Buying a home and getting a mortgage is a big financial decision. It is important to shop around and see what mortgage products and features different lenders offer to find one that best suits your needs.
Be sure to research and compare mortgage products offered by a number of potential lenders directly or talk to a licensed mortgage broker or agent who works with multiple lenders and can help you understand the types of options available. Think about your current financial situation, your income, your debts and other payments, and any future plans that may impact your housing or financial situation. Licensed mortgage brokers and agents help to arrange a mortgage option that is suitable for you; it’s ok to ask your them why they’ve made a certain product recommendation, and/or how the terms of the loan match the financial (and lifestyle) circumstances you have shared with them.
Whether you work with a licensed mortgage broker or agent or shop around yourself, consider the following:
- The type of mortgage that best suits your needs
- A fixed, variable or adjustable-rate, or one that offers a mix of both (hybrid)
- For variable- and adjustable-rate mortgages: does the payment amount change based on interest rate changes, or remain constant?
- An open, closed or convertible term (is there a cost to break the contract before the end of the term, or to convert the term from open to closed?)
- The features and options for your needs
- A short or long mortgage term (this is the length of time you are “locked-in” to the specific contract, for example one, three, or five years)
- A short or long amortization period (this is the total length of time it will take to pay off your mortgage completely through regular payments, typically 25 years)
- Frequent or less frequent mortgage payments (e.g., monthly versus biweekly payments)
- Regular or accelerated payments
- The ability to make pre-payments or lump sum payments (e.g., to pay an extra $200 each month or an extra $2,000 per year)
- The option to transfer the mortgage (including the interest rate) to another property if you sell your home (known as portability)
- The impact on the total cost of the mortgage from the factors (e.g., frequency of payments, amortization, amount of the mortgage payment, etc.)
- The options if you can’t make a payment (e.g., features like “skip-a-payment” once per year or apply any pre-payments to cover a current payment that is due)
- Penalties or fees that may apply when breaking a mortgage contract or renegotiating a new one before the term is up and how are they calculated
- Penalties for late payments or charges if there is not enough money in your account to cover the payment
- Any fees involved in setting up, discharging or renewing a mortgage and how they are calculated
- Options to save on interest charges
While comparison shopping is important when selecting a mortgage, understanding the risks associated with getting a mortgage are just as critical.
There is more to getting a mortgage than just qualifying for a loan. Here are some of the biggest risks when it comes to taking on mortgage debt and what you can do to manage and prepare for them.
Mortgage fraud is a criminal offence. Read more on how to protect yourself.
Can You Afford a Mortgage?
Before shopping for a mortgage, take a close look at your situation—your finances, future plans and lifestyle—and consider how much debt you can comfortably handle.
Consider not just how much money you have today, but your financial position for the entire length of the mortgage (known as the loan’s amortization). When taking on a mortgage, be sure you can:
- Make full mortgage payments on time
- Deal with sudden or unexpected financial needs
- Continue to meet other financial obligations, such as saving for a child’s schooling or saving for retirement
When deciding how much money you can afford to borrow, consider:
- Your current financial situation
- Your future plans which could impact your financial situation (unpaid time off of work, returning to school, early retirement, etc.)
- How long you plan to own a home, have a mortgage or sell and buy a different home
- Any extra expenses you plan to incur (e.g., buying a car, starting a family etc.)
- The economic climate
- Interest rates
- The total cost of owning a home (e.g., property taxes, home repairs, condominium fees, etc.)
- How much your home may increase or decrease in value over time
- The potential for higher mortgage payments
- The potential for a drop in income (due to job loss or other circumstances)
- Your personal tolerance for debt and risk
While your current financial situation may allow you to afford a mortgage, there is always the possibility of changes in your income or expenses you hadn’t planned on. Seasonal and contract workers and those working on commission may already be aware of the need to plan for a change in their income, but this planning for changes should also be completed by those with regular income as well. The more common situations that can affect your income include:
- Starting a family
- Changing careers or returning to school
- Assuming caregiver responsibilities
- Relying on income from tips, bonuses or other incentives
- Losing your job(s)
- Getting into debt
- Becoming ill or disabled, or getting injured
- Running into business or legal problems
- Getting divorced or separated
- Losing a spouse, partner or family member
When shopping for a mortgage, consider how you would manage if your income fell or your expenses rose, regardless of the reason. Keep in mind, your mortgage payments could increase, as well, depending on the type of mortgage you have and your terms. You should also factor in how potentially higher mortgage rates in the future can significantly increase your mortgage repayment costs.
When faced with financial trouble, meeting your mortgage payments can be stressful—or even impossible—without prior planning.
Before taking on mortgage debt, find out what sources of income and alternative funding options are available to you, and develop a plan for making payments in hard times.
To create this plan, follow these steps:
- Create a detailed budget for your household (including housing, food, utilities etc.)
- Build up emergency savings for mortgage payments, usually six months worth of bills and expenses
- Clarify what payment options are available in your mortgage contract (e.g., some mortgage providers give you the option of applying pre-payments you have previously made to a current payment that is due)
- Investigate insurance products that may help you or your estate cover the mortgage if you become ill or disabled, get injured or die (e.g., disability insurance, critical illness insurance, term insurance etc.)
- Find out what tax credits, employment and government benefits you may be entitled to
- Ask your mortgage brokerage, broker or agent if a better interest rate can be offered when your current term ends
- Know whether or not, and how, you can access any other funds or investments (e.g., money in your registered pension plan or RRSPs)
- Consider consulting a team of professionals, which could include a lawyer, mortgage brokerage, real estate salesperson, financial planner/advisor and/ or accountant.
Impact on Your Credit History
It’s important to maintain a good credit score as it improves your chance of getting the lowest, most competitive mortgage terms.
Your credit score and your credit history determine your credit worthiness and your ability to get a loan, including a mortgage. Lenders check your credit history to determine if they should loan you money or extend financing terms. Before applying for a mortgage, get a copy of your credit history and make sure it is complete and accurate.
There are two main credit-reporting agencies Equifax Canada Inc. and TransUnion of Canada. Both agencies give you the option to pay a small fee for near-instant digital access to your credit history and score. If you only want to see your credit history, you can request a free copy.
While not all mortgage accounts and payment histories will show up on your credit report, most of the larger lenders, such as big banks, will report your payment history. If you are late in making your mortgage payment, it can hurt your credit score. The best way to keep a positive credit history and a high credit score is to make sure you are able to pay your mortgage on time, every time.
Impact on Other Obligations
There are more costs to owning a home than your monthly mortgage payment. When you purchase a home, there are closing costs, including legal and other fees such as home inspection, along with appraisals and land transfer taxes to be paid. Once the home is yours, there are moving expenses, property taxes, insurance, condo fees, home repairs, and so on. Make sure to include all of these expenses as part of the total cost when considering if you can afford a mortgage.
Will owning a home affect your other financial and life decisions?
Mortgage payments could limit your ability to manage other expenses. After making your mortgage payments, would you have enough money to also pay for the things you might need in the years ahead? You might need a vehicle, wish to travel, have children or add to your family in the future. Consider if a mortgage could prevent you from being able to manage other commitments or goals.
Not being able to meet your mortgage payments in full and on time can have serious financial and legal consequences, not just on your credit history but on your immediate finances( e.g., a variety of penalties or late fees).
If you consistently miss making your mortgage payments, you could face more serious consequences, including the default of your mortgage and your lender selling your home through Power of Sale or Foreclosure.
Power of Sale: The lender has the right to sell the property to recover the money still owed on the mortgage. Depending on the circumstances, you may never get the home back. If the lender sells the home for a price that is more than what is left on the mortgage, the extra money is given back to you (or the legally registered homeowner). In the case of a shortfall, you will have to pay the difference.
Foreclosure: The lender gets a court order to take over the property. If this happens, all of the previous mortgage payments you have already made, all the money you have invested into the home and any equity (value beyond what is owed on the mortgage) in the home are now lost. You will get nothing once the property is sold and the proceeds will be used to repay the debt.
In both circumstances, your credit rating will be severely impacted and it will be much harder to find a lender that will offer you another mortgage in the future.
To avoid the worst of these consequences, it’s important to take proactive action. If you foresee difficulties in making your monthly mortgage payment, contact your mortgage lender immediately, as there may be options to help. You can also put your emergency plan into action.
Like most legal contracts, a mortgage can be very complicated. It is important to know and understand what you are committing to and if it’s right for you. Before signing a mortgage contract, you need to be sure that you understand all of the terms and conditions and ask questions if you don’t understand something. You may also wish to seek legal advice before signing a mortgage contract.
In Ontario, mortgage brokerages, brokers and agents are required to disclose to you the material risks of your mortgage in writing and in plain language. You are also entitled to have at least two business days to review a mortgage disclosure statement before you sign a mortgage agreement (e.g., a commitment letter), or sign a mortgage instrument (the legal registration completed by the lawyer), whichever is earlier. You can choose to waive this two-day waiting period, but you don’t have to.
To minimize the risks associated with your mortgage commitment, consider the following:
Find payment options that work for you
Mortgages can be paid every week, every two weeks, once a month or twice a month, depending on what options the lender offers. Make sure that you can handle the frequency, timing and amount of the mortgage payments. Can you afford them and do you understand how they will affect the total cost of the mortgage? Making larger payments than required will let you pay off the mortgage faster and reduce the total cost of the mortgage. But make sure you can afford the payments, plus all of your other expenses.
Consider interest rates
The interest rate will also affect the total cost of the mortgage. Choosing a variable, fixed or hybrid rate will have an impact. Ask yourself if the interest rate is reasonable for you and if you can afford it.
If the interest rate is variable, there is the risk that it might go up. Even if the rate is fixed, the interest rate can still increase when you renew the mortgage. Increasing interest rates can raise your payment amounts and can make the total cost of the mortgage much higher in the long run.
Watch out for fees and penalties
Some mortgage contracts may outline fees or penalties. Be sure to understand which fees and penalties may apply and when and how the amounts are calculated. Lenders are required to provide information on fees and penalties.
The most common types of fees and penalties are:
A pre-payment is when you pay more than the scheduled payment amount or pay off the entire mortgage ahead of schedule. Pre-payments can help you pay your mortgage back faster, but most mortgages have rules and restrictions. Some don’t allow pre-payments at all. Depending on the mortgage, pre-payments can come with costly penalties. Make sure you understand the pre-payment privileges, rules and penalties included in your mortgage and whether they are right for you.
With some mortgages, the borrower agrees to continue to make payments for a specific period of time (“term”). Leaving a mortgage before the term has finished can lead to penalties and fees. The amount of penalties and fees depends on the lender and the mortgage contract.
Review the services that might be included in the mortgage contract. Services usually come at a cost. It’s possible that you may not want all of them. Find out what the costs are, whether any of the services are optional, and if you can cancel the ones you don’t want.
Administration & Discharge Fees
If you decide to exit a mortgage contract, renew the mortgage with another lender or pay the entire mortgage amount early, you may have to pay for the administrative work needed to make the change. Make sure you understand these fees if you are considering changing lenders or exiting the mortgage.
Late Payment Penalties
Your lender may charge you fees and penalties if you are late making a mortgage payment. When these penalties apply, the amount charged will depend on the lender. You should understand both the triggers and the amount of these penalties. Also, if you continue to make late payments, your lender may not want to renew the mortgage with you at the end of the term. It’s always best to make your payments on time and in full.
Many mortgages allow homeowners to keep the same mortgage contract and mortgage amount and have it transferred to a new home if they move. This is called mortgage portability. But, if your mortgage does not have a portability feature, your lender could charge a fee if you want your mortgage transferred to a new property.
Change in Use
Your mortgage might include an agreement on how the property can be used. There can be penalties or you might not be allowed to change how the property is used (e.g., changing your property from a residence to a place of business or rental property).
Be prepared for renewal
A mortgage contract is usually for a limited term (usually one, three or five years) and not for the entire length of the loan (i.e., the amortization period). At the end of the term, your mortgage will have to be renewed or paid out in full/discharged. There are no guarantees that the lender will renew your mortgage. The terms and conditions can also change over the amortization period.
It is a good idea to contact your mortgage broker or agent well before you have to renew. If you do not use a mortgage broker or agent, give yourself enough time to look elsewhere to negotiate the interest rate and other terms and conditions.