Whether you are a first-time buyer or an experienced real estate investor, you need to be educated on terminology that is used during application and approval processes.
Mortgage Agent
Who is a “Mortgage Agent”?
A Mortgage Agent is a licensed individual that is authorized to act on behalf of a lender. Mortgage agents deal with multiple lenders, with intent to find best product for the borrower.
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What are the advantages of IK Financial Mortgage Agnets?
- IK Financial represents more than 50 lenders across Canada.
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- Educating and coaching our clients is our passion.
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- Be confident when choosing IK Financial.
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- IK Financial advice and expertise are complimentary.
Mortgage
What is the meaning of the “Mortgage”?
Mortgage - is a type of loan that is used to finance a home or other property. It is secured by the collateral of real estate and has to be repaid over a specified period.
- When you are getting your mortgage, you are called the mortgagor;
- The lender is called the mortgagee.
How “Mortgage” works?
There are different lenders and they offer different rates and conditions depending on the case. The most popular ones are:
- A Lenders - banks and credit unions that are looking for customers with good credit scores and a reliable income. Examples of those lenders in Canada: RBC, TD Bank, Scotiabank, etc.
- B Lenders - institutions that have fewer requirements to mortgagors of entry to be qualified for a mortgage
- Private Lenders - an individual that lends his or her own capital to you.
Mortgage Refinance
What is a “Refinance”?
The process of paying out existing mortgage for purposes of establishing a new mortgage on the same property under new terms and conditions. This is usually done when a client requires additional funds.
The Pros s of Refinancing?
- Lower your mortgage rate
- Access built up equity in the home
- Improve/change mortgage terms
HELOC - Home Equity Line of Credit
What is a “HELOC”?
HELOC stands for Home Equity Line of Credit. This line is secured by the equity that you have built up in your home. In other words, with HELOC, the lender uses your home as a guarantee that you will pay back the money you borrow.
What are the advantages of HELOC?
- you can borrow as much as you want within your available credit limit
- pay back the money you borrow at any time without a prepayment penalty
- lower interest rates than other types of credit.
Mortgage Renewal
What is a “Renewal”?
Once the original term of your mortgage expires, you have the option of renewing it with the original lender or paying off all of the balance outstanding.
Mortgage Components
What are the components of the mortgage?
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A mortgage usually consists of four components:
- Mortgage principal - is the amount You borrow from Your lender to purchase a home.
- Mortgage interest - is the rate charged on the loan. It is calculated as a specified percentage of full mortgage principal over a period of time.
- Amortization period - is the total length of time required to pay off the mortgage balance in full.
- Mortgage default insurance (if applicable) - Mandatory insurance protecting lender from borrower default. Calculated as a percentage of total loan it varies depending on the amount of downpayment.
Mortgage Pre-Approval
What is a “Pre-Approval?”
This is the initial step required to determine what type and amount of loan You qualify for based on Your financial information.
Note: Pre-approval cannot guarantee you a specific rate or mortgage amount.
What do we need for Your Pre-Approval?
- Identification (passport or driving license)
- Confirmation of income.
- Confirmation of Your savings available for a downpayment and closing costs.
- Information about Your assets.
- Information about Your debts or financial obligations.
This information will help us identify Your eligibility for a mortgage amount and choose the right lender and product for You.
Open and Closed Mortgages
Open Mortgage VS Closed Mortgage, is there a difference?
- Open Mortgage - a type of loan that may be repaid at any time during the term without any additional costs or penalties.
- Closed Mortgage - a type of loan that should remain unchanged for the term You agreed. It means there are restrictions on what You can pay towards Your loan before the end of the term. But You are still allowed to do so.
In Canada, closed mortgages are more common, and the reason is simple - they offer lower interest rates. If You are the one who wants to make stable payments, then it might work for You the best. On the other hand, if You are looking for a short-term mortgage - an open Mortgage might be a solution. If You decide to close the Mortgage at any time You can do so without any penalties.
Co-applicant
Who is “Co-applicant”?
Co-applicant - an additional person considered in a mortgage loan application. Co-applicant may help improve the chances of getting loan approval with more favourable loan terms.
Who can be a “Co-applicant”?
- Parent
- Child
- Sibling
- Husband or Wife
- Common-Law Partner
- Close Friend
- Business Partner
What are the advantages of having a Co-applicant?
- Good Financial Health = Better Mortgage Rate. Considering both applicants have a good Credit Score and Stable Income, the chance of getting a more favourable mortgage rate is growing
- Big Mortgage = Big Home. Bringing co-applicant increases your chance for a bigger mortgage loan.
- Co-applicant = Co-owner. If payments are made on time, co-borrowers will receive favourable credit score for the shared mortgage
Credit Score
What is a “Credit Score”?
Credit Score - the digits that make up your credit score tell a lender a lot about Your credit history and ultimately the status of your financial health.
What those ‘DIGITS’ mean?
- POOR (300-692)
- FAIR (693-742)
- GOOD (743-789)
- VERY GOOD (790-832)
- EXCELLENT (833-900)
Where can you check your score?
In Canada, there are two major credit reporting agencies. You can easily access your account and see the report.
- Equifax - consumer.equifax.ca
- TransUnion - transunion.ca
- Your Bank - major banks of Canada offer this feature on mobile app
Down Payment
What is a “Down Payment”?
An amount You pay towards the purchase of a home. This part is not financed by the mortgage loan and deducted by the lender from the price of Your home. The difference between the purchasing price and the down payment will be Your mortgage amount.
What is a MINIMUM Down Payment in Canada?
- 5% if the purchasing price is equal to or less than $500,000;
- 10% of the remaining purchasing price, if purchase price is over $500,000 but less than $999,999;*
- 20% if the purchase price is over $1,000,000.*
*Example: If the property price is $750,000, the minimum down payment would be $25,000 (5% from first $500,000) + $25,000 (10% from the difference $750,000-$500,000=$250,000) Total down payment is $50,000.
If you down payment is less than 20%, Mortgage Default Insurance premiums would be added to Your mortgage balance and amortized over 25 years.
Mortgage Amortization
What is “Amortization”?
Amortization is the process of paying off debt by making regular principal and interest payments over a specified period of time at the end of which the mortgage balance is paid off in full.
- The amortization period affects how long it will take to repay the loan and how much interest will be paid over a life of a mortgage;
- Shorter amortization periods involve larger monthly payments and lower total interest costs;
- Longer amortization periods involve smaller monthly payments and higher total interest costs;
- Amortization over 25 years requires a minimum down payment of at least 20%.
Mortgage Term
What is a “Mortgage Term”?
It is the length of time of your mortgage contract. During this period interest rate, payment and other mortgage conditions are set.
What terms options are available? The most common terms are listed below:
- 1 year
- 2-4 years
- 5 years
- 11+ years
By statistics, most Canadians prefer the 5 years term and the second popular option is a 2-4 years term. It is also important to keep in mind that the mortgage term you choose will directly affect your interest rate.
Fixed Rate Mortgage
What is a “Fixed Rate Mortgage”?
It is an interest rate that does not change during the entire mortgage term. In other words, everything you have agreed with the lender will remain the same over the term of the contract.
- Fixed Rate has generally been most popular among Canadians over the years.
- Less stress, since you do not need to worry whether mortgage rates change.
- Fixed mortgage rates have similar pattern of movement as the Canada Bond Yields
Interest Rate
What is “Interest Rate”?
Interest Rate is the amount that lender charges for the use of assets expressed as a percentage of the principal for the use of its money.
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It is important to know that the rates You see in advertisements may not be the rate you will end up with. Several factors that may affect your final rate:
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- Down payment - is it less than 20% or more?
- Credit score - is it poor, fair, good, very good, or excellent?
- Type of mortgage - is it Your purchase of a primary, investment, or refinance?
- Amortization period - is it long-term or short-term?
That is why at IK Financial never promote or focus on Interest Rates alone. We first thoroughly analyze Your particular financial situation as well as Your long term and short term goals and only then we discuss available rates and options for your specific case.
Variable Rate Mortgage
What is a “Variable Rate Mortgage”?
It is an interest rate that will fluctuate in accordance with the prevailing market prime rate during the mortgage term. The prime rate is linked to the Bank of Canada rate and is also commonly referred to as the “Overnight Rate.”
- 21% to 29% of all Canadians opt for Variable rate on their mortgage
- Variable rate fluctuates with the market interest rate (BoC)
- Variable Rate may be less expensive over time (but depends on many conditions)
Interest Adjustment
What is an “Interest Adjustment”?
The amount of interest due between the date your mortgage starts and the date the first mortgage payment is taken. Sometimes there is a gap between the closing date of your home purchase and the first payment date on your mortgage.
- Let's say that the closing date on your new house is April 10th.
- Your mortgage payments are on the 15th of each month.
- You have to make an extra payment to make up for these five days; the payment is generally due on your closing date.
High-Ratio Mortgage
What is a “High-Ratio Mortgage”?
The mortgage you obtain when you have less than 20% of the total purchase price to put down as your downpayment. This type of mortgage must be insured (through sources such as CMHC, Genworth Financial Canada or Canada Guaranty).
A mortgage default insurance premium is payable by borrower and added to the total loan amount and amortized with loan over 25 years. This option allows buyers with fewer assets to get into home ownership.
Down payment breakdown:
In order for you to obtain mortgage insurance, you will need a minimum down payment. The amount depends on the home’s purchase price:
- If the home costs $500,000 or less, you’ll need a minimum down payment of 5%.
- If the home costs more than $500,000, you’ll need a minimum of 5% down on the first $500,000 and 10% on the remain amount.
- If the home costs $1,000,000 or more, mortgage loan insurance is not available.
Mortgage Lump Sum Payment
What is a “Lump Sum Payment”?
An extra payment that you can make to reduce the amount of your mortgage principal. Putting extra money towards your mortgage helps pay it faster.
When can you make Lump Sum Payments?
- At certain times during your term
- Before the end of your term
- At the end of your term
You only may put a limited amount of money towards your mortgage, as you may face some penalties by paying more.
Offer to Purchase
What is an “Offer to Purchase?”
A legally binding agreement between you and the person who owns the property you want to buy. It includes the price you are offering, what you expect to be included with the sale, and the financial conditions of sale (your financing arrangements, the closing date, etc.).
There are a number of various types of conditions that might be included in the Offer to Purchase.
Below we have listed one of the most important clauses:
- Financing Condition
- Appraisal Condition
- Legal Review Condition
When You find a perfect property to purchase, we will require MLS listing and Purchase agreement signed by all parties. It is time for You to lean back and wait while we will do all the behind-the-scenes work. Inna and Katerina will submit an application to lender and provide You with a commitment letter upon receipt.
Closing Date
What is a “Closing Date?”
The date on which the purchase of a property becomes final and the buyer takes possession of the property.
What is happening on this day?
- You will meet with your lawyer 2-3 days before the scheduled closing day. You must provide the rest of the down-payment as well as the closing costs to Your lawyer
- Your lender will provide the funds to your lawyer on the closing day
- Your lawyer closes the transaction with the seller
- Your lawyer registers the home in your name
- You are receiving the keys to your new home
Closing Costs
What are the “Closing Costs”?
Additional Costs that are associated with the completion of transaction and which are payable on or before the closing date.
Here are some examples of the Closing Costs listed by CMHC:
- Land transfer tax
- Appraisal fee (if applicable)
- Estoppel certificate fee (for condominium/strata unit)
- Home inspection fee (if applicable)
- Land registration fee (if applicable)
- Legal fees and disbursements
- Prepaid property taxes and/or utility bills adjustment
- Property insurance
- Survey or certificate of location cost
- Title insurance
- Additional builder fees on new construction
Appraisal
What is “Appraisal”?
An appraisal process helps to determine an estimate of the current condition and market value of a home. Unbiased professionals evaluate the current condition of the home and perform an analysis of the market.
What steps are involved in the Appraisal process?
- Making an Appointment with the Appraiser
- Inspection of the Property
- Completion of the Appraisal Report
What is the cost?
An appraisal company must be approved by Your lender. An average appraisal price typically varies between $350 and $500 depending on type and location of property as well and specific type of report required.
Prepaid Property Tax and Utility Adjustments
The amount you will owe if the person selling you the home has prepaid any property taxes or utility bills. The amount to reimburse them will be calculated based on the closing date.
The most common fees that buyer may face on the closing date are:
- Property taxes
- Utilities
- Condo fees
IK Financial Mortgage Team operates on behalf of Mortgage Edge. Lic#10680
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