What is a mortgage pre-approval and why do I need one?

A mortgage pre-approval is a conditional commitment from a lender to loan you a specific amount of money. It shows sellers you are a serious buyer and helps you understand your budget before house hunting. Pre-approvals typically last 90-120 days and lock in your interest rate.

How much down payment do I need to buy a home in Canada?

For homes under $500,000, you need a minimum 5% down payment. For homes between $500,000 and $1 million, you need 5% on the first $500,000 and 10% on the remaining amount. For homes over $1 million, you need at least 20% down payment.

What is the difference between fixed and variable mortgage rates?

A fixed-rate mortgage has the same interest rate for the entire term, providing payment stability. A variable-rate mortgage fluctuates with the prime rate, which can result in lower rates when rates drop but higher payments when rates rise. Your choice depends on your risk tolerance and market conditions.

How can I improve my chances of mortgage approval?

Improve your credit score by paying bills on time, reduce existing debts, save for a larger down payment, maintain stable employment, avoid major purchases before applying, and get pre-approved early. A mortgage broker can also help you find the best lender for your situation.

What is mortgage insurance and when is it required?

Mortgage default insurance (CMHC, Sagen, or Canada Guaranty) is required when your down payment is less than 20% of the home price. This insurance protects the lender if you default on your mortgage. The premium is typically added to your mortgage amount and ranges from 0.6% to 4.5% of the loan.

Can I break my mortgage early and what are the penalties?

Yes, you can break your mortgage before the term ends, but penalties apply. For variable-rate mortgages, the penalty is typically three months of interest. For fixed-rate mortgages, you pay the greater of three months interest or the Interest Rate Differential (IRD), which can be substantial.

What is the stress test and how does it affect my mortgage?

The mortgage stress test requires borrowers to qualify at either 5.25% or their contract rate plus 2%, whichever is higher. This ensures you can afford your mortgage if rates increase. The stress test may reduce the amount you can borrow compared to what lenders previously offered.

Should I choose a 5-year or shorter mortgage term?

A 5-year term is most popular in Canada as it balances rate security with flexibility. Shorter terms (1-3 years) may offer lower rates or align with your potential timeline for life-changes (need a HELOC in 3 years? Or might sell?) but more frequent renewals and rate risk. Longer terms (7-10 years) provide stability but typically at higher rates. Consider your financial goals and rate outlook.

How much mortgage can I afford based on my income?

Lenders typically use two ratios: Gross Debt Service (GDS) ratio should not exceed 32-39% of gross income for housing costs, and Total Debt Service (TDS) ratio should not exceed 40-42% for all debt payments. A mortgage broker can calculate your exact borrowing capacity.

What is the difference between amortization and mortgage term?

Amortization is the total length of time to pay off your mortgage (typically 25-30 years). The term is the length of your current mortgage contract (typically 1-5 years). At the end of each term, you renew your mortgage, potentially with different rates and conditions.

Can I get a mortgage if I am self-employed?

Yes, self-employed individuals can get mortgages, but requirements are stricter. You typically need two years of tax returns showing consistent income, a good credit score, and often a larger down payment (20% or more). Alternative lenders may offer more flexible options for self-employed borrowers.

What documents do I need for a mortgage application?

You will need proof of income (pay stubs, T4s, tax returns), proof of down payment (bank statements), government-issued ID, employment verification, credit report authorization, property details, and information about your assets and debts. Self-employed applicants need additional documentation.

What is mortgage refinancing and when should I consider it?

Refinancing replaces your existing mortgage with a new one, potentially at a better rate or to access home equity. Consider refinancing to lower your rate, consolidate high-interest debt, fund renovations, or adjust your mortgage term. Be aware of potential penalties for breaking your current mortgage.

How do mortgage brokers make money if their service is free?

Mortgage brokers are paid commissions by lenders when they successfully place a mortgage. This does not cost you extra - lenders price this into their rates whether you use a broker or go direct. Brokers provide access to multiple lenders and can often secure better rates and terms.

What is a Home Equity Line of Credit (HELOC)?

A HELOC is a revolving credit line secured against your home equity, allowing you to borrow up to 65% of your home value minus your mortgage. You only pay interest on what you borrow, and you can reuse the credit as you repay. It is ideal for renovations, emergencies, or investments.

Can I port my mortgage to a new property?

Many mortgages are portable, meaning you can transfer your existing mortgage and rate to a new property when you move. This helps you avoid early discharge penalties. However, you must qualify for the mortgage on the new property, and there may be blending options if you need to borrow more.

What is the difference between a mortgage broker and a bank?

Banks only offer their own mortgage products, while mortgage brokers work with multiple lenders (banks, credit unions, trust companies, alternative lenders) to find you the best rate and terms. Brokers provide unbiased advice and can access products not available to the general public.

How does my credit score affect my mortgage rate?

A higher credit score (680+) qualifies you for the best rates from prime lenders. Scores of 600-679 may still qualify but at higher rates or with additional requirements. Below 600, you may need alternative lenders at significantly higher rates. Improving your score before applying can save thousands in interest.

What are closing costs and how much should I budget?

Closing costs include legal fees ($1,000-$2,000), land transfer tax (varies by province), home inspection ($400-$600), appraisal ($300-$500), title insurance ($300), and moving costs. Budget 1.5-4% of the purchase price for total closing costs. First-time buyers may qualify for tax rebates.

Can I make extra mortgage payments to pay off my loan faster?

Most mortgages allow prepayment privileges, typically 10-20% of the original principal per year without penalty. You can make lump-sum payments or increase your regular payment amount. These extra payments go directly to principal, significantly reducing your amortization and total interest paid.

What happens at mortgage renewal and can I switch lenders?

At renewal, your term expires and you negotiate a new rate and term. You can renew with your current lender or switch to a new one. Switching lenders at renewal typically has no penalties, and a broker can help you shop for the best rate. Start the renewal process 120 days before your term ends.

How long does the mortgage approval process take?

Pre-approval can be completed in 1-2 days with proper documentation. Full mortgage approval typically takes 1-2 weeks, depending on the complexity of your application, property appraisal timing, and lender processing times. Rush approvals are sometimes available. Working with a broker can expedite the process.