The amount of financing you require will depend on the purchase price of the property, but also the indirect costs included in the price, and your down payment amount.
There are several things to consider in addition to the financed amount when it comes to financing a new home. Below is a brief overview.
- Calculation of required financing
- Mortgage broker
- Mortgage loans
- Home Buyers' Plan (HBP)
- Mortgage calculator
Calculation of required financing
Use the table below to help calculate your required financing:
|CALCULATION OF REQUIRED FINANCING|
|Purchase price of the property||$|
|+ Indirect costs||$|
|'= Acquisition cost||$|
|- Down payment||$|
|' = Required financing||$|
The above table is from the Association des courtiers et agents immobiliers du Québec Buyer Practical Guide
A mortgage broker works on your behalf to find the best financing for your needs. Many institutions provide mortgage loans, such as banks, trust companies, credit unions, caisses populaires, pension funds, insurance companies, and financial corporations. A mortgage broker can help simplify life when you are faced with this important choice.
In addition, mortgage brokers receive better rates than a private individual. The difference in rates may seem minimal, but when considering the cost difference over your total amortization period, you will see significant savings.
It costs nothing to meet with a mortgage broker and you can benefit from substantial savings, so why wouldn't you? Just ask and I will be happy to help you in your choice of mortgage broker.
A mortgage loan is a method of financing in which the immovable (your property) is used as collateral for debt repayment.
Mortgage loan approval
A mortgage loan pre-approval does not guarantee you a mortgage. Even if you have a pre-approved mortgage certificate, you must still meet with your lender during the conditional offer period to get a final mortgage approval. To ensure all goes well, remember to bring:
- a copy of the property description;
- a signed copy of the offer to purchase.
Most mortgage lenders use two ratios to calculate the maximum loan that you can be granted: Gross Debt Service ratio (GDS) and Total Debt Service ratio (TDS). Here is how the ratios are calculated and the maximums granted:
GDS ratio =
principal reimbursement + interest + taxes + heating + 50% of condo fees
Gross annual income
This ratio shall not exceed 32%.
TDS ratio =
principal reimb. + interest + taxes + heating + 50% of condo fees + personal debt pmts.
Gross annual income
This ratio can go up to 40% since it takes into account the borrower's repayment of other personal debts.
A conventional mortgage is a loan not exceeding 80% of the loan value. Typically, the loan value is the lesser of the following amounts: the purchase price of the property or its market value. The down payment is equal to at least 20% of the purchase price or market value.
If you make a down payment of less than 20% of the purchase price, you will require a high-ratio mortgage. For this type of mortgage, you must also purchase mortgage loan insurance, of which CMHC is a major provider.
Fixed, variable or adjustable rates
Mortgage rates may be fixed, variable, or adjustable. For a fixed-rate loan, the interest rate is locked and will not increase during the term of the loan. For a variable-rate loan, the interest rate will fluctuate according to market conditions, but your mortgage payments will not change. However, for an adjustable-rate loan, your interest rate and mortgage payments will vary depending on market conditions.
If you prefer to budget for fixed mortgage payments, a closed mortgage may be a good choice for you. Closed mortgages, however, are not flexible. Oftentimes, a lending institution will impose penalties or restrictive conditions on borrowers wanting to prepay their loan or make extra payments. A closed mortgage may not be the best choice if you decide to move before the end of your loan term or if you hope to take advantage of a potential decrease in interest rates.
This type of mortgage loan is more flexible. You can usually make extra payments or pay off your loan any time without penalty. An open mortgage is a good choice if you plan on selling your home in the near future or making lump sum payments to pay off your loan faster. For a small fee, most lenders will allow you to convert to a closed mortgage at any time.
Your lender will also explain the available options for the term of the loan, meaning the period during which the agreed-upon conditions, particularly the interest rate, apply to the mortgage loan. A term can range from six months to ten years. If you choose a longer term (e.g., 5 years), you will have the chance to plan for and protect against rising interest rates while you adjust to homeownership. Carefully review your options and do not be afraid to ask your lender to explain the differences between short and longer terms.
The period of time it takes to repay a debt. Most mortgages loans are amortized over 25 years, but longer periods are also available. The longer the amortization period, the lower the regular mortgage payments, but the more interest you pay in the long run.
Mortgage loans are typically reimbursed in regular weekly, biweekly, or monthly payments. The more frequent the payments, the lower the interest costs since the principal balance decreases more quickly than with monthly payments. The more payments you make in a year, the less interest you will pay on your loan.
Source: Homebuying Step by Step, CMHC
Home Buyers' Plan (HBP)
The HBP option allows you to use money accumulated in your RRSP plan to make a down payment on your future property. Each buyer is allowed to make a tax-free withdrawal of up to $25,000 from his or her plan. This amount must be repaid over a set period of time or else the unpaid portion will be added to the buyer's gross income and taxed.
Check with your institution to find out the detailed repayment terms and conditions that apply to your situation.
With a good idea of the monthly home payments you can afford or the financing amount required to purchase your new home, you can now use my Mortgage Calculator to calculate monthly payments based on your financing or vice versa.