{"id":9246,"date":"2021-07-27T13:09:08","date_gmt":"2021-07-27T13:09:08","guid":{"rendered":"https:\/\/www.canadianrealestatemagazine.ca\/how-do-mortgages-work-in-canada\/"},"modified":"2023-10-24T04:20:24","modified_gmt":"2023-10-24T04:20:24","slug":"how-do-mortgages-work-in-canada","status":"publish","type":"post","link":"https:\/\/www.canadianrealestatemagazine.ca\/expert-advice\/how-do-mortgages-work-in-canada\/","title":{"rendered":"How do mortgages work in Canada?"},"content":{"rendered":"

After the United States 2016 election, the search “How to move to Canada” increased in search engine results dramatically. Since then, there has been an increase in curiosity surrounding what it\u2019s like to move to, and live in, Canada. Alongside these international expats are a whole new demographic entering the housing market. More Canadians in their twenties and thirties are looking to buy their first home. This influx of people entering the Canadian real estate market has caused more people to question, “How do mortgages work in Canada?”.<\/p>\n

In this article, we will provide a detailed look at how mortgages work in Canada and will include everything from finding a mortgage loan to what the different types of mortgages have to offer. At the end of this article, readers will know how a mortgage works and be ready to take the next step in the home buying process!<\/p>\n

Saving a down payment<\/b><\/h2>\n

Although this payment is only a portion of the sale price, it signals to lenders that the buyers are financially sound and capable of making regular mortgage payments. Before jumping to finding a mortgage broker and a mortgage rate, begin saving up a down payment for your new Canadian home. Unless you have quite a bit of money already saved, it may be difficult to get a home loan.<\/p>\n

Finding a mortgage lender<\/b><\/h2>\n

The first step in the mortgage process is to find a mortgage lender. A mortgage lender is a bank or organization that is willing to lend money to the borrower to supplement the costs of buying a house. In short, a lender will pay the price of the house and then the borrower will need to repay that cost in regular payments. We will touch more on this later.<\/p>\n

In Canada, there are many different lenders to choose from. Most financial institutions like the Royal Bank of Canada (RBC), Scotiabank, and the Bank of Montreal (BMO) offer mortgage loans, also referred to as \u201cprimary lenders\u201d. In order to be eligible to receive a mortgage loan, applicants must complete the pre-approval process which includes a and a review of their credit history.<\/p>\n

\"Finding<\/p>\n

The Mortgage Stress Test<\/b><\/h3>\n

The is a test that determines whether borrowers will be able to afford their mortgage payment if their interest rate increased. In order to determine this, credit unions, brokers and other financial institutions will evaluate borrowers’ debt, income, and how much extra money a borrower can spend on their mortgage interest payments while also affording initial closing costs, property tax, utilities and other fees associated with owning a home.<\/p>\n

Other qualification criteria to get a mortgage<\/b><\/h3>\n

In order to qualify for a mortgage loan, applicants will need to apply for a mortgage. Most lenders require applicants to supply government-issued ID, proof of address, proof of employment and employment history, a credit history report, their credit score and a bank account with a Canadian bank. This information will allow a broker or lender to determine what your budget is and how much you can viably afford using the Gross Debt Service (GDS) Ratio and Total Debt Service (TDS) Ratio.<\/p>\n

Open and closed mortgages<\/b><\/h2>\n

After applying for a mortgage, borrowers will need to determine what type of mortgage they would like: open or closed. All mortgages in Canada are either open or closed. Open and closed mortgages have different mortgage terms that dictate what is allowed and what is not, including how often mortgage payments can be made and how much can be paid off. It is important to evaluate what is important to you and how your financial situation may be in the future when deciding what type of mortgage you would like.<\/p>\n

A closed mortgage offers lower interest rates in exchange for more prepayment penalties. These mortgage penalties outline the mortgage term and limit how much money can be paid for each payment. Overall, borrowers can have lower monthly mortgage payments in exchange for a longer amortization period with a closed mortgage.<\/p>\n

In contrast, an open mortgage<\/a> provides prepayment privileges at higher interest rates. With an open mortgage, borrowers’ monthly payments are not limited to a specific amount of money. Rather, borrowers can make lump sum payments of their choice to pay off their mortgage faster.<\/p>\n

\"Open<\/p>\n

Before deciding what type of mortgage you should choose, ask yourself these questions:<\/p>\n