Mortgages in Canada are an essential part of the growing Canadian real estate market. A mortgage is a loan (from a bank or lender) that is taken out to finance the purchase of a home. Without Mortgages, homes would need to be purchased outright (imagine?!). With the average price of a Canadian home increasing year over year, the importance of mortgage financing has grown too, since buyers need to borrow more money in 2023 to achieve home ownership. In this blog, we will discuss what you need to know about mortgages in Canada, from the types of mortgages offered to the steps involved in the mortgage process.
Firstly, let’s discuss the types of mortgages available in Canada concerning rates. The two main types of mortgages are fixed-rate and variable-rate mortgages. A fixed-rate mortgage means that the interest rate remains the same for the duration of the mortgage term, typically between one to five years (although longer terms are offered). In contrast, a variable-rate mortgage means that the interest rate will fluctuate based on market conditions (or the banks’ prime lending rate). These fluctuations can be both upward and downward.
Now, regardless of the type of rate chosen, there are also Open and Closed mortgages. Open mortgages allow homeowners to pay off the mortgage (in full) at any time throughout the term, without incurring a penalty. There are also closed mortgages, which come with set terms and conditions, and are subject to prepayment penalties if the borrower pays off the mortgage before the maturity of the term. Open mortgages are not nearly as common as closed mortgages, as they generally come with much higher interest rates – but are suitable for come depending on their circumstances.
The process of obtaining a mortgage in Canada involves several steps. Firstly, borrowers should obtain a pre-approval from a mortgage lender to ensure they’ve been prequalified, and to understand their maximum purchasing power. This process involves providing the broker or lender with personal and financial information, including income, debt, and credit details. Once pre-approved, borrowers will then have the confidence to make offers on properties without any guesswork! Once the homebuyer finds a property and makes an offer that is accepted by the sellers, the bank will provide a firm mortgage approval and the borrower can proceed with the purchase. This is where a pre-approval becomes a firm approval.
After the purchase closes, and the borrower now legally owns the home, they will make regular mortgage payments (on a payment frequency of their choice – monthly, bi-weekly, semi-monthly, etc.). Their regular payment will include both principal and interest. The principal portion is what allows a homeowner to pay off the mortgage over time. With every payment, the principal portion will increase, while the interest portion will decrease. This is referred to as amortization.
When it comes to mortgages in Canada, it is crucial to work with a qualified and experienced mortgage broker or bank who can educate you on all areas of mortgage financing. A mortgage broker, like CMS, is best suited to find the best mortgage rates and options for your specific needs without the bias that comes with bank reps who only work for one bank. For this reason, a mortgage broker can help you navigate the complexities of the Canadian real estate market better than a bank representative, generally because of a wider understanding of products across multiple banks and lenders. Not to mention, our availability is much better than your traditional bank representative – we’re available weekdays, weekends, mornings, and evenings.
Again, mortgages in Canada are a necessary part of the home-buying process and are part of nearly 100% of purchase transactions across the country. With a variety of options available (almost too many for buyers to understand), it’s important to work with a qualified mortgage broker to find the right mortgage for your needs. By following the necessary steps and working with a professional, borrowers can successfully obtain a mortgage and purchase their dream home or investment with confidence.
In conclusion, without Mortgages, Canada’s real estate market would not be as robust and resilient as it is. It has always kept competition strong and healthy – and 2023 is no exception. Fixed-rate and variable-rate mortgages (both open and closed) are the common types of mortgages available in Canada. Pre-approval, home appraisal, and mortgage payments are the necessary steps in obtaining and carrying a mortgage in Canada. Working with a professional mortgage broker is crucial to finding the best mortgage rates and navigating the Canadian real estate market, especially in 2023.
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