggestions on how you can make your payments work harder for you.

Get pre-approved
It's fast, simple and free. Before you shop for your home, spend some time with your financial institution. You'll receive a written, pre-approval for a specified amount. When you've found your dream home, there's no waiting, or objections to the seller.

Consider your comfort level
In some cases, you may qualify for more or less than the dollar amount you want to commit to each month. Take the time to calculate different payment plans. Be sure you are comfortable with this amount. Develop a budget. Leave yourself some breathing room for unexpected expenses.

Consider your long-term goals
Before committing to a mortgage ask yourself these important questions: How long will you won this home? Will interest rates rise or fall? Will your income rise or fall? Will you be able to commit to monthly payments? Being objective about these factors can make a difference to the type of mortgage that is best for you.

Review payment schedule and additional privileges
The more you can pay, the more often, the more you'll save. For example, making weekly or biweekly payments can take years off your mortgage. This way, you lessen the amount of interest accrued over the term. Increasing your monthly payment can also reduce interest and term. Some mortgages allow you to pay a lump sum towards the mortgage at a specified time. Be clear about pre-payment privileges, as not all mortgages include them.

Consider a portable and assumable mortgage
You can take a portable mortgage with you, should you move. You'll avoid paying discharge penalties and reapplying, unless you've moving to a more expensive home. A buyer could take over your payments if you have an assumable mortgage. This could work to your advantage, making it easier for a buyer to purchase your home.

A professional realtor can assist you in obtaining the best mortgage for your needs. Having worked with families in various financial situations, his or her services can make a significant difference in the cost and effectiveness of the mortgage you obtain.

Shave years off your mortgage

Whether you're buying your first home, or have been making mortgage payments for years, you may be thinking about reducing this obligation, faster. In fact, changing your term, the payment amount and even making lump sum payments could pay down your mortgage more quickly.

Reduce the amortization period
The amortization period is the length over which the debt is carried. By reducing this time period, from 25 years to 15 years, you will save thousands in interest. The following chart shows these savings.

*Compounded half-yearly, not in advance.
**Interest savings over the life of the mortgage, assuming constant interest rate throughout amortization period.
Based on figures obtained from RBC Royal Bank

Make lump-sum pre-payments
Many lending institutions allow for lump sum payments. On the anniversary date you can make a payment of a specified amount towards the mortgage. You may also be able to double up on regular payments on any payment date. These double-up payments are applied to the principal.

Increase the amount of your payments
Any additional amount you can make on your principal reduces the amount of interest. Check with your lender when you have additional cash reserves.

Don't forget about these costs when buying a home

Buying a home is a milestone, whether it's your first, third or fourth. In addition to the price of a home, there are some other costs you'll incur. Some of these costs are one-time fixed payments, while others represent an ongoing monthly or yearly commitment. Not all costs apply to every sale or purchase. However, when you are aware of the following items you won't be hit with any surprises on closing day.

Inspection fee
An inspection performed by a professional inspector is a sound investment. For $300 - $500, you'll receive a written report on areas that are structurally sound and those where repairs are required.

Appraisal fee
When you apply for a mortgage, your lending institution will ask for an appraisal of the property. Budget approximately $300 -$ 500.

Survey fee
When you purchase a resale home, you are also required to complete a Real Property Report, which assess any changes to the home and property. Budget around $400 - $600.

Property insurance
Insurance on your home covers the replacement value (structure and contents). To protect their investment on their loan, financial institutions require this coverage. Allow for $500 - $1,000.

Service charges
There will be an installation fee for utility services, including telephone, water, electricity, gas,
and cable. Hook up fees range from $50.00 - $175.00 depending upon the service.

Legal fees
A lawyer should review every real estate transaction. Fees are determined by the complexity of the issues involved. Shop around and ask for an estimate prior to hiring any lawyer.

Mortgage loan insurance fee
Depending upon the down payment, some lending institutions require mortgage loan insurance. Budget between 0.5% - 3.5% of the total amount of the mortgage.

Mortgage application fee
Some financial institutions charge a mortgage application fee to process your application. If your request for a mortgage is turned down, most will return the application fee to you. Each you're you renew a mortgage some institutions also charge a fee.

Moving costs
Costs for professional movers range from $65.00 - $100/hour for a van and two movers. Prices may be higher during peak moving times.

Local improvements
In some cases, the cost of local improvements made in your area (sewers, sidewalks, alleys) could be added to your tax bill.

Closing costs
With the purchase price of a resale home, the closing is always “subject to usual adjustments.”
This means that any amount that the seller has already prepaid will be adjusted so that the home buyer pays the excess amount back to the seller, and vice versa. These adjustments can include:
municipal property and school taxes monthly condominium maintenance fees first and last month's rental for rental properties that may be in the home, utilities, such as hydro, water and fuel oil, including GST.

Interest adjustment costs
Most lenders expect the first mortgage payment one month after closing the purchase - however, if you close mid-month, some lenders expect the first payment at the beginning of the next month, two weeks before you would normally expect. Or they charge a pro-rated interest to make up the difference.

Land transfer tax
Most provinces levy a one-time tax based on a percentage of the purchase price of the property.