![\"\"](\"https:\/\/www.livabl.com\/articles\/wp-content\/uploads\/2019\/03\/how-to-choose-a-mortgage-plan-thats-right-for-you.jpg\")
<\/a><\/p>\nPhoto: Romain Toornier\u00a0<\/a><\/em><\/p>\n Enter Matt Yakabuski, an Ontario-based mortgage broker \u2014 here to break it all down and help you, me, all of us<\/em> \u2014 understand the variables to help pick the best mortgage plan. If you\u2019re Oprah, or just won the lottery \u2014 feel free to stop reading. Everyone else, buckle in!<\/p>\n And if you\u2019re curious, I\u2019ll be sharing more about my cottage mortgage in the next newsletter, landing in your inbox on Wednesday, April 3rd \u2014 sign up here<\/a>!<\/p>\n\n Mortgages usually come from either a bank or a broker.<\/p>\n Think of your mortgage broker as your personal mortgage shopper \u2014 they are provincially licensed professionals who have access to multiple lenders, including all of the major banks. They will listen to your needs and goals, analyze the numbers, help you through the qualifying process and find a mortgage product that fits just so.<\/p>\n \u201cOnline, you\u2019ll get an idea of what the rates are generally, but they vary based on the downpayment amount, the location, your credit, your income and more. No two deals are alike, no two clients are alike, no two properties are alike,\u201d says Yakabuski.<\/p>\n Banks are trusted, federally regulated lenders that can only access and offer you their own rates and products. You can also get a mortgage from a credit union (an increasingly popular option ever since the mortgage stress test was introduced) or a non-traditional Mortgage Investment Corporation. MICs are typically used by Canadians who have not qualified with traditional lenders and are willing to gobble higher interest rates to get into the property game.<\/p>\n Photo: CreditRepairExpert<\/a><\/em><\/p>\n To qualify for a mortgage, you have to prove to your lender that you can afford it and have a steady stream of income to keep up with payments. They will take a look at your income before taxes, living expenses, your credit score and all of the debts you carry. They will also look at your downpayment amount and the terms of your mortgage.<\/p>\n \u201cYour debt servicing ratio is the main measure we use to qualify people for their mortgage,\u201d says Yakabuski. \u201cDepending on your credit score, you\u2019re allowed to put a maximum of 44 percent of your total income towards debt servicing. This covers your mortgage, your property tax, credit card bills, car loans and any lines of credit.\u201d If your debt eats up more than 44 percent of your income, you won\u2019t be approved by traditional lenders.<\/p>\n As of January 1st, 2018, you also have to pass the mortgage stress test \u2014 a calculation used by federally regulated lenders to determine if homebuyers can keep up with their mortgage payments if interest rates were to rise. If you can demonstrate that you can withstand your mortgage at the Bank of Canada\u2019s benchmark qualifying rate (at 5.34 percent at the time of writing) or your interest rate plus two points \u2014 whichever amount is greater \u2014 you pass.<\/p>\n The mortgage stress test has reduced purchasing power by just under 20 percent. But as Yakabuski puts it, \u201cIf interest rates do go up, you know you can afford it.\u201d<\/p>\n Photo:\u00a0adventures_of_pippa_and_clark\/Instagram<\/a><\/em><\/p>\n Your lender will tell you the maximum loan you can qualify for (and they can help you find ways to increase that amount). But the maximum isn\u2019t necessarily the loan you should take.<\/p>\n \u201cInstead of my clients asking me what they can afford, I ask them what they\u2019re comfortable spending on a monthly basis on their mortgage, property tax, heat, hydro, that kind of thing. And then we\u2019ll work backwards,\u201d explains Yakabuski.<\/p>\n Everyone has different comfort levels. \u201cSome people are conservative and some people just want to hit their maximum,\u201d he says. In the end, it all comes down to budgeting and making sure you don\u2019t completely wipe out your bank account and end up house poor. If you have to beg your in-laws to cover the closing costs, can\u2019t afford to hire movers or even get the nice coffee beans you like \u2014 you may want to consider getting less house than you can actually qualify for, but more financial freedom.<\/p>\n Photo: mandimakes\/Instagram<\/a><\/em><\/p>\n You may have seen a low rate on a website or on the window at the bank, but not every rate is for you and you have to read the fine print. There are rates for refinancing, rates for rental properties, rates if you’re putting more than 20 percent down (uninsured) and rates if you’re putting less (insured), and on and on.<\/p>\n \u201cYour friend who got a 2.49 percent interest rate six months ago, sorry to say \u2014 that\u2019s just not available today \u2014 and even if it was, it doesn\u2019t mean you could have gotten it. If you find a rate that seems like a much better deal than everywhere else, there\u2019s probably a reason for that,\u201d explains Yakabuski.<\/p>\n For example, restricted mortgages, which often have lower rates but inflict painful penalties if you break them and prohibit you from refinancing elsewhere before your term is up. \u201cIf I sell you a restricted mortgage and then in two years, you have to sell the property, I don\u2019t want to say, \u2018Sorry, your penalty is going to be triple the amount of a regular penalty because it was a restricted deal.\u2019 Anyone who is looking out for your best interest is going to take into consideration the portability of the mortgage.\u201d<\/p>\n Photo: James Bombales<\/em><\/p>\n The term you choose will have a direct impact on your mortgage rate and how long you\u2019re locked in to the rate, lender, and various terms and conditions of your mortgage product.<\/p>\n \u201cA shorter term length has historically proven to have a lower interest rate. Right now, not so much,\u201d explains Yakabuski. Terms can range from six months to 10 years. \u201cMost people choose a five-year because it\u2019s often the longest term for the best rate.\u201d<\/p>\n Your mortgage amortization period is the length of time it will take you to pay off your entire loan. In Canada, the maximum amortization period is 35 years \u2014 but you\u2019ll only have access to this timeframe if you\u2019re putting down more than 20 percent. If you\u2019re putting down less than 20 percent and have an insured mortgage, the maximum amortization period is 25 years.<\/p>\n If you go with a longer amortization period, you will have smaller monthly payments, but keep in mind: you\u2019ll pay more in the long run in interest over the life of your mortgage.<\/p>\n Depending on your mortgage commitment, lenders will only allow you to pay so much extra towards a mortgage before they start penalizing you. How\u2019s it\u2019s calculated depends on the product you\u2019re in and what lender you\u2019re with, but in many cases you will have the opportunity to make lump-sum payments towards your mortgage, to double up payments or to increase the payment amount.<\/p>\n \u201cI suggest taking the highest amortization possible, but if you have the affordability to pay more, make sure you do,\u201d says Yakabuski. \u201cEven with a longer amortization, you effectively could pay at the rate of a 15- or 20-year amortization, saving you thousands of dollars in interest by paying the principal off that much quicker. But should your financial situation change, you could scale back your payments all the way to the 25-year if you have to.\u201d<\/p>\n Photo: James Bombales<\/em><\/p>\n Fixed mortgages mean the rate you settle on will be your rate for the entire term of your mortgage. A variable rate is going to fluctuate based on what the prime rate is doing (at the time of writing, it\u2019s currently sitting at 3.95 percent). If the prime rate goes down, your rate and payment will go down and vice versa. With a variable rate, there is often an opportunity to save money, but you have to be comfortable with some risk.<\/p>\n Choosing the right strategy often comes down to flexibility. Many Canadians default to a five-year fixed rate mortgage, but if there\u2019s a possibility you may be moving on before then, the penalty for breaking the term can get costly, whereas a variable mortgage will cost you three months of interest.<\/p>\n \u201cVariable is a good option because they traditionally have a lower interest rate and you have flexibility should you need to get rid of it quicker with the smallest penalty possible,\u201d says Yakabuski.<\/p>\n Let\u2019s say you come into a large inheritance and want to pay off your mortgage in full or you unexpectedly have to ditch your property before the term is up.<\/p>\n With a closed mortgage, you cannot repay, renew or renegotiate before the term is up without incurring penalties. With an open mortgage, you can do all of the above without penalty \u2014 but the interest rates are often much higher.<\/p>\n \u201cI rarely recommend an open mortgage, even when people say they\u2019re going to flip the property,\u201d says Yakabuski. \u201cThe reason is because an open mortgage right now has an interest rate of about six percent (all open terms are variable). Whereas the interest on a closed, variable mortgage is, let\u2019s say, three percent less. If you\u2019re going to sell the place inside two, maybe three months, then open makes sense. But if you\u2019re going to keep it for four months plus, generally the three-month interest penalty on breaking a closed, variable mortgage can save you thousands in just six months.\u201d<\/p>\nUm, where do I get a mortgage?<\/h2>\n
\r\n SEE ALSO:<\/span>A first-time buyer\u2019s guide to working with a mortgage broker<\/a><\/strong>\r\n <\/div>\n<\/a><\/p>\nHow do I qualify for a mortgage?<\/h2>\n
Will I pass the mortgage stress test?<\/h2>\n
\r\n SEE ALSO:<\/span>Can you pass the mortgage stress test? Here's how to find out<\/a><\/strong>\r\n <\/div>\n<\/a><\/p>\nShould I take the biggest loan I can get?<\/h2>\n
\r\n SEE ALSO:<\/span>A first-time homebuyer\u2019s guide to avoiding the house poor trap<\/a><\/strong>\r\n <\/div>\n<\/a><\/p>\nFinding the \u201cbest rate\u201d is not as easy as it looks<\/h2>\n
<\/a><\/p>\nHow long should my term and amortization be?<\/h2>\n
<\/a><\/h2>\nShould I get a fixed or variable mortgage?<\/h2>\n
Should I go for an open or closed mortgage?<\/h2>\n
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