Last Updated: 12th December, 2019
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Mortgages in Canada
This article lists the many variations of Mortgages in Canada. You will see a lot of talk on here and everywhere about CMHC or mortgage insurance. This is the insurance that you pay if you purchase a home with less than 20% down. This is known as mortgage default insurance and is mandatory as per the government if you purchase a home with less than 20%.
Insurance is not available on rental properties or purchases of homes worth over $1 million. The mortgage insurance premium is on the total amount of the mortgage and is tiered. With 5% down you will pay a 4% fee for the mortgage. With 10% down you will pay a 3.1% fee and with 15% down you will pay a 2.8% fee. These fees are included in the mortgage, raising the total mortgage amount you pay. You will have to pay the HST (or applicable tax) at the time of closing. The benefit of the insurance is that you can purchase with less money down and you will get better rates from your lender as they have less risk, which they pass along to you. The down side of this is that you do have to pay the insurance premium which increases your loan amount and payment. Insured mortgages in Canada can have a maximum of 25 year amortization and are subject to passing the current B20 guidelines for stress testing. This is outlined below.
In Canada mortgage qualifying criteria is based off of two main ratios your GDS and TDS. GDS (Gross Debt Service) is the amount of your monthly income that can go towards your housing costs. These costs consist of (PITH) Principle, Interest, Taxes and Heating) . The amount that you are allowed to borrow will be based off of your credit score. A credit score of 680 or higher and you can have a GDS of 39%. A credit score below 680 and your maximum GDS is 35%. To calculate your PITH you will need to add up the principle and interest of the mortgage along with the monthly property tax and heating. (Half of your condo fees will also be included is you live in a condo) If this number is less than 35% of your GDS you qualify! The other number used is your TDS (Total Debt Service). This is the total debt that you have, including lines of credit, credit card payments and car loans, but not insurance. This number can be 42% of your gross income with a credit score under 680 and 44% if your credit score is above.
As of January 1st 2018, all mortgage transactions must comply with a stress test guideline, often referred to as B20 guidelines. In order to calculate your GDS and TDS ratios, you would need to ensure that you are calculating these percentages using these guidelines. The end result to a consumer seeking a mortgage is that your GDS and TDS must be calculated at the Bank of Canada Qualifying Rate (as of Oct 16 2018, this is 5.34%) or the contract rate being offered plus 2%, whichever of these is higher.
Fixed vs Variable
Fixed mortgages offer you the same rate over the duration of the contract. If you have a 5 year fixed mortgage at 3.00% interest your payment will remain the same over the duration of the 5 years. Variable rate mortgages are based off of the lenders Prime rate. This was the same across all lenders until in 2016 some banks have increased their mortgage prime rate. This rate will fluctuate based off of the Bank of Canada’s overnight lending rate. A variable rate will go up and down based on the overnight lending rate. The Bank of Canada meets and decides movement 8 times annually. If you have a variable rate mortgage your payment amount can increase or decrease based off of the overnight lending rate. Adjustable rate mortgage is much the same as a variable rate mortgage, but instead of the payment going up or down the amortization will get shorter or longer. Most Canadians call adjustable rate mortgages variable, but it is important to know the difference. Amortization is the duration in which you intend to pay back your loan.
In Canada with have mortgage terms, which are how long you are locked in at a particular rate, but the amortization is the total duration of all loans in order to pay back your mortgage. Payment frequencies will vary by lender, but most will offer some or all of the following: monthly (once a month), Semi-Monthly (Twice a month), bi-weekly (26 times a year) accelerated bi-weekly (26 times a year at bi-monthly amount), weekly (once a week). When getting a mortgage you have several options. You can go to your bank, a credit union or a mortgage broker. All have different benefits and are worth exploring to see what is the best fit for you.