Canadian Mortgage Basics - Mortgage 101

Summary

In this video, Nolan Matthias breaks down the basics of mortgages, explaining key concepts like mortgage insurance, fixed vs. variable rates, and the differences between amortization and term. He provides clear examples and practical tips for homebuyers, highlighting the importance of pre-approval, accelerated payments, and working with mortgage brokers. Nolan also emphasizes how understanding these mortgage fundamentals can help viewers make informed decisions, save money, and get the best mortgage for their situation. Plus, there's a fun contest to win your monthly mortgage or rent payment just by subscribing!

Takeaways

• 😀 A mortgage is simply a loan used to purchase a property. The mortgage amount is determined by subtracting the down payment from the property's purchase price.
• 😀 If you put down less than 20%, you need mortgage insurance. In Canada, this can be provided by CMHC, Sagen, or Canada Guarantee, all of which are backed by the federal government to varying degrees.
• 😀 Mortgage insurance protects the lender, not the borrower, in case of default. However, having mortgage insurance can lead to lower interest rates.
• 😀 Mortgages with more than 20% down payment do not require mortgage insurance, and often require an appraisal instead.
• 😀 Fixed-rate mortgages have a stable interest rate for the entire term, while variable-rate mortgages fluctuate based on the Bank of Canada's lending rate, typically offering lower rates but with more risk.
• 😀 Statistically, variable-rate mortgages tend to save you more money over time compared to fixed-rate mortgages, even though fixed rates offer security.
• 😀 Amortization refers to the total time it takes to pay off a mortgage. Insured mortgages have a 25-year maximum amortization, while uninsured ones can go up to 30 years.
• 😀 The term of your mortgage refers to the length of time your rate is guaranteed, which is different from the amortization period. For a variable-rate mortgage, this term is typically 5 years.
• 😀 Accelerated payments (biweekly or weekly) are preferred as they help reduce the total interest paid over the life of the mortgage, compared to non-accelerated monthly payments.
• 😀 A fully underwritten pre-approval is essential for getting a real idea of how much you can borrow. This involves providing documents like pay stubs and job letters, unlike quick, non-underwritten approvals.
• 😀 It's recommended to use a mortgage broker rather than a bank, as brokers have access to more lenders and products, ensuring the best deal for your mortgage.
• 😀 Lenders assess three factors when approving a mortgage: credit, down payment, and income. They also evaluate the property's quality, as it serves as the security for the loan.

Q & A

What is a mortgage in simple terms?

A mortgage is essentially a loan used to purchase a property. The loan amount is determined by subtracting your down payment from the purchase price of the property.

What happens if I put down less than 20% on a home?

If you put less than 20% down on a home, you will need mortgage insurance, which protects the bank in case you default on the loan. This insurance is provided by companies like CMHC, Sagen, and Canada Guarantee.

Is mortgage insurance required if I put down more than 20%?

No, if you put more than 20% down, you do not need mortgage insurance. However, some lenders may still opt to insure their portfolio to offer you better rates.

What are the differences between fixed and variable mortgage rates?

Fixed rates remain the same for the term of the mortgage, providing stability but often with higher penalties for early termination. Variable rates fluctuate with the Bank of Canada’s key lending rate and tend to be lower, though they come with some risk of rising interest rates over time.

What is the difference between amortization and mortgage term?

Amortization is the total time it takes to pay off your mortgage, while the term refers to the duration for which your interest rate or discount is fixed. For example, a fixed-rate mortgage could have a 5-year term but a 25-year amortization.

What are unaccelerated and accelerated mortgage payments?

Unaccelerated payments are typical monthly or semi-monthly payments, while accelerated payments (weekly or biweekly) are designed to pay off your mortgage faster. Accelerated payments break down the amount into smaller payments, reducing your loan balance quicker.

Why should I choose accelerated payments for my mortgage?

Choosing accelerated payments (weekly or biweekly) helps you pay down your mortgage faster, potentially saving you thousands in interest over the life of the loan. It also helps with cash flow management.

What is a pre-approval, and why is an underwritten pre-approval better?

A pre-approval is an estimate of how much a lender is willing to loan you based on your financial situation. An underwritten pre-approval is more thorough, as it involves verifying your documents (e.g., job letter, pay stubs) and gives you a more accurate figure.

Why should I use a mortgage broker instead of a bank?

Mortgage brokers have access to a wider range of products and lenders, which can help you find the best mortgage deal for your specific situation. They offer more options than individual banks, which may have a more limited selection.

What factors do lenders consider when evaluating a mortgage application?

Lenders evaluate three main factors: your credit score, the size of your down payment, and your income. Additionally, they assess the quality of the property, as it serves as collateral for the loan.