So the news has been full of a bunch of information about mortgage over the last few months and it can be very overwhelming to say the least. We are going to take a look at the new reality of the mortgage landscape in Canada in an attempt to dispel some of the misconceptions.
1. You can still buy a home with 5% down. Many people seem to think this was changed but the truth of the matter is that yes, you can purchase a home with just 5% down. The down payment can come from a variety of sources.
• Sale of an asset
• Tax refund
• Gift from an immediate family member
• Borrowed from a secondary source such as a credit card, loan or line of credit
If you are buying a second home which will be used by a family member you can proceed with 5% down. If you have purchased and sold before you can still proceed with 5% down. You will of course pay the mortgage insurer fees each time you do so but it is good to know this option is still open to you.
2. There is now a stress test interest rate in place. This is to make sure you will be able to afford your home when the rates start to climb. You must qualify for the mortgage at the posted rate which is currently 4.64%. The rate you will be offered is much lower than this but if you are trying to see how much home you qualify to purchase, this is the rate you need to use on the mortgage calculator.
3. The longest you can take a mortgage over, in 99% of the cases, is 25 years. Yes, in the past we could look at 30, 35 or even 40 years but those days are gone.
4. If you are considering a refinance of your home to invest, payout bills or for any other purpose, keep in mind that you can only go to 80% of the property’s value. For example, if your home is currently appraised at a value of $300,000, the maximum mortgage you can put in place would be $240,000.
5. Mortgage insurer fees have increased again as of March 17th. This insurance premium is what allows the mortgage lenders to lend to people with less than 20% down. If you default on your mortgage, the lender is assured they will not have any losses.
6. The really pretty low rates you often see advertised are more likely to be offered to those putting less than 20% down. In October the federal government made some changes whereby mortgage lenders could no longer insure all mortgages. This was most often done at the expense of the lenders and was done to lower their overall risk on their mortgage portfolio. In the new lending landscape, there is now less risk for lenders on insured mortgages and they are offering these clients some very attractive rates. It is counter intuitive but those with a larger equity position are now higher risk.
7. You need to have a strong financial picture to qualify for a mortgage. The lenders are looking for two years on two types of credit at a minimum. These need to be paid on time and gone are the days where ‘I just forgot to pay’ as a valid response. Ensure your bills are paid on time and that your credit cards do not exceed 50% of their limit.
There you have it, the new reality of mortgage in an attempt to dispel the myths and to let you know what is now possible.
Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.