When purchasing a home for the first-time or refinancing your current property there are common questions everyone asks their mortgage broker. The job of a mortgage broker is to assist the applicant in receiving the lowest rate possible. Mortgage brokers are licensed professionals that have access to many lenders and are knowledgeable of various programs. Essentially, the mortgage broker is the middle man between the borrower and the lender. They shop around to different lenders to get you the lowest interest rates.
Questions to Ask your Mortgage Broker
1. What is the difference between an open mortgage and a closed mortgage?
An open mortgage allows you to pay towards your principal without receiving a penalty. The repayment terms are more flexible, allows to you to pay off your principal anytime. But, the interest rates are higher because you are paying the prime rate plus a prepayment flexibility. However, if you do choose an open mortgage and want to convert to any other term, there is no prepayment charge. You should only consider an open mortgage if you are planning on paying off your loan amount earlier than the maturity date.
A closed mortgage is the opposite, if you pay more than the required amount towards your principal it applies a penalty. In closed mortgages you are only permitted to pay 15% to 20% of the principal balance of the mortgage per year. This, depends on the lender’s policy. But, in this term you will get a lower interest rate. You should only choose a closed mortgage type if you have no intention of prepaying any portion of the loan amount other than what is required.
2. Should I get a fixed interest rate or a variable rate?
A fixed interest rate remains the same for the duration of the term. Like of instance, TD bank’s 5-year fixed mortgage rate with a 25- year amortization is 3.64%. This will be your locked rate for the 5-year term.
Whereas, the variable interest rate fluctuates over time. This means, if the prime rate decreases you are paying more towards your principal. Vice versa, if the prime rate increases you are paying more towards the interest portion of your loan. For example, Scotiabank’s 5-year variable rate with a 25- year amortization is 3.45%. The interest rates are slightly lower, if you want to take more of a risk then a variable rate would be a good option.
3. How much down payment should I put down?
It is always recommended making a higher down payment, in order to receive lower monthly payments on your loan amount. You can make either a 5%, 10%, 15% or 20% and higher down payment. The amount of down payment you make is dependent on your purchase price. According to Government of Canada, you can only make a 5% down payment if your purchase price is $500,000 or less. This means, any purchase price higher than $600,000 to $999,999 requires a minimum down payment is 10% or 15% down. If, your purchase price is 1 million or more the minimum down payment you can make is 20% of your purchase price (www.canada.ca). By making a higher down payment you will be borrowing less and saving money on the additional default insurance premium added when you make less than 20% down payment.
4. What are all the costs?
The costs when purchasing a residential property include the following but not limited to this list.
1. Appraisal fee
2. Lawyer fee
3. Mortgage insurance
4. Home insurance
5. New home warranty (only applicable on new built properties)
6. Land transfer tax
7. Title insurance
8. Moving costs
This, is why it’s so important to ask your mortgage broker about all the costs associated with getting approved for a mortgage. By, knowing this information beforehand will allow you to budget and save accordingly.
5. Why do I need an appraisal for my property?
An appraisal is conducted In order to find out the current market value of the property. The appraisal depends on the lender, some lenders conduct desktop appraisals. This, is conducted without the physical inspection of the property. While, others require a full appraisal ordered from their approved list of appraisal companies or any ordering companies of your choice. The most common appraisal companies are Nationwide Appraisal Service (NAS), Solidify Values and Cross-Town Appraisal Ltd.. An appraisal is important because it can affect the loan amount advanced. Like for instance, if the value of your property upon inspection, came back lower, this will decrease your loan amount. Vice versa, if the value is higher upon inspection, the lender will increase your loan amount if desired.
6. What does amortization mean?
The amortization period is the total length of time it will take for you to pay off your mortgage in full. The period is usually 25- years, 30- years and sometimes 1- year interest only loans or less. The longer your loan period, the lower your monthly payments.
Example 1: If you purchase a property for $600,000 and have a 5-year variable rate at $5.34 with a 25- Year amortization. Your monthly payment will be $2,885.33.
Example 2: If your purchase price is $600,000 and have a 5-year Variable rate at $5.34 with a 30- year amortization. Your monthly payment will be $2,659.96.
The difference between the two is $225.37. By choosing a longer amortization period you can save money each month and use the savings towards other expenses. However, the downside is the longer the loan period the more you pay towards interest, because there is more time to accumulate interest.
7. What is a Good Credit Score?
In Canada credit scores ranges from 300 to 900. According, to Transunion and Equifax, the two main credit bureaus suggest a good score is 680 and above. The higher your credit score, the less risk you are to the lender and better chances of getting approved with the A lenders. However, if your score is lower than 680, you might now qualify with A lenders and should consider alternative institutions. Such as, credit unions and private lenders. While, their interest rates are higher, you can use this time to improve your credit and refinance your mortgage to receive a lower interest rate.
8. How much time do you need to close the deal?
Once you receive your mortgage commitment, and once the lender receives all the conditions and verifies the documents, the closing usually takes 2 weeks. This, is highly dependent on the borrower and when they provide the documents requested.
9. What is a conventional mortgage?
A conventional mortgage is no more than 80% of the purchase price. In order to qualify for a conventional mortgage you must put 20% of the purchase price as your down payment. If, your down payment is less than 20%, this is referred to as a high ratio mortgage or insured mortgage. Since the down payment is less than 20% a default insurance premium is added to the loan amount, this is known as Canada Mortgage and Housing Corporation (CMHC) or Genworth.
Example 1: If, your purchase price is $600,000, and you are making 20% down payment.
$600,000 – 20% = $120,000
Example 2: If, your purchase price is $500,000, and you are making 5% down payment.
$500,000 -5% = $25,000
The two examples above show a huge difference between the down payments. However, this does not take into account the additional default insurance premium added to the loan amount for example 2. In this, example you would be borrowing more.
10. How much do I qualify for?
This is one of the common questions first-time home buyers ask their mortgage broker. When asking this question, they want to know 2 things the maximum purchase price they can afford and the monthly payment for the loan.
Example 1: Jack’s maximum purchase price he can afford is $650,000, with a 20% down payment, 5-year variable rate of $5.34, and a 30- year amortization.
$650,000 -80% = $520,000
Therefore, the loan amount advanced will be $520,000 and your monthly installment will be $2,881.63. This, does not include the additional expenses, such as, property taxes and household expenses.
Hence, these are some important questions to ask your mortgage broker. The first step is to find a mortgage broker. Rateshop is a mortgage brokerage that has knowledgeable brokers who have tons of experience in the mortgage industry. They can help you improve your credit and get you approved by lenders quickly!