General Mortgage Tips

Obtaining a mortgage can seem like an overwhelmingly difficult and troubling task to many first time home buyers. The process is definitely complex, but with a basic understanding of the essentials of the mortgage business, you can confront these challenges with confidence. Here are some general mortgage tips to help you with the procedures.

Mortgage Amortization

The period of amortization of a mortgage has a significant effect on the total amount your mortgage is going to cost you over and above the repayment of the principal. An amortization schedule shows the time and cost involved in the repayment of a mortgage obligation, but it of course does not include the unforeseeable effects of interest rates changing in mortgages with adjustable rates, any late payments, or any payments which are made in addition to the regular schedule in an open mortgage setting.

There are various ways to reduce the amortization of your loan and therefore avoid paying enormous amounts of interest. Some of the easiest ways are simply to increase the amount of money you are paying on your mortgage:

increase the amount of your payments
pay additional amounts on your predetermined payment dates
make lump sum payments whenever you can

However, there is a way to keep the amount of monthly payments roughly equal but still save many thousands of dollars over the life of a loan and that is by an increase in the frequency of your payments. It is difficult for many to believe that paying $500 twice a month results in a far lower outlay for total interest over the life of a loan than paying $1,000 a month, however, it is very true.

It goes without saying that if you opt for a shorter amortization you will save countless thousands of dollars over the life of the loan. This table shows you the vast difference in paying off $100,000 of mortgage borrowing amortized over 15 years all the way up to 40 years.

Mortgage Amount	Amount Amortization	Monthly Payment	Interest Paid
$100,000	15 years	$788	$41,862
$100,000	20 years	$657	$57,710
$100,000	25 years	$581	$74,481
$100,000	30 years	$533	$92,128
$100,000	35 years	$501	$110,595
$100,000	40 years	$478	$129,825
Interest rate: 5% This calculator is for demonstration purposes only. Always consult a professional financial advisor before making personal financial decisions.

Mortgage Term

The overall amortization period of a mortgage is generally broken up into shorter time sections named Terms. A term is the period of time where your mortgage loan will be subject to a specific set interest rate, and can be as short as a few months or as long as 25 years. When the term expires, you must then renew your mortgage for the next term at whatever the prevailing interest rates are at that time. Mortgage rates have varied from well over 20% in the 1980s to just a few percentage points in the early 2010s, so a mortgage renewal in the future always entails an element of risk.

In conventional mortgage terms, the longer the period of time, the higher the interest rate will be that is applied to that term. Here is an example based on a 25 year amortization.

Mortgage Amount	Term	Interest Rate	Montly Payment
$100,000	3 years	6.60%	$675.90
$100,000	5 years	6.75%	$685.05
$100,000	10 years	7.05%	$703.51
This calculator is for demonstration purposes only. Always consult a professional financial advisor before making personal financial decisions.

As is clear by the table there is a relatively small monthly difference required in order to lock in a specific interest rate for an additional seven years. Whether or not this is a reasonable gamble can only be determined through conversations with your mortgage broker.

Down Payment

The single greatest obstacle for many first time home owners is the accumulation of a substantial down payment to obtain a property. Conventional mortgages require at least 20% down payment in cash, and given the high price of the average property in many of the major Canadian cities, this amount can exceed $100,000. A total sum which many young families simply cannot accumulate.

There are various ways to fulfill the down payment requirement, and they include borrowing at least part of the sum from family and friends, liquidate assets, and some first time home owners even take huge cash advances against their credit cards to accumulate enough money to satisfy the down payment requirements. However, many of these home buyers end up in financial trouble since the interest rate that they have to pay on the amount they have borrowed to obtain their down payment can be crushing.

A far preferable alternative is to adhere to the high ratio mortgage requirements of the CMHC or Genworth which allow qualifying first time home buyers to obtain a mortgage of up to 95% of the total purchase price of the property, and only having to deposit a down payment of 5% in total in order to close on the property.

Payment (Principal & Interest)

Many of the mortgage funds utilized for the purchase of residential properties are set up with a monthly payment schedule, where each payment is made up of a blend of interest and principal amounts. The amount of interest for each payment is calculated on the total balance that is owed, therefore each monthly payment is composed of a bit less interest and a bit more principal than the one that came before.

The very first mortgage payment you make will be almost all interest, while the last payment you make will be almost all principal. The payments in between the two have the interest and payment equation expressed on a sliding scale.

For Example:
If you take a mortgage of $150,000 with a 25 year amortization, and a 5 year term at 8%, your payments will be $1,144.82 per month. In the first month of your mortgage, that amount will consist of $161.09 as a principal payment and $983.73 in interest. After 30 months the same payment will consist of $194.71 as a principal payment and $950.11 in interest. After 60 months (5 years), the same payment will consist of $236.90 as a principal payment and $907.92 in interest.
This calculator is for demonstration purposes only. Always consult a professional financial advisor before making personal financial decisions.

No Money Down Mortgage

These forms of mortgages were gaining in popularity in Canada at one point but with changing economic standards are now quite difficult to obtain. As much as these mortgages can be attractive to first time home owners, statistics prove that when individuals are able to obtain residential property with no money down, they tend to not be able to service the mortgage obligations over a long term and many of these deals end up in a default.

First Time Home Buyers' Plan

The First-time Home Buyer's Plan is a Federal Government program which provides Canadians with the opportunity to withdraw up to a total of $20,000 from their own personal registered retirement savings plans (RRSPs) for the specific purposes of building or buying a home. In order to qualify, the applicants must not have in the previous five years directly or indirectly, owned a residence.

Under the terms of the HBP, withdrawals that qualify are not to be included in the individual's annual income, and the issuers of RRSPs will not withhold any income tax from these amounts when withdrawn. If you are engaged in building or buying a home in conjunction with your spouse or any other qualifying individual, then each party can withdraw up to a total of $20,000. The commitment to the HBP is that there must be a repayment of the withdrawn amount within a time period of fifteen years.

In order to withdraw these amounts from your RRSPs, you must start by entering into a written contractual agreement to build or to buy a residential property in Canada. You also have a requirement to confirm that you will personally occupy the property in question as your primary residence. However, once you have taken occupancy there is no specified minimum period of time that you have a requirement to continue using that property as your primary residence.

Cash Back Mortgage

The mortgage business is competitive and there are a variety of incentives that some lending institutions offer in order to secure your business. The Cash Back Mortgage is a scheme which literally pays you back in cash a small percentage of the total amount you are borrowing. If the Cash Back Mortgage is specified to be at a rate of 3%, the lender will effectively give you a payment of $3,000 for every $100,000 you borrow.

There are significant advantages to this program especially with first time home buyers. Purchasing a home is a time when a family has to undertake considerable expenditures and this money can come in handy to pay for furniture, moving costs, or just paying down some credit card bills.

There are some drawbacks, however. This Cash Back cannot be applied towards the down payment; if you decide to pay off the mortgage early you may actually have to repay some of this Cash Back to the lender; and the interest rate you will be charged will tend to be higher than other competing mortgages without the Cash Back feature.

As in everything else in the mortgage business there are trade offs to be considered. You may find that a lower interest rate over the life of your loan is more advantageous to you in the long run than a quick cash payment now, but each family's situation is different.

Gross Debt Service

One of the primary questions that a lender asks when presented with any mortgage application is whether this borrower is going to be likely to support the payments of the periodic mortgage obligations. In order to make these determinations, there are various calculations which are performed on the income and current debt load of any individual applicant, and the primary determinant is the Gross Debt Service.

In order to perform this calculation the determination must be made as to your total gross monthly income and then the amount of monthly mortgage payment, property taxes, and half of the strata fees (if any). The total of those amounts cannot usually be allowed to exceed 32% of your total income.

Total Debt Service

The next calculation is Total Debt Service, which includes your Gross Debt Service, and adds on all of the other monthly payments that you're responsible for. Since the Total Debt Service cannot usually exceed 40% of your gross monthly income, and the Gross Debt Service has already allotted for 32% of this, it can be said that the difference is 8% and out of that you have to show that you can service all of your other outstanding debts.

For individuals who have been fervent users of consumer credit, it is well nigh impossible to bring down their total monthly payments for their total consumer credit debts to 8% of their gross monthly income, thus they end up failing on this critical calculation.

It is imperative to understand the Gross Debt Service and the Total Debt Service ratios prior to applying for a mortgage to avoid turn-downs.

Credit Rating

There have been entire volumes written about an individual's credit rating, how to establish it, and how to improve it once it is established. Suffice it to say that your credit rating is a very significant factor which will determine what interest rate you are charged for your mortgage.

Two individuals purchasing identically priced properties with identical down payments will be charged very different mortgage interest rates: The reason is the difference in their credit scores. An individual with a high credit score will pay a far lower rate, and the individual with a bad, or low credit score will pay a much higher rate, if they can secure a mortgage at all.

There are two remaining credit bureaus in Canada after the 2009 closure of Experian: Equifax and TransUnion. The information contained in your credit file in each of these agencies is the critical component that determines your credit worthiness. It is imperative that you check your credit reports from both agencies, as an error or derogatory may only appear in one of them.

Switching Mortgages

Due to the roller coaster of interest rates and competitive offerings from mortgage lenders, many home owners find that there may be advantages to switching a mortgage from one institution to another.

The primary reason for switching a mortgage is to obtain a more competitive and lower interest rate. Holders of open mortgages can switch mortgages at any time, but most other borrowers have to wait until a predetermined renewal date to do so. In some cases borrowers can switch their mortgages at any time by paying a penalty equivalent to several months of mortgage payments.

It is important to carefully understand and evaluate all of the costs involved in switching a mortgage as the penalties and other charges may end up obviating the advantages offered by the lower interest rate.

Vendor Take Back Mortgage

In some cases, especially in a Buyers' Market situation, some sellers may be motivated enough to offer their own financing to the borrower in the guise of a vendor take back mortgage.

Most of these types of loans are placed on a property as a second mortgage and essentially are no different in structure than any other privately funded second mortgage. The advantages are that the vendor will most likely not qualify you through credit checks or other verifications, and may tend to offer a considerably lower interest rate.

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Ajay Chopra

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