Purchasing a home is a long-term financial dream for many Canadians. Owning a house allows you to develop equity and gives you more control than renting. However, purchasing a home comes with a lot of financial responsibility, and not everyone is ready for it.
An essential stage in the home buying process is finding a mortgage that matches your needs. Like many other nations worldwide, Canada relies on a mortgage system to facilitate the purchase of a home. To help first-time homeowners through the process, we’ve put together a detailed reference to mortgage requirements.
For more in-depth knowledge, visit this site and make the buying process easier.
Meeting Financial Requirements
It’s important not to rush things when you buy a house because it’s likely to be one of the most important decisions you’ll make in your life. Instead, decide whether or not you’re ready to buy by asking yourself the following questions:
- Is it financially viable to accomplish your home-ownership goals?
- Can you keep your budget afloat with the additional housing costs?
To evaluate your credibility to buy a home, lenders look at three broad indicators of your financial well-being – income, equity, and credit.
Have A Steady Income
When you take out a mortgage, your income is one of the most important things lenders consider. They will want to know your salary to evaluate how much you can borrow.
The amount you’ll get depends on the sort of job you have – full-time salaried, entrepreneur, or contract work.
Pro Tip: You will be accepted for a mortgage that is less than 4.5x your gross taxable yearly family income.
Good Credit Score
Mortgage lenders want to establish that you have a proven record of paying your bills on time before sanctioning you for a mortgage. Lenders will do this by examining your credit report.
A credit report is a document showing how you have paid your debts over time. You can see what kind of credit you’ve had, the balances, and the payments you’ve made. Many prospective homebuyers experience difficulties obtaining a mortgage due to poor or inadequate credit.
A 650-credit score will be necessary for a mortgage from a standard lender in Canada. A mortgage broker can assist you in better understanding your credit and the many loan choices accessible to you based on your requirements.
Down Payment
A down payment is the portion of the total purchase price of the property you provide at the time of purchase. The minimum down payment depends on various factors like property type, your credit profile, your income, and the lender’s requirements.
If you are purchasing a home in Canada, you must make a down payment of at least 5% of the actual price of the property. Minimum required down payment in Canada to own a house:
- 5% down payment for properties with a purchase price of <$500,000.
- 5% and 7.5% down payment for properties between $500,000 and $999,999.
- >20% down payment for properties more than $1,000,000.
Pre-approved Mortgage
If you’ve fulfilled the credit, income, and down payment requirements to purchase a property in Canada, the next crucial step is obtaining a pre-approved mortgage.
There are many benefits to getting a pre-approved mortgage. It lets you know the amount you can afford, the interest rate, and the mortgage payments for each month.
When it comes to zeroing in a mortgage, you have plenty of options. We recommend relying on your lender or broker to obtain the best mortgage. Below are some of the standard mortgage options in Canada:
- Open mortgage: This allows you to clear your mortgage without incurring any penalties.
- Closed mortgage: Although it has a low-interest rate compared to an open mortgage, it offers only a handful of choices to pay off your mortgage early, in whole or in part.
- Conventional mortgage: A type of loan having an equal or less than 80% of the lending value of a property. This mortgage needs a down payment of at least 20%.
- High-ratio mortgage: A loan that exceeds 80% of the home’s lending value. This indicates that the down payment is less than 20%, and the mortgage may need to be insured by a lender.
- Others: Mortgages can also be classified based on interest rates charged by the lender. They can be fixed, variable, and capped variable rates.
Mortgage Loan Insurance
You’ll almost certainly need mortgage loan insurance if you have only 20% saved for a down payment. It safeguards lenders against the danger of mortgage failure in the same way that home insurance does in the event of a loss.
Mortgage insurance premiums are determined as a proportion of the entire loan amount. They are calculated by evaluating various criteria, including the amount and source of the down payment. Note that insurance premiums will be higher if the down payment is lower.
Canadian Mortgage Stress Test
The Canadian mortgage stress test is one element that determines your eligibility for a mortgage. The country’s federal agency in charge of banking regulation, The OSFI (Office of the Superintendent of Financial Institutions), brought the mortgage stress test into practice in 2018.
To qualify for a mortgage, a borrower must pass this stress test. Borrowers must demonstrate their ability to finance a mortgage.
Homebuyers must make a down payment of at least 20%, equal to the higher of the Bank of Canada’s five-year benchmark rate and the lender’s interest rate of 2%. And for those making a down payment of less than 20%, it is the greater of the Bank of Canada’s five-year benchmark rate and the lender’s interest rate.
Homeowners may need the stress test to refinance their loan, apply for additional credit, or switch lenders.
Endnote
A complex system governs the mortgage sector in Canada. The guidelines consider the interests of both the lender and the potential buyer. Make sure that you plan well in advance, save a significant down payment, and ensure your finances are in order before applying for a mortgage to own a house in Canada.
