How Mortgages Work

How Mortgages Work

Mortgages and the Down payment 

Have you been wondering how mortgages work? When it comes to buying a home we all have to think about how we’ll finance it. It’s a major purchase and one that is life changing, you’re becoming a homeowner, it’s exciting. First we should review how mortgages work. 

There’s a lot that goes in to purchasing a home, you need to do a mortgage stress test. This test will determine what sort of mortgage you qualify for, we’ll discuss more of that later. We want to make sure that you also understand the two different types of mortgages as well, open and closed. We’ll start by discussing the down payment. 

The Down payment 

The down payment is just one part of the whole sale process, it’s a way of letting the mortgage lenders know that you, the buyer, are able to handle the financial sound. It also let’s the lender know that you’re able to make the monthly payments. It’s important for you to start saving for the downpayment well in advance of making an offer on a home. 

When it comes to the first step that you’ll take in this process, after saving, will be to find a mortgage lender. What is a mortgage lender? They’re a bank or an organization that is willing to lend you the money you need to purchase your new home. 

In Canada, there are a few lenders to choose from, for example, The Royal Bank of Canada, Scotia Bank, etc. In order to be able to get a loan you need to be eligible, this is determined by completing the pre-approval process. In this stage it’ll involve the mortgage stress test. We actually covered this in a previous blog. We’ll do a quick review of that here. 

The Mortgage Stress Test  

What is the mortgage stress test? To get more details please also check out a previous blog. To answer this question, in short, the stress test is designed to determine and see whether you qualify for a mortgage. Most lenders will require you to supply government ID, proof of address, employment information, employment history, credit history, credit score, and that you have an account with a Canadian bank. 

The stress test will allow the lender to determine a budget and how much you’ll be able to afford. Which is very important when it comes to what price range you can look at when house hunting. It’s also important to know so that you can budget for each month, making sure that you can make your mortgage payments, along with other payments that go in to having a home. There are two types of mortgages and this test will also help determine which one might be best for you. 

What are Open and Closed Mortgages?

Did you know that there are two types of mortgages? In Canada, when it comes to how mortgages work, all mortgages are either open or closed. Each one has different terms, and these terms will determine what’s allowed and what’s not. The terms also decide how often payments can be made and how much can be paid off. You can prepare choosing what type of mortgage you want, you’ll need to review you finical situation to do this. 

Closed mortgages have lower interest rates, however, they have more payment penalties. The penalties will be outlined in the montage details and will state how much money can be paid for each payment. You can lowed the monthly payment in exchange for a longer amortization period. 

Open mortgages have payment privileges at a higher interest rate. In this case your monthly payments don’t have a limit to what the specific amount can be. You can make lump sum payments if you choose. With an open montage you’re able to pay it off faster in many cases. 

When you’re deciding what mortgage is best for you, you’ll need to ask yourself a few questions. Some of the questions you might want to ask yourself are; what is your financial situation, can you pay your mortgage off early, when do you plan on selling, do you plan on selling before the mortgage term is up, what mortgage rate will you be able to afford. These are just a few important questions you need to try and answer. The next step will be actually applying for a mortgage. 

Applying for a Mortgage 

Now you’re ready to apply for a mortgage loan, but how do you do that? When applying for a mortgage it can be pretty straight forward, and the current market is flexible. Because the market is flexible it means that it’s easier for homeowners, and new homeowners, to get a loan that will suit their needs. You’ll apply for your mortgage through the financial institution of your choice, we listed a few above. They’ll walk you through the process in greater detail.

If you want lower rates and more freedom with loans, you’ll need to compete the qualifying criteria and also prove that you are able to make the monthly payments, the stress test will help determine this. Then when you’re ready you can begin to look for the house of your dreams, this is the really fun part. I can’t want to help you along in this journey. 

Contact Lori VanDinther and Team 

Taking the step to look for your new home can be a big one for some, and I want to make sure that you have a wonderful experience. Myself and my team work hard to make sure that our clients are happy and in love with their new home. 

You can contact me either by phone to email and I will be happy to answer any questions about how mortgages work, and any others you might have. If you’ve been wondering what your home is worth, you can use my What’s My Home Worth calculator. I’m looking forward to working with you soon! 

Skyline of the financial district

Rate Hikes Are Not The Answer

According to the Polls

In a recent joint Nanos and Bloomberg poll, that took place in May, it was revealed that Canadian’s would welcome rate hikes if it means that it could help cool the housing market. According to the poll, 49% of respondents would support or somewhat support the Bank of Canada to increase the interest rate. This is because they believe that a rate hike would help relieve the very hot housing market. However, in order to soften the activity in the housing market, but this could also torpedo the economy. 

The President of Mortgage Architects, Dustan Woodhouse was interviewed about this potential rate hikes and stated, “who in their right mind would want interest rates to rise? Anyone who’s thinking they want interest rates to rise to slow home prices doesn’t understand how mortgage approval rules work because all mortgage approvals were written to 4.79%, now 5.25%, so what the actual interest rates are don’t actually mean anything as far as home prices have gone, because nobody is qualifying for any extra money over and above what they would if the actual interest rates were 4.79%, and 5.25% (as of June 1),”

Material Slowdown 

When you slow down the amount of money people have to purchase homes, you then need to rise the interest rates to 7.5-8.5%, says Woodhouse. This would cause housing prices to more than just slow down, the entire economy would in fact, grind to a halt. As Woodhouse puts it, “that would be like trying to kill a mosquito with a nuclear bomb.”

Woodhouse also believes that there’s a fundamental misunderstanding of how interest rate policy works. According to Dr. Sherry Cooper, “the problem is that interest rate policy is a blunt instrument and it leads to all sorts of unintended consequences. If you were to raise rates too much, you’d dampen the whole economy, which makes no sense given all the problems we still have in terms of jobs and getting the economy restarted. The Bank of Canada will never do it for that reason. It will raise rates when it thinks the economy is growing rapidly and is close to full employment.”

Rate Hikes to Rise in 2022

It’s been reported that interest rates are expected to rise by 2022, one year earlier than perviously warned by the Bank of Canada. This is because the economy seems to be healthier than everyone had thought it would be during the COVID-19 pandemic. 

The Bank of Canada also recently sated that it’s anticipating a return to full capacity a month sooner than expected. However, while other things are remaining constant, Dr. Cooper says, “it would reduce buying power. The question is would it lead to a decline in home prices? It would take quite a tightening in monetary policy for that to happen, and tightening is unlikely. Even the housing market isn’t one market nationwide; it’s many, many different markets, so we could see home prices reverse in one area or one sector without seeing it happen in another. To see the overall average home price decline, which means it would have to be a widespread phenomenon outside of both Toronto and Vancouver, it’s not that it can’t happen but it’s unlikely.”

Contacting Lori VanDinther and Team 

Please contact Lori VanDinther and her team today if you’re interested in buying or selling your home. If you’re interested in learning what your home is worth, try our free home evaluation.

Mortgage Stress Test Calculator with wooden house and coins stack and pen on wood table. Property investment and house mortgage financial concept

The Mortgage Stress Test

Looking to Invest in the Housing Market?

If you’ve been looking to start investing in the housing market, there are somethings you’ll need to know first. If you’re just starting out, there’s a chance you’ve probably heard of the Mortgage Stress Test. This test determines how your mortgage and finances might be affected by any sudden change when it comes to your financial situation, such as unemployment. 

Canada’s banking regulators have suggested some new rules for the Mortgage Stress Test, this was due to the ongoing COVID-19 pandemic. Which has resulted in many people finding themselves unemployed, causing the housing market to soar to record highs. However, the new rules will now make it harder for these potential new homebuyers to qualify. 

What is the Mortgage Stress Test? 

According to the Office of the Superintendent of Financial Institutions (OSFI), the Mortgage Stress Test is designed to prepare buyers for the financial stress of becoming a homeowner. The test also determines how the homeowner would be able to handle any sudden change to their financial situation that could affect their mortgage payments. It’s giving them a glimpse at what the high expense of buying a home. 

All buyers in Canada are required to take the Mortgage Stress Test in order to determine if their mortgage loan is even viable for them. It’s also based on their income, property tax and any other debt they might have at the time. Then borrowers can help to complete the evaluations of the potential homebuyers finances, determining what mortgage payment would be right for them. 

How I Pass the Mortgage Stress Test?

The Mortgage Stress Test was revised in April 2021, in order to pass the test now, you’ll need to prove that you qualify at either your contracted mortgage rate plus 2 per cent, or at the Bank of Canada’s five-year benchmark rate of 5.25 per cent – which ever is higher. 

For example, “if you buy a house at the purchase price of $500,000, make a 20 per cent downpayment, and receive a rate of 3.8 per cent, you are required to pay a monthly interest rate of $1,401.63.” In order to complete the Stress Test, you have to be able to prove that you can pay 5.25 per cent or $2,492.15 per month in mortgage rates. The issue is that for some homebuyers, they might default if they aren’t prepared for this sort of payment. 

Homebuyers Are Reconsidering What They Can Afford

This new Stress Test is now causing some potential first-time homebuyers to reconsider what they can afford. It’s been recommended that borrowers should take time to evaluate their finances with their banks, and with the help of a realtor. 

Due to the current housing market, which is is hot, the government regulators have upped the Stress Test. While the interest rates have remained historically low, this has caused the housing market to be flooded with buyers. In order to cool the hot market, the government has decided to institute this new benchmark qualifying rate for uninsured mortgages. 

The Office of the Superintendent of Financial Institutions

The OSFI is now concerned about homebuyers ability to pay their mortgage loans. While banks lenders are now worried that the homebuyers are over reaching in this very highly competitive market. 

“Given elevated levels of household debt and the risks that households may overstretch in the face of rising housing prices, we welcome the recent proposal by the Superintendent of Financial Institutions to introduce a fixed floor to the minimum qualifying rate for uninsured mortgages.” – Tiff Macklem, governor of the Bank of Canada

The test is most likely to have an impact on the housing market. The new Mortgage Stress Test rules will help to ensure that when someone is buying a home at a low-rate, that they can handle a potential increase in their mortgage payments. The 5.25 per cent point Stress Test is going to take effect in June 2021. 

Contact Lori VanDinther 

If you have any questions about the new Mortgage Stress Test, please contact Lori and her team today. They will be happy to help you make the move to becoming a homeowner. 

Please contact Lori VanDinther and her team today if you’re interested in buying or selling your home. If you’re interested in learning what your home is worth, try our free home evaluation.