Mortgage Basics:
ABC'S of Mortgages provides all you need to know information if you are thinking of purchasing a home.
www.fcac-acfc.gc.ca provides links to interactive tools to calculate mortgages, mortgage repayment acceleration, and mortgage qualifier calculator complete with calculations of TDSR and GDSR, etc.
Mortgage experts, Loans officers, Bankers, and many investment companies can assist you in the process of calculating what you can afford to borrow when purchasing a home.
Purchasing a home may be the single most expensive investment you make in your lifetime.
There are many factors to consider when purchasing a home and negotiating a mortgage. For more information on negotiating a mortgage
When you want to know how much you can afford to borrow for a mortgage contact your lending institution and they will be able to assist you in this process.
You may actually be Pre-approved for a mortgage before you actually find the house you want to buy.
There are two standard formulas that are used by mortgage lenders to determine the maximum amount of money you may borrow for a mortgage.
These Standard formulas are known as the GDSR (Gross Debt Service Ratio) and the TDSR (Total Debt Service Ratio).
To calculate GDSR:
Mortgage principal, interest payments, property taxes, heating costs, any secondary financing required, and 50% of condominium fees are calculated to determine the ratio of these expenses to your income. Two income families may use combined or family income in this calculation. Housing costs must not be more than 32% of your gross (before tax) monthly income.
To calculate TDSR:
This calculation is much the same as the GDSR except that other debt payments are included in the calculation. Car payments, credit card balances, loan payments etc. are added to the other expenses above to calculate your total debt service ratio. Total debt commitments and housing costs must not be more than 40% of your gross (before tax) monthly income.
Once these ratios are calculated your lender will use the lesser of the two amounts to determine the amount of income you have available for a mortgage payment.
Conventional or High Ratio mortgage?
Depending on the amount of money you will be borrowing your mortgage will either be a Conventional mortgage or a High Ratio mortgage.
Conventional mortgage - lender will provide up to 75% of the appraised value or purchase price of the property. You must provide at least 25% of the financing in the form of a down payment. If you are able to provide 25% of the down payment you will not require the mortgage loan to be insured by a company such as Canada Housing and Mortgage Corporation. When you don't require this type of insurance you can save thousands of dollars over the life of your mortgage.
The cost of this type of insurance can be anywhere from .5% to 3.30% of the loan. This cost is paid by the borrower. The borrower will have the option to add the cost of this insurance premium to the mortgage or they can pay the fee upfront. This insurance is required for a High Ratio mortgage.
High Ratio Mortgage - a higher percentage of the mortgage can be financed up to 95% of the appraised value or purchase price of the property. The High Ratio mortgage must be insured against non payment by a company such as Canada Mortgage and Housing Corporation (CMHC). The higher ratio of mortgage borrowed to down payment supplied, the higher the cost of the insurance. Mortgage insurance may be subject to provincial sales tax.
Tbere are several Mortgage options to choose from:
You'll need to decide on the term of the mortgage contract, whether it should be an open versus closed term, and whether you want a variable or a fixed interest rate.
All of this can be very confusing, especially if you a first time home buyer.
Term of the mortgage - is the length of time of the current mortgage before it has to be renewed.
Open versus Closed Term - refers to whether or not you can make additional principal payments throughout the term of the mortgage.
An open mortgage allows payment of the principal, in part or in full, at any time throughout the term without penalty. Which means you won't have to pay additional interest charges for paying out early.
Open mortgages tend to be for a short term -- usually six months to one year. Since they offer so much flexibility, they typically have higher interest rates.
A closed mortgage allows less flexibility since it allows limited prepayment priveleges. Prepayment priveleges are usually restricted to a percentage of the outstanding or opening balance. Restrictions are usually placed on when you can make the prepayments which are usually on the anniversary date of the mortgage. A penalty will ususally apply if you repay the loan in full prior to the end of its term. Closed mortgages typically offer lower interest rates compared to open mortgages.
How do you choose between short versus long terms?
When interest rates are either high or falling, there's a tendency to choose a shorter term mortgage. This strategy pays off if you can renew at a lower rate six months or one year later. When interest rates are rising, or if you have a fixed income, or if you need your mortgage payments to remain the same for a period of time you may want to choose a longer term mortgage.
Fixed vs Variable Interest Rates
The interest rate on a fixed rate mortgage is locked in for the term of the loan. This type of mortgage offers security in the sense that you'll know what your monthly mortgage payment will be and how much you will owe at the end of the term.
The interest on the variable rate mortgage is generally lower than on fixed rate mortgages, but it can fluctuate depending on what interest rates are doing in the market. Your monthly mortgage payment may remain the same but what might change is the amount of the payment that is going to the principal of your debt. If interest rates rise this portion going to principal may be lower.
Build Equity in your home by making annual lump sum prepayments.
