Purchasing a home is an expensive venture, and not everyone is ready to secure it without financial assistance. Mortgages loans are one of the most viable options that can help an investor to buy a property. However, the process of obtaining mortgages can be intimidating and multifaceted to an inexperienced investor.
However, a sheer understanding of different aspects of mortgage loans can clear all the doubts and misconceptions about this financing option. This blog will highlight all the elements of mortgage loans in detail to make the concept clear for newcomers. If you are planning to purchase a property using mortgage loans, this blog is going to help you to understand the definition, types of mortgages, guidelines to get qualified and ways to choose the best mortgage plan.
What is a Mortgage and How Does It Work?
The term mortgage is one of the most used terms in the real estate industry. Thousands of investors apply for mortgage loans to buy properties every year in Canada. If you are new in this landscape, you may not be aware of this beneficial phenomenon.
In simple words, a mortgage is a form of financial assistance offered by financial institutions like banks or mortgage brokers. Investors opt for this option when they feel short to arrange the whole amount to purchases a property. To get a certain amount, which can be the total price of the property, an applicant needs to deposit at least 20% of the asking price. The borrower will repay the obtained amount through monthly instalments within a specific timeframe.
How Does It Work?
If you are a newbie in the real estate industry and want to make your investment successful, you must be aware of fund-collecting options: meaning, the finance options you will have for your purchasing spree. The mortgage is one of the most popular forms of resources that can help you to purchase a property. Whether it is a primary residential property or an investment property, as an investor, you may feel the need for additional funds to buy the property.
Most of the lenders offer flexible repayment terms for mortgages. You can get up to 25 years to repay the amount to your lender. The repayment term, however, can be reduced, and you can customize it based on your financial status and preferences.
Mortgage-Related Terminology
Terminology set for mortgage loans varies from one country to another. Different countries and financial institutions come with varying sets of rules, terms and conditions. Have a look at some crucial terminologies you need to know before applying for a mortgage.
Mortgage Loan Terminology
If you are planning to buy a property in Canada, you have to ready to pay 20% or more of the value of the property as a down payment. If the loan is insured by Canada Mortgage and Housing Corporation (CMHC) or Genworth, your down payment can range between 5% and 19.9%. In Canada, you cannot purchase a property without clearing the down payment.
Repayment Terms
Repayment duration is also known as amortization, which defines the number of years you will have to repay the loan. If you are applying for mortgages, you are likely to get 15 to 25 years to repay the obtained loan amount.
Interest Rates
When it comes to choosing interest rates, you can select options like fixed-rate and variable rates. If you go with the fixed-rate, you will be paying a fixed rate of interest through the repayment term. Variable-rate, on the other hand, does not steady, as it fluctuates based on market performance. Since the fixed interest rate is less risky, you may find it a little bit higher than the variable option.
Types of Mortgages
As a borrower, you can choose from different types of mortgage options. Each of the types features additional terms and conditions, and you can go with one that suits your capacity, needs and financial goals precisely. Have a look at some common types of mortgages available in Canada.
- High Ration Mortgage: If a borrower chooses to pay less than 20% of the asked price, the loan is a high ratio mortgage. This form of the mortgage requires mortgage default insurance from CMHC, Canada Guarantee or Genworth Financial.
- Low Ration Mortgages: When a borrower pays 20% or more of the asked price as down payment, it is called a low ratio mortgage. This type of mortgage does not require insurance protection.
- Fixed-Rate Mortgage: This type of mortgage plan comes with a fixed interest rate. In this plan, your lender can offer you flexible repayment plans to speed up the process.
- Open Mortgage: This is a short term mortgage, where borrowers enjoy the flexibility of repaying the obtained amount at any time without getting any penalty.
- Closed Mortgage: It is a fixed mortgage that cannot be altered, prepaid, refinanced or renegotiated before maturity time.
- HELCO: Home equity lines of credit or HELCO is also a type of mortgage loan, which is secured by your property. In this mortgage, a borrower can obtain money up to the credit limit. The loan option allows the borrowers to borrow on their home equity. Your home equity defines the differences between the value of the mortgaged property and the unpaid amount from the mortgage.
- VRM/ARM: Variable rate mortgages and adjustable mortgages are different from fixed-rate mortgage loans. These types of mortgage loans are described as standard loans in the beginning based on the current rate of interest. Lenders can review the mortgage plans at a specific period and may alter the repayment plans according to market conditions.
How to Qualify for a Mortgage?
If you are a newcomer in the landscape of property investment, this can be a million-dollar question for you. However, the process of getting qualified is not as complicated as it looks from outside. Here are some simple steps that can help you to get prepared for mortgages.
- Come with an excellent credit score and loan history
- Calculate Debt-to-income ratio
- Your assets can help you
- Determine the value of target property
- Your income history can be a game-changer
These are some crucial aspects you need to take care of when applying for a mortgage to purchase a property. Your credit score is going to play a significant role in qualifying you for the proposed mortgage. Hence, it is better to consult a financial adviser or trustable mortgage brokers to learn more about credit score and other issues. Individuals with bad credit history can also be eligible for the mortgage, but you have to choose the right lender or mortgage broker for this.
How to Choose the Right Mortgage Plan?
If you are applying for a mortgage for the very first time, you should learn about the all mortgage type, their rules, terms and conditions. Here are some factors you need to look at when choosing a mortgage plan.
- The size of the asked price
- Percentage of down payment
- Fixed or variable rate for interest
- Repayment terms
- Mortgage fees
- Mortgage penalties, etc
Mortgages are some of the most popular options to finance a property. Canada’s thriving real estate industry welcomes investors to purchase income or primary residence property. In most cases, investors prefer to arrange funds from outside and decide to apply for mortgages. You can approach traditional banks or qualified and licensed mortgage brokers to make the process hassle-free. If you are a newcomer in this domain, a qualified broker can advise you on how to choose the best mortgage plan to meet your financial objectives. A competent broker can also help you to come across multiple mortgage programs offered by different lenders. Purchasing a property is an expensive affair, and you must seek professional help to avoid mistakes.