Mortgages 101: Get to know the basics

What is a mortgage?

A mortgage is a loan used to purchase or refinance a property with the property itself serving as collateral on the loan. Typically, homebuyers will pay 5%-20% of the home’s purchase price as their down payment when they buy the home and use a mortgage loan to finance the remaining 95%-80%. 

What is mortgage insurance?

You may have heard the topic of mortgage insurance come up when discussions turn to down payments. That’s because mortgage insurance is mandatory in Canada if you have a down payment that is less than 20% of the home’s purchase price. It serves to protect lenders from borrowers who may default on their payments. Mortgage insurance amounts up to 2.5-4% of the total mortgage amount and is usually financed through your mortgage, increasing your monthly payment.

Mortgage term vs. amortization

When discussing mortgages, buyers can sometimes mix up the mortgage term and the amortization period. At first, they may sound similar since they both refer to important mortgage timelines, but once you understand the differences, keeping them straight is easy.

The amortization period is the length of time it will take to pay off the mortgage, including interest. This period typically spans 25 to 30 years. The longer the amortization period, the higher the total interest paid by the homeowner. 

A mortgage term refers to the length of time that your mortgage contract with a specific lender is in effect. The conditions in your contract, such as the interest rate, will remain in effect for the duration of the mortgage term. Terms can range from 6 months to 10 years, but the majority of Canadians choose a 5-year term. If the mortgage has not been paid in full by the end of the mortgage term, the mortgage will be refinanced or renewed.

Longer mortgage terms typically imply a higher interest rate, but also protect homeowners from future spikes in interest rates, while shorter terms provide homeowners with more flexibility. If you choose to break your mortgage term early, you may be subjected to a prepaid penalty fee, though the specifics will depend on the type of mortgage you have and your lender. 

When choosing your mortgage term, it’s important to keep in mind factors like your financial situation, short and long term goals, and risk tolerance to discuss with your mortgage advisor.

Types of mortgages and interest rates

As a first-time homebuyer learning about mortgages, you may get confused hearing mortgages referred to as open, closed, fixed, or variable. What do these terms really mean and which one is best for you? Your mortgage advisor will be able to outline your options and help you understand which may best fit your situation and, to help you become familiar with your options, we have included some simple descriptions below.

Open mortgage

Open mortgages typically have higher interest rates than closed mortgages but are also more flexible as they allow the owner to pay off their mortgage sooner through higher monthly payments or a lump sum payment. An open mortgage also allows homeowners to prepay their mortgage without a prepayment charge. 

Closed mortgage

A closed mortgage only allows a limited amount of the principal to be prepaid without an additional prepayment charge. The interest rate for a closed mortgage is generally lower than an open mortgage.

Variable interest rates

With a variable interest rate, the homeowner’s interest rate can change when the prime lending rate does. The monthly mortgage payment is usually locked in, but the amount going towards the interest and principal fluctuates. If interest rates rise, more of the monthly payment goes toward the interest. If rates go down, more of the payment goes toward the principal. 

Fixed interest rates

With a fixed interest rate, the mortgage interest rate and monthly payments do not change for the term of the mortgage. If interest rates rise, you’re protected as your rate remains unchanged.

The mortgage process

The mortgage process can be divided into 3 separate steps, each coming in different stages of the homebuying journey.

Mortgage pre-qualification

A mortgage pre-qualification gives homebuyers an estimate of how much they can borrow for their mortgage. Pre-qualifications can be received online from many lenders’ websites and use a buyer’s debt, income, and savings to calculate an estimated mortgage amount. 

A pre-qualification can be a helpful starting point when you’re first beginning to think about buying a home, but once you decide that you are ready to seriously consider buying, it is recommended you talk to a mortgage advisor and receive a mortgage pre-approval. 

Mortgage pre-approval

A mortgage pre-approval is a more in-depth process than a prequalification. During this process, homebuyers work with a mortgage advisor who will collect information about the buyer’s income and debts to determine the maximum mortgage a buyer can qualify for. The mortgage pre-approval will also give homebuyers an estimate of their monthly mortgage payments and lock in an interest rate for a set period of time. 

The homebuyer can then use this mortgage pre-approval while looking for homes to make sure they stay within their budget while making offers. Read more about mortgage pre-approvals here.

Mortgage application

Once a homebuyer’s offer on a home is accepted they can complete a formal mortgage application. 

Having a pre-approval in hand should make this step more streamlined, however, the property itself will need to be approved by the mortgage underwriting team. The mortgage lender will evaluate the property, taking into account the location, property taxes, property type, and various other factors, before approving the mortgage application and the buyer’s loan.

As the closing date on your property approaches, your lender will finalize your agreement, locking in your mortgage payments, interest rate, term, and amortization. On closing day your real estate lawyer will make sure all the final documents are in place, transfer the necessary funds to the seller, and you will be the proud owner of your new home!

Final notes

If you feel confused or overwhelmed about mortgages, you’re not alone. The mortgage process can be stressful if you don’t know what to expect, but it doesn’t have to be. Hopefully, this guide has helped you feel more prepared for your mortgage and home purchase. 

When you co-buy with Ourboro, we’ll be your trusted homebuying partner. After completing an application we’ll connect you with one of our top lending partners and guide you through the entire mortgage, and homebuying, process. 

Interested in seeing how much Ourboro may be able to contribute towards your down payment? Get an estimate and see how shared ownership can help you buy the home you want, sooner.

Mortgage Pre-Approval Checklist

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A mortgage pre-approval can help give you the knowledge you need to confidently find your new home. Learn more about mortgage pre-approvals here.

We’ve created this Mortgage Pre-Approval Checklist to help you organize and prepare for the process. The documents and information your mortgage advisor will ask for are all related to verifying your income, assets, or liabilities. There may be additional information required, such as residency status or information to support anomalies in your credit history, but this list is a great starting point as you begin your home buying journey.

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Verifying your income

  • Two most recent pay stubs
  • Most recent T4
  • Notice of Assessment from the past two years

Verifying your assets

  • Most recent bank statements
  • Investment statements, including your RRSP
  • The above should support  your down payment contribution amount and ability to pay closing costs

Verifying your debts

  • Most recent statements for any credit cards, loans and/or lines of credit
  • Spousal or child support payments, if applicable

Property information

  • Info on the type of property you’re interested in
  • If already a homeowner, your mortgage statement and most recent property tax bill

This information will give your mortgage advisor a look into your financial picture and determine the amount of mortgage debt you can carry and how much home you can afford.

Questions to consider

While the pre-approval process involves your mortgage advisor gathering information about you and your finances, it is also a great opportunity for you to ask your own questions about your mortgage. Especially as policies across lenders may differ, it’s important to understand exactly what you can or cannot do with your pre-approval.

Your questions will likely be unique to you, but some common examples include:

  • How long is my pre-approved rate guaranteed?
  • Can this pre-approval be extended?
  • If interest rates go down during my house search, does my rate get updated?
  • What are my estimated closing costs?
  • What type of mortgage loan would be best for me?

Collecting all the necessary information for your pre-approval may feel daunting, but once you start you should be able to easily find everything you need within a couple of hours. Then you’ll be well on your way to determining your home buying budget and setting out to find your new home.

At Ourboro, we work with market-leading lending partners for your mortgage pre-approval. Get started with an estimate today to see how much you may be able to afford through co-ownership.

What is a Mortgage Pre-Approval?

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Determining your home buying budget can feel like a complicated process for first-time home buyers. You know how much you’ve saved for a down payment, but how do your savings, your income, and other factors, impact how much home you can afford?

Getting a mortgage pre-approval is your first step to finding out. 

A pre-approval is a low-risk way to find out what your home buying budget should be. Whether you’re exploring shared ownership with Ourboro, or getting ready to buy on your own, this guide will help you prepare for your mortgage pre-approval.

What is a mortgage pre-approval?

You can think of a mortgage pre-approval as a preliminary assessment of your finances.

You will work with a mortgage advisor who will look at your full financial picture to find out what amount of mortgage debt you can carry, and ultimately, how much home you can afford. They will collect information around your income and debts and, with the help of their underwriting team, determine the maximum mortgage you qualify for.  See what information your mortgage advisor is likely to ask for here.

After receiving your mortgage pre-approval you’ll have a clear sense of your budget and can feel confident beginning your house hunt. Once your offer is accepted on a home just let your mortgage advisor know and they will help you complete a formal mortgage application for the property you wish to purchase.

What will my mortgage pre-approval include?

Sample Mortgage Pre-Approval
View a PDF of this image here.

What to keep in mind while shopping for a home

It’s always important to remember, the maximum mortgage amount indicated on your pre-approval is not guaranteed. Once you make a successful offer on a home, you will then complete a mortgage application that will go through a formal underwriting process. The final amount that the lender can provide will be based on your mortgage carrying capacity as determined during the pre-approval process, as well details of the property you are purchasing.

Some things that, if changed between your pre-approval and your mortgage application, may impact your final mortgage amount include:

  • Changes to your employment status, income, or debts.
  • Purchasing a condo or condo townhouse with maintenance fees if the additional monthly cost were not included in your pre-approval.
  • Your pre-approval expiring prior to the closing date. This can lead to changes to your interest rate and, as a result, your approval amount.

Once you have a mortgage pre-approval in hand, you can feel confident in your home buying budget and start the search for your new home.

Interested in seeing how much Ourboro may be able to contribute towards your down payment? Get an estimate and see how shared ownership can help you buy the home you want, sooner.