Frequently Asked Questions
These are the questions I’ve been asked most often by my clients.
In a recent conversation with a client, the question of ‘fixed’ versus ‘variable’ mortgages came up. He wanted to go with an ‘open variable’ rate mortgage, which surprised me because they are often more expensive.
When I asked why he wanted to pay more for the option of having his mortgage ‘open’, he replied, “Well, aren’t all variable-rate mortgages ‘open’?”
I realized then that what was obvious to me isn’t necessarily so to everyone else. How many Canadians make the same mistake and end up paying a premium for mortgage features they’ll never take advantage of?
Most Canadians are not mortgage experts, and the various terms that the bankers and brokers throw around can be confusing.
Fixed, open, closed, variable – as if you’re supposed to understand everything and make a choice in five minutes on the biggest ticket item you’re likely to ever commit to.
So, what are the terms and what do they mean? We’ll make sure you understand all the terminology before you sign on the dotted line!
A fixed-rate mortgage involves a specific interest rate over a fixed period of time, such as a one-, three- or five-year term. ‘Fixed’ mortgages can have terms as long as 10 years. Generally speaking, the longer the term, the higher the rate.
The idea is that you’re willing to pay a slightly higher rate today to have the security of knowing that the interest rate on your mortgage won’t change over the course of your term. For this reason, many first-time homebuyers or those on fixed incomes choose a five-year term to have the comfort of knowing exactly what their mortgage payments will be for the next five years. In exchange, they forgo a potentially cheaper mortgage with less security.
These long-term mortgages are ‘closed’, meaning you have a contractual obligation to the lender, and there will be a penalty to get out of this mortgage should you want to break your contract in future.
The alternative to taking a fixed-rate would be the variable-rate mortgage. These are products that base their pricing off the bank prime rate. Most lenders today offer a discount off prime of roughly half of one per cent. Since the prime rate is typically lower than the prevailing five-year fixed rate, a variable-rate mortgage is almost always less expensive than a five-year fixed rate to start.
Why wouldn’t someone take the cheaper variable-rate mortgage?
Well, the reason it’s called a “variable-rate” is because the rate will float with the Bank of Canada prime rate. If the prime rate goes up, so too does your mortgage. Rather than losing sleep over the prospect of their largest debt item fluctuating at the mercy of the market, many people prefer to lock in. A significant benefit of a variable-rate mortgage, however, is that you can convert it to a fixed rate, meaning lock it in, at any time with no penalty or cost.
For this reason, variable-rate mortgages have been gaining in popularity. However, most borrowers do not realize there are two different types of variable-rate mortgages – ‘open’ and ‘closed.’
An open variable-rate mortgage will allow you to break the contract at any time (either pay the mortgage out or switch to a different lender) with no penalty – thus it is called ‘open.’ This product comes at a higher rate for the flexibility inherent in the product.
The closed variable mortgage will typically have a three- or five-year term and cannot be paid out prior to the end of the term without triggering a penalty – typically three month’s interest.
Many new borrowers will gravitate to the idea that they want the freedom and flexibility to be able to pay out their mortgage early, or they misunderstand that the term ‘variable’ is by definition an ‘open’ mortgage, when in fact, it can be open or closed.
Here are three ways to become mortgage free faster:
- Make a lump sum payment: A lump sum payment, or prepayment, reduces your outstanding principal. Even a small sum – from a bonus or tax refund, for instance – can reduce your overall interest amount.
- Increase the amount of your payments: Paying an extra $100 a month on a $300,000 mortgage at 3.29 per cent over 25 years will save you more than $11,000 and reduce the amortization by almost four years.
- Accelerate your payments: this means you pay the equivalent of one more monthly payment per year. If you’re paying bi-weekly, for example, take 13 monthly payments and divide it by the number of payments you make per year (26, in the case of bi-weekly frequency). This simple change can decrease your amortization by more than two years.
What does it mean to be self-employed? If you are a business owner, regardless of the size of the company or if you T4 yourself, an independent contractor or derive most of your income from sale commission, you are considered self-employed or business-for-self in the eyes of a lender.
There are 3 different programs for those you are in business for themselves.
The main differences are:
- length of time you’ve been self employed
- how provable is your income – get more into provability as we go through the various programs
The answers to the above will determine:
- down payment – ranges from 5%-35%
- what rate you qualify for
If you’re self-employed and want to buy a home, call me, I can talk you through the various scenarios.
A pre-approved mortgage is just like applying for a mortgage when you buy a home, but it is done ahead of time. I will collect all the information it requires from you to determine how much you can comfortably afford to pay each month and what price range of home you can look at purchasing.
With a pre-approved mortgage, you can shop with confidence, knowing that the biggest hurdle in home buying has been seen to ahead of time. Generally speaking, pre-approval terms and conditions are guaranteed by the financial institution for up to 120 days, giving you the protection of ‘locking in’ a certain mortgage rate should rates climb higher while you look for a home to purchase. If interest rates go down, the banks will generally give you the lower rate.
For funds derived from a bank account, lenders require three months of bank statements showing the down payment funds in the account. For funds derived from RRSP, GIC, or stock portfolios, the most recent statement, along with a snapshot of the account today, showing the funds are still available, is required. For funds derived from the sale of property, a fully executed binding sale agreement is required.
It is common for buyers to receive part or all of their down payment as a gift. Once a lender is chosen, we’ll ask the giftor to complete a gift letter, using the lender’s template, and then we’ll need proof these funds were deposited into your account.
Where Child Support and Alimony are paid by you to another person, generally these are treated like any other monthly debt obligation and will, in part, determine the amount you qualify for.
Where Child Support and Alimony are received by you from another person, generally the amount paid may be added to your total income before determining the amount you qualify for, provided a legal separation agreement and proof of regular receipt is available. Lenders like to see other income, in addition to just child and spousal support. Some lenders may allow these as the sole source of income, but only for strong clients with a history with the lender.
No, we want to get you a rate hold at 120 days before maturity. This way, if rates increase, you’re protected. If rates decrease, we can always take advantage of a lower rate.
Keep in mind that most lenders send out their mortgage renewal notices offering existing clients their posted interest rates. The rate you are being offered is usually not the best one.
Absolutely! Financial institutions are not permitted to discriminate based on age. As such, you are entitled to the same mortgage terms and qualifications guidelines as non-retired persons. Further, pension income qualifies the same as any other income.
While we will discuss these costs in detail when we meet, the following are a guide to what kind of closing costs you can expect: Legal Fees, $1,000 – $1,500; Appraisal, $300 – $500; Title Insurance, $250-$300.
While not applicable to properties in Alberta, depending on what Province the property is in, you may be subject to land transfer tax when purchasing. I will discuss these costs with you when we meet to talk about the process.
Secure transmission of your personal information is of utmost importance to TMG – The Mortgage Group, as it is with all of the lenders that we deal with. TMG uses the most secure technology available on the Internet to ensure that the data you send us remains absolutely confidential and secure. We want to ensure that you a comfortable in knowing that your personal information is secure.
Your personal privacy and the security of your personal data are our primary concern. Our overall privacy policy is simple. Under no circumstances will TMG, or Ashton Mortgage Solutions, sell or share any personal information about you to or with any person or organization except to the Lenders in our network, our authorized agents, or as may be required by law or court order. Please review our privacy policy for more information.
For the typical residential mortgage there are absolutely no fees passed on to the borrower from the lender. It costs the borrower nothing!
If you decide to accept the offer from the lender, and follow through with the mortgage, there will be the closing costs mentioned above. These costs are not specific to Ashton Mortgage Solutions, and are normal expenses associated with mortgages in Canada.
In some cases, when secondary lenders are required to facilitate your mortgage requirements — which may be the result of credit concerns or in the case of private or commercial mortgages — brokerage fees may apply. If this is the case, you will be made fully aware of any fees prior to your commitment.
The brokerage network, for traditional, residential mortgages—includes the majority of the top respected mortgage Lenders in Canada including Chartered Banks, Credit Unions and Trust Companies.
While you may not be given immediate mortgage approval, TMG has access to many lenders and products for these situations. The terms and interest rates will depend on the severity of your credit situation.
Depending on the circumstances surrounding your bankruptcy, generally lenders would consider providing mortgage financing. If you have been previously discharged from bankruptcy, the best way to determine whether or not you qualify at this time is to fill out an application and we can discuss your situation. TMG has many lenders to approach based on your circumstances.
The ability to pay down your mortgage without penalty is called pre-payment privileges. Most lenders today offer pre-payment privileges of 15-20% of the original mortgage balance. You can also increase the payments by up to double the regular payment.
If you pay your closed mortgage, in part or in full, over and above your pre-payment privileges, you will be assessed a penalty. The penalty will be the greater of three-month’s interest or interest differential, if you close out your mortgage prior to the maturity date of the term.
Note that not all lenders calculate these penalties the same, with some penalty calculations being far more restrictive than others. Call me and I’d love to sit down with you and explain the differences among the lenders.