There are as many types of mortgages to choose from as there are types of houses to buy. Your mortgage is going to make a lot of money for the lender, and it's going to cost you a lot of interest.

But it will allow you to purchase a home now, without having all the money to pay for the home. And even though you will eventually pay a lot of mortgage interest, hopefully it will be offset by your increase in equity in the home.

At any rate, you'll want to make sure you get the right one for you. The following outlines the basic components to consider when looking for a mortgage. You'll need a combination of a downpayment and closing costs (the money needed up front) for your initial investment in your new home.

The following is simply an outline of the basic components of a mortgage. We strongly advise you to seek the help of a qualified mortgage broker for the details. Call or email us and we’ll be happy to provide you with the details of mortgage brokers who have done a good job for our clients in the past.

Downpayment

The money that you pay up front for a house is the downpayment. These payments typically range from 5 to 25% of the total value of the home.

The obvious source of money for your downpayment is either your savings or the proceeds from the sale of a home you already own. You are also able to apply a certain amount of your RRSPs as a downpayment, but you will be required to repay a certain percentage back to your RRSPs annually. See your mortgage broker for details. Still another source may be a gift from family (may require gift letter) or selling of an asset.

While it is possible to buy a home with as little as 5% down, the amount of your downpayment will determine whether you will have a conventional mortgage or an insured, high-ratio mortgage.

What's the difference?

• Conventional mortgage: Your downpayment is at least 20% of the purchase price.
• High-ratio mortgage: Your downpayment is less than 20% of the purchase price and must be insured by CMHC (Canadian Mortgage & Housing Corporation) or GEMI (GE Mortgage Insurance). An insurance premium will apply and is usually added to your monthly mortgage payment.

Closing Costs

For high-ratio or insured mortgages, the mortgage provider requires the borrower to demonstrate his or her ability to cover closing costs in the amount of 1.5% of the value of the property. Closing costs can be as high as 3% of the value of the property being purchased and can vary widely depending on:

• The property being purchased
• Services required
• Taxes
• Applicable insurances
• Whether the home is new or old
• Closing dates affecting interest adjustments
• The balances of any prepaid expenses

Check out our page on Closing Costs to learn more.

Credit

It is a good practice for you to request the details of your credit rating from the credit agencies periodically. This will help you to understand your rating and ensure the credit agencies have the correct information.

To obtain a copy of your credit bureau report, you may contact the credit bureau agencies directly:

Equifax Canada
1-800-465-7166
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Trans-Union Canada
1-877-713-3393 (Quebec only)1-800-663-9980 (All other provinces)
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Financial Ratios

Generally, lenders calculate that the homebuyer shouldn't pay more than 30 to 32% of gross income for principal, interest, taxes, and insurance (PITI), or 40 to 42% for both PITI and monthly debts combined.

The easiest way to make a quick estimate of the mortgage amount you may qualify for requires applying the two basic formulas used by lenders for loan application. Keep in mind that the loan balance will vary over the term of the loan, although the monthly payment remains the same.

Two lender formulas:

30 to 32% formula

Total monthly housing costs (PITI) = 30 to 32% (or less) gross monthly income

40 to 42% formula

PITI + all monthly debts = 40 to 42% (or less) gross monthly income

How Much Can You Afford?

Knowing how much you can afford will bring your house hunting into focus and help you stay on track.

How much house you can afford depends on two things:

• how much you can afford for the monthly mortgage payment, and
• how much you can invest in the down payment.

Monthly payments include the principal and interest on the mortgage loan plus property taxes and home insurance. These four costs are often abbreviated PITI.

The key items are the size of the down payment, the amount of the mortgage and the term – or length – of the loan. To calculate how much you can afford please check out our Mortgage Calculator.

Getting Pre-Approved

Having a pre-approved mortgage allows you to know exactly what you can spend on a home before you start looking. There is nothing more disappointing then finding the house of your dreams, only to find out it’s slightly over what you can afford.

You will also be protected against interest rate increases while you look for your new home. Most mortgage brokers will guarantee a rate for anywhere between 30-90 days. Not to mention, if the home of your dreams comes up on the market, and you aren't prepared to make an offer, because you are not pre-approved for a mortgage, you may lose the property to another buyer who is ready and prepared to make an offer.

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