First-Time Buyer in Vancouver, BC?

There are four areas that mortgage lenders look at:

1. Income & Employment History
A lender will consider how much of your total income you will be spending on housing and on other debts. This helps lenders decide whether you can comfortably afford your home. Also, lenders generally want to know that you have income stability. If you are self-employed, hourly or on commission, a 2-year history of your income may be required.

2. Debts
These include any car payments, credit cards, loans, etc. These are all factored in when calculating your purchasing power. Your debts will be reviewed when your credit bureau is pulled.

3. Down Payment
Your down payment must be from your savings or investments or they can be gifted from family members. The Government of Canada has regulated that most down payment sources need to be tracked for 90 days and in the form of bank statements or with gift letters before being used to purchase a home.

4. Your Property
The value of the property you wish to purchase is an important factor in deciding how much a lender will lend you, and whether you will be required to have an insured mortgage.

A pre-approval is contingent upon verification of your income, debts and down payment.

Once these three are satisfied, we will know for certain what you can afford based on lender (and insurer, if needed) criteria, and what your payments on a specific mortgage will be. We will also be able to lock-in an interest rate for you for anywhere from 60-120 days while you shop for your perfect home. By locking in your rate, you are guaranteed to get a mortgage for at least that rate or better.

In order to get pre-approved, we are required to fill out an application and to submit documentation to determine your buying power. The pre-approval document list is the same list required if you were buying a home, except at this point, there is no specific home in mind yet.

Getting pre-approved for a mortgage is something every potential home buyer should do before shopping for a new home. A pre-approval will give you the confidence of knowing that a specific amount of financing is available, and it can put you in a positive negotiating position against other home buyers who aren’t pre-approved.

Mortgage Term
The term is the length of a mortgage, after which a borrower renews its terms and conditions if the balance is not paid. Terms are from 6 months to 10 years, and the longer a term is, the higher the interest rate (generally). Your personal situation determines what term to choose in respect of your budget and future vision.

Closed or Open
LockedA closed mortgage means that your rate is closed and not open for discussion over the term agreed upon. Closed mortgages generally have lower interest rates than open mortgages but have prepayment charges if you wish to renegotiate your interest rate prior to your term coming up. Most closed mortgages do offer the ability to save interest through paying off your mortgage faster. An open mortgage has no term and it allows you to renegotiate or refinance your mortgage at any time. Because a closed mortgage has rate stability over an open mortgage, most mortgages chosen are closed.

Variable or Fixed Rate
This depends on your personal risk tolerance as well as the prevailing rates at the time. Regarding risk tolerance, if for instance you’re a first-time homebuyer and/or you have a set budget that you can comfortably spend on your mortgage, it’s smart to lock into a fixed mortgage with predictable payments over a specific period of time. If, however, your financial situation can handle the possible fluctuations of a variable-rate mortgage, this may save you some money over the long run. Finally, there are also other mortgage options that enable you to split your mortgage into both fixed and variable portions.

Sometimes there is an easy answer between getting a fixed or variable mortgage. Many times it can depend on the spread between the variable and fixed rates at the time of purchase and your risk tolerance.

Amortization
Selecting the length of your mortgage amortization period – the number of years it will take you to become mortgage free – is an important decision that will affect how much interest you pay over the life of your mortgage.

I generally advise my clients to take the longest amortization possible for two main reasons. The first reason is that with almost all mortgages, you can pay off your mortgage sooner using pre-payment options, effectively decreasing your amortization. Secondly, I always advise clients to be in the most flexible position possible. Longer amortizations mean lower monthly payments. However, we will arrive at your amortization period by determining what is the best option for you.

Portable
If you are moving into a new home and you want to take your mortgage with you when you move, the “portable” option let you do that. This option allows you to continue on with the low rate you may currently have or avoid paying penalties if you were to break your mortgage.

Assumable
Your mortgage may be assumable by another borrower if you were to sell your home. What happens if you have a fantastic interest rate, you are moving, and you don’t want to take your mortgage with you? An Assumable Mortgage allows the buyer of your home to take over your mortgage, provided that they can be approved for the mortgage by your lender. Having a buyer assume your mortgage allows you not to pay any mortgage penalties.

Convertible
You may convert your variable mortgage into a new fixed-rate mortgage during your term.

HIPHIP Mortgage
Allows for the Home Improvement Plan Mortgage. For more information on the HIP Mortgage, go to the HIP Mortgage page.

SkipSkip-a-Payment
You may skip a payment if required.

Blend to Term
The lender may provide you with an increase in your mortgage and blend your current rate with a new rate. The new blended rate will be a weighted average of your current rate and the lender’s mortgage rate for a term equal to how long is left on your current mortgage. Your approval will be based on the Bank of Canada qualification rate.

Blend and Extend
Lender will provide you with a brand new increased term and “blend” in your current rate and new rate. There are no out of pocket expenses in this route. Your approval will be based on the new term’s interest rate.

Collateral Mortgage
Allows you to use your home for security for more than just your mortgage. In many cases, you can register for an amount higher than your actual mortgage. This may allow for HELOCs or other mortgage segment in the future. When it comes to mortgage transfers, collateral mortgages must be fully discharged and a full new mortgage must be registered

Mortgage Segments
The lender will allow you to get more than one “segment” for your mortgage. This will allow you to take advantage of having different mortgage types, terms and rates, all under one collateral mortgage.

HELOC Available
You will be able to apply for a Home Equity Line of Credit in the future. You will not have to reregister your mortgage with a solicitor or notary.

HELOC Included
Your mortgage comes with an included Home Equity Line of Credit.

Large Bank
Your mortgage is placed with one of the large Canadian banks. You will be able to go to a bank branch and speak to a representative in person.

Monoline Lender
Your mortgage is placed with a Monoline lender. Monoline lenders are supported by the big banks and focus solely on mortgages. They follow the same rules and regulations that Canadian banks do. Monoline lenders allow me to be your account representative.

Telephone-CloudTelephone and/or Web Service
You have access to your mortgage online or over the phone.

Extra Payments against Principal
The most important features you can have for your mortgage are pre-payment options. The prepayment option on your mortgage directly correlate to your Mortgage Optimization Strategies which allow you to pay off your mortgage sooner, saving your thousands of dollars over the life of your mortgage. All prepayments go directly to the principal balance owing on your mortgage.

Although all financial institutions offer some form of prepayment privilege, the amount and how it can be applied varies from one to another. The most restrictive lenders only allow you to pre-pay up to 10% of your original balance, once per year, and only on the anniversary date of your mortgage. Other lenders offer pre-payments as high as 20% per year, in any increment (over $100) and as many times as you want as long as the total prepayment does not exceed 20% of the original outstanding balance per year.

Increase Your Regular Payment
Most lenders allow you to increase your scheduled (weekly, bi-weekly, semi-monthly or monthly) payment. This is either done through an increase of your payment by 10-20% or by doubling your payment or both. Any increase in payment goes directly to pay down your mortgage, saving you thousands down the road.

Double Up
On any regular payment date, you can double-up your payment of principal and interest. The full amount of extra payment is applied directly to the principal of your mortgage.

Payment Frequency
Do you want to pay your mortgage every month? Or do you want want to pay your mortgage every two weeks just after you get paid from work? Lenders allow for weekly (weekly – 52 payments), bi-weekly (every two weeks – 26 payments), semi-monthly (on the 1st and 15th of every month – 24 payments) and monthly (monthly – 12 payments). You are free to choose and switch between payment frequency before and during your mortgage term. I generally advise clients to choose whatever payment type they find most comfortable to them.

Accelerated Payments
You notice that there is very little difference to how much interest you pay between payment frequencies. However, some banks will advertise “Accelerated” payments as a means of paying off your mortgage faster. Accelerated Payments are 26 bi-weekly payments, having payments match each regular semi-monthly payment. This means that you will pay one more month’s payment over the course of your mortgage. Although this strategy is usefully, we find that it does not go far enough. Your Personalized Mortgage Strategies will be more effective that an Accelerated Payment.

Make sure your mortgage has options that will protect you in case of life changes. In many cases, changing aspects of your mortgage will require you to cancel your mortgage, costing you many thousands of dollars.

Bank IRD Penalty
When breaking your mortgage contract early, you will have to pay your lender the prepayment penalty. Fixed-rate mortgage holders pay the greater of the interest rate differential (IRD) or 3-months interest. The bank IRD penalty uses the bank’s posted rate and the discount that was provided to you at the time of your mortgage. Typical bank IRD penalties are about 4% of the outstanding mortgage amount.

Low IRD Penalty
Your mortgage pre-payment penalty is based on your rate minus a current rate your lender has for a term matching the time you have left remaining on your mortgage. Typical low IRD penalties are about 1% of the outstanding mortgage amount.

Variable Penalty
Variable mortgage pre-payment penalties are 3 times your current monthly interest payment.

Distinct Restriction
Your mortgage may have a restriction that is unique. Some of these restrictions contain no porting clauses, the inability refinance or refinance with a new lender during your term.

Mortgage Insurance, instituted by the Bank Act, was created to help make home ownership easier and more attainable for many people without the means to put down large sums of money on their home. Mortgage insurance should not be confused with life and disability “Creditor Insurance,” where clients can be get insurance to pay off their mortgage or pay their mortgage payments in case of death or being unable to work.

With Mortgage Insurance, home buyers can also purchase their home with as little as 5% down payment. The Bank Act stipulates that all mortgages that are above 80% of the value of the home must be insured. The largest mortgage insurer is Canada Mortgage and Housing Corporation (CMHC).

Mortgage Insurance costs a percentage of the mortgage amount and is added to the mortgage, to be paid off over the life of the mortgage.