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How Does a Mortgage Work in Canada?

Before buying a new house, it is important that you take the time to understand how mortgages work.

By John FernandesPublished 3 years ago 4 min read
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Before buying a new house, it is important that you take the time to understand how mortgages work. Not every potential homeowner in Canada has the extra money to pay the full purchase price of their dream home. In order to be able to afford the cost of a new property, homeowners apply for loans or mortgages. This involves borrowing money from financial institutions or banks and paying off the amount loaned with interest over the years. It sounds simple but there are various considerations to think about before applying for a mortgage. There are different types of mortgages and each of them has features that may or may not suit you. While mortgages are common all around the world, the rules may differ from one country to another. To help you understand this aspect of the real estate world, we bring to you the ultimate guide where you will learn how mortgages work in Canada.

How Do Mortgages Work?

1. You Are Required to Have a Down Payment

You require a percentage of the cost of the home you wish to purchase as a down payment. Usually, buyers are asked to pay 20% of the purchase amount as a down payment. Nevertheless, it is possible for you to secure a mortgage even if you have only enough money to pay less than 20% of the price of the property. In such cases, having mortgage loan insurance is essential. This secures the lender in the occurrence that you default on your payments as it is the insurer who will then be liable to pay for what you owe.

2. You Need to Get Pre-Approved for a Mortgage

Getting pre-approved is a crucial step towards the process of buying a home, it allows you to know how much you can borrow towards buying a house. After you are pre-approved, you can also lock in a certain interest rate for a limited period of time while you are looking for the right house. When you contact a lender to seek pre-approval, the financial institution or the bank will ask you to submit the following:

● Proof of identity issued by the government

● Proof of address

● Contact information of the employer and employment history

● List of assets and liabilities

● Proof of income

Lenders tend to pay extra attention to your credit history as it puts light on how financially responsible you are

3. You Must Choose What Type of Mortgage Works for You

If you are planning on making extra payments to pay off your mortgage as soon as possible, then you must try to get an open mortgage as it is more convenient and flexible when it comes to letting you make prepayments. The interest rate for this type of mortgage is generally higher. On the other hand, a closed mortgage offers a lower rate of interest but caps the amount of extra money you can add to pay your mortgage off faster. This type of mortgage generally charges penalty fees if you want to make prepayments that are more than the limit set by your lender and if you decide to break the mortgage agreement.

4. How Long Does It Take to Pay Off Your Mortgage?

The time you will require to pay the principal amount of the loan is known as the amortization period. It is often between 10 and 25 years and your monthly payments will also differ based on the amortization period you choose. A longer amortization period might mean lower monthly payments but it also means that you will be paying more interest.

5. You Will Need to Renew Your Mortgage Once the Contract Expires

The duration of the mortgage contract ranges from a few months to five years and sometimes even longer. This means that the terms and conditions of your mortgage contract with the lender, along with the established interest rates, will be valid only for that period. You will be required to renew or renegotiate the terms of your mortgage.

You may not be able to decide which type of mortgage suits you best which is why you should get in touch with mortgage specialists in Montreal. You can find the most skilled and experienced mortgage specialists in Montreal at Mortgage MD. So, what are you waiting for? Get the best mortgage specialists in Montreal and buy your dream home now!

personal finance
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