Sometimes concepts in the finance world can be tricky. We get so caught up in trying to understand what all the offerings are that we forget to understand the simple things. When is the last time that someone asked to have Canadian mortgages explained? Or what is a mortgage? Or asked to have the mortgage approval process explained? Or what the different types of mortgages in canada are? Or even explained the mortgage basics?! Or explained why I can only buy a home for $350,000. We all have questions in the back of our minds that we don't articulate because we are just too embarrassed. Here is our "Mortgages for Dummies" - the top five questions about mortgages you are afraid to ask.
1. What is a mortgage?
A simple enough question but not one that people seem ready to admit to . A mortgage is a home loan secured by real property, commonly referred to as real estate. In essence it is a contract that includes rights and obligations of both parties. The term actually comes from a French term meaning "Death Contract". Sounds kind of morbid doesn't it.
2. What happens if I don't pay the mortgage?
No one ever wants to address this elephant in the room. If you don't pay your mortgage in Canada the lender will generally start a power of sale process. Sorry, it's not the same as the crazy foreclosures we saw in the United States (that means no fire sales). This is a legal process that requires the lender to take control of the property through the court system, it is important to note that the lender does not take over the ownership. The process for power of sale proceedings are laid out in the mortgage paperwork.
3. How does the bank calculate how much I can afford?
Lenders all use two ratios called TDS and GDS. Firstly GDS or Gross Debt Service is a calculation which uses the total of you property cost, interest, taxes, and heating and condo fees (if any). According to CMHC this cannot exceed 35% of your monthly income. TDS or total debt service is GDS plus other obligations (such as line of credits, car loans, etc). Again according to CMHC TDS cannot generally exceed 42% of your total monthly income. Using these calculations is a great way for the lenders to judge whether or not you will be able to afford to pay for your new home. You can use our helpful mortgage affordability calculator or one of our many other mortgage calculators.
4. What is a mortgage rate hold, and why should I care?
A rate hold is simply when you call a lender or mortgage broker and they hold the rate for you. It is important to note that this is not a pre-approval. A rate hold will hold the rate, however there are no documents required or mortgage application. A pre-approval consists of a mortgage application and a credit check, as well as request that you bring along some supporting documents. Once the mortgage lender is satisfied they will give you a written confirmation of your rate and possibly your price range as well. Neither is a sure thing but a pre-approval is definitely the better of the two.
5. I have an approval. Can I go and buy furniture?
Sometimes our ratios are a little tighter than we think they are. Just because you have a mortgage approval doesn't mean that the lender will guarantee the mortgage will be funded. In truth you are not 100% guaranteed until you have the keys in your hands. Your job until closing is to try and keep everything the same. Did you pay off that Visa card? Yes, then keep it as close to paid off as you can because the lender can can check your credit again. The lender may even check your employment again to make sure that you haven't been let go in the last rash of lay-offs at IBM.
For other Mortgage Basics, read fixed versus variable rate mortgages.
The mortgage industry is a very competitive and ever change place. It is important that you seek the advice of a trusted professional to help guide you through. In most cases your mortgage professionals offer their service at no cost to the consumer.
Stay tuned for Part 2, featuring questions that you were too afraid to ask.