CHAPTER 5: FINANCING 101 – AN OVERVIEW OF MORTGAGES AND HOME FINANCING

Now that you have created a budget and have a good understanding of what you can afford, as well as the costs associated with homeownership, it’s time to get familiar with mortgages and home financing. In this section, we will provide an overview of all things mortgages and home financing related, so that you have a good understanding of the process before meeting with a mortgage broker or financial planner.

Common mortgage terms

1. Amortization: under the conditions of your mortgage contract, this is the estimated amount of time it will take you to fully repay your mortgage, assuming you maintain equal payments throughout the lifetime of your loan.
2. Conventional Mortgage: a mortgage where the down payment on the property is 20% of the purchase price or greater.
3. High-Ratio Mortgage: a mortgage where the down payment on the property is less than 20% of the purchase price. These mortgages require CMHC insurance.
4. Principal: this is the outstanding balance of the sum you borrowed, not including interest.
5. Term: this is the length of your current mortgage contract. The mortgage term is the length of time you are committed to a specific lender at a specific interest rate. It ranges anywhere from 6 months to 10 years or greater.

Qualifying for a mortgage

There are numerous factors that lenders look at when determining how much of a mortgage you can afford. Here, we outline four key factors lenders look at when evaluating your loan application.

1. Credit Score

The higher your credit score, the more likely a lender will approve your loan.

2. Income

Generally, lenders tend to approve mortgage loan applications where less than 30% of a person’s monthly income is spent on home expenses (mortgage payment, property taxes, insurance, etc.)

3. Current Loans

Existing loans, such as car loans and student debt, could impact your eligibility for a mortgage.

4. Down Payment Percentage

Lenders are more favourable to purchasers who are prepared to make larger down payments on properties. As a general rule of thumb, 20% is considered an ideal down payment.

Different types of mortgages

There are many different types of mortgages and home financing products on the market. Here, we outline some of the most popular types of mortgages for ease of reference.

For more detailed information on mortgages and home financing, including tips to pay off your mortgage faster, download our free Pocket Guide to Mortgages from the Nest & Castle Education Centre at www.NestandCastle.com/