At the same time, being a first-time home buyer can be an extremely daunting position to be in. There are numerous questions to consider when buying a home for the first time.

What is the cost of owning a home? What is the process for qualifying as a first-time home buyer? How much money do I need for a down payment on my first home? Should I buy a condo or a house?

It's important to be methodical in answering these questions, so let's explore them together.

Pros and Cons of Buying a Home

Before jumping into the process of buying your first home, it's important to be aware of both the pros and cons of buying one in the first place. It's likely that buying a home will be the biggest purchase you make in your lifetime, so it's worthwhile to consider the weight of what you are venturing into.

Pros of Buying a Home

Buying your own home offers you the pride of ownership and the freedom to do what you want with your space. You can paint walls, replace carpet, build a garage if you have the space and tear down walls at will without having to go through a landlord for even the tiniest modifications.

On top of doing what you want with your home, owning your own home is a solid and secure method for building equity. Each mortgage payment is one step closer to being able to leverage that equity for further investment opportunities.

On the topic of investment opportunities, buying your first home can be something you enjoy for yourself, but you can also look at the possibility of turning your home into an income-producing property. Whether it's renting out a bedroom to a roommate or the basement to an independent tenant, owning your own home can be a great alternative source of income.

As a first time home buyer you might be interested in a fixer-upper. In that case a purchase plus improvement mortgage might be for you.

Cons of Buying a Home

The challenge of getting into the home ownership market is no small feat. Perhaps the biggest challenge is coming up with a sufficient down payment. Down payments are determined by the purchase price of the home you are looking at, and in Canada, houses can be very expensive depending on where you buy.

With every home comes the reality of maintenance and repairs. Many of these expenses are foreseeable, but occasionally something unexpected happens and it can be difficult to swallow the cost of these situations.

Finally, when it comes to owning a home, you are at the mercy of the market. Buying and selling at the right time can be a tough thing to predict and there's always a risk of loss if the value of your home is low if you need to sell quickly.

Moving Forward with Buying Your First Home

While there is notable risk in buying and owning a home, it's fair to say that both the immediate and long term benefits of owning a home generally outweigh the potential downsides.

Now that you're feeling confident that home ownership is something for you, let's discuss how to pull it off.

Finding Enough Money for a Minimum Down Payment

Every home purchase requires a down payment and this can be a big hurdle to jump over to get into the home ownership market. In Canada, down payments can be as small as 5%, but most lenders look for 10-20%.

If you can achieve a higher down payment to reduce your mortgage payments, this can be even more beneficial. All of this can be calculated with a simple mortgage payment calculator that is available on any financial institution website.

What Mortgage Am I Pre-Approved For?

Beyond that initial down payment, it's important to know what is affordable for you. The CMHC lays out a general rule that suggests your monthly housing costs should be no more than 32% of your average gross monthly income.

Crunching these numbers is an important next step before scrolling through listings and checking out all the open houses. Most financial institutions and mortgage brokers offer no-charge consultation on what kind of mortgage you will be qualified for.

You can apply on Breezeful.com to find out how much you can borrow. Or learn more about mortgage pre approvals here.

Additional tools:
- GDS and TDS calculator
- Mortgage Affordability Calculator
- Land Transfer Taxes Calculator

Home Buying Incentive Programs

Given the challenge of scraping together enough money for a down payment, the federal government offers Canadians several benefit measures to help first time home buyers. These incentives include:

The Home Buyers Plan

This allows first time home buyers to pull money from an RSP and use that money toward a down payment on a home.

The Home Buyers Amount

This is a $5000 non-refundable tax credit that can be applied to qualifying home buying situations.

The First Time Home Buyers Incentive

This incentive from CHMC allows home buyers to decrease their mortgage payments without having to increase their down payment by means of shared equity in partnership with the government.

Which Home Should I Buy?

When you've gathered a sufficient down payment, assessed what you're pre-qualified for and tapped into any incentives you qualify for, it's finally time to get into the fun stuff and start looking at homes!

Realtor.ca is a great place to start poking around for homes in the affordability range that you've determined. You can connect with a real estate agent and check homes out in person and find out what works for you.

There's an endless debate between condo, townhouse and detached homes. Much of this is personal preference and what you can tolerate, but if you're a first-time home buyer, the biggest determining factor is likely affordability.

Despite the speed of the Canadian real estate market, it's important not to rush the process. Know what you're looking for and when the right opportunity presents itself, you can jump in with confidence. Once you've purchased your new home, it's time to prepare for your move. Tons of online resources are available to help you with this step, such as moving concierge services that can assist with every step of the process.

Mortgage brokers like Breezeful can help first time home buyers navigate the market and answer any questions that may come up, like open vs. closed mortgages or conventional vs. high ratio mortgages.

On top of crunching the numbers and figuring out what's affordable, housing markets can be tough to work with too. Particularly in hot housing markets, you need to know what you're working with and be able to make decisions quickly.

A common question when it comes to transitioning from one home to another is, "Do I need to sell my current home before I buy a new one?" Many people understandably think, "Of course you do!" The reality is that you don't. In fact, there's a relatively simple way to work around this common dilemma.

Bridge Loans

Enter the concept of bridge loans (also known as a swing loan). Bridge loans are a handy way to navigate those situations where you might need to buy a new home before selling your old home. Arranging closing dates and possession dates perfectly can be difficult to manage, but bridge loan financing is here to help you out.

What Is A Bridge Loan?

A bridge loan (also called bridge financing) is a short term loan that allows you to use the equity of your current home to finance the purchase of your new home. The concept is similar to that of a home equity line of credit (HELOC) except that it is only short term.

Most lenders are willing to finance a bridge loan for anywhere between 3 to 6 months; sometimes even up to 12 months depending on your financial situation. Each application is dealt with on a case-by-case basis and is highly dependent on several important factors.

When Would I Use a Bridge Loan?

The usual process for transitioning between homes is to sell first and then buy a new home. However, there are situations where this ideal arrangement might not happen.

Depending on where you live in the country and depending on the housing market, houses that are for sale can move very quickly. In this type of situation, having a contingency clause around needing to sell your current home can be a disadvantage.

In order to move quickly in that type of housing market, you might need to be okay with buying before selling your home. A bridge loan empowers you to do this efficiently and relatively cost-effectively too.

How Do I Qualify For a Bridge Loan?

Qualifying for a bridge loan is not overly complicated. Financing for a bridge loan is typically dependent on the things you would need for any regular loan: stable income and a good credit score.

Additionally, a decent amount of equity in your current home must be built up in order to qualify for a bridge loan. Most lenders would expect a minimum of 20% equity. Some private lenders may be more flexible depending on income levels.

With these qualifications, all you need is a sale agreement on your current home and a purchase agreement on your new home and you're ready to make it happen.

Calculating Bridge Financing

The math behind bridge loans is not overly complicated. Here's a simple example.

Let's say you find a great deal on a house that's worth $300,000 and you plan to put a 10% down payment on that new home ($30,000). Additionally, you have $140,000 of equity in your current home that you plan to add to the down payment, but that money is tied up in your current home until you sell it after the possession date of your new home.

The possession date of your new home is May 1st, 2021, but the closing date on your current home isn't until May 24th, 2021. You will need a bridge loan to cover that 24 day time period where your equity is tied up in your current home.

The calculation for the bridge loan is quite simple. You take the total amount you are PLANNING to use as your down payment ($140,000) and subtract what you DO use for the initial down payment.

$140,000 - $30,000 = $110,000.

Your bridge loan is $110,000 and that amount is financed over 24 days until the sale of your current home closes.

Additional Fees with Bridge Loans

Lending fees for bridge loans are fairly reasonable especially given that the time period is quite short. Most often the interest rates are Prime + 2-3%. On top of that, lenders usually charge an administrative fee for handling this process. That fee can be anywhere from $200-500.

Overall, this is a fairly reasonable cost for the ease of transitioning between homes when possession dates don't line up optimally.

Potential Pitfalls

As hassle-free as bridge financing sounds, there are some potential pitfalls to watch out for when leveraging this option.

One of the primary concerns with bridge financing is to keep the time period short. Most lenders are willing to lend for up to a 3-6 month time period. This is reasonable and doable for most homeowners. Obviously the longer the time period, the more interest you will pay.

Another potential pitfall is that you may be rushing to sell your home. Perhaps you found a great deal on your next home, but now you need to sell your current home. Depending on the housing market you are in, a quick sale might be a challenge to pull off. In order to achieve that, you may end up sacrificing price on the sale of your home which could affect the equity you are planning to put into your new home.

A further risk is if the timeline of your bridge loan passes and you still have not sold your current home. At this point, you will be left holding two mortgages which is likely uncomfortable for most people regardless of the housing market you are in. This is a worst-case scenario of course, but it's important to be aware of the potential for this.

Is A Bridge Loan Right For You?

Bridge loans are a great way to get you out of that logistical pinch where closing dates don't line up. If you are in a secure financial situation, this can be an easy process to execute with very little headache.

Like most things in life though, there is always a small amount of risk involved. Be sure to consult a professional mortgage broker or financial advisor to assess your situation and evaluate if this is the right move for you.

On the other hand, doing your homework on how a mortgage works and trying to understand the variety of options available to you is a whole different challenge. Fixed rate vs. variable rate, open mortgage vs. closed mortgage, amortization period… it can all feel a little overwhelming at times – especially as a first-time homebuyer.

As it is with any big decision, it's important to do your research in order to make an informed decision. This article is going to explore open vs. closed mortgages. What are open and closed mortgages? What is the difference? What are the pros and cons of each? How do you decide which mortgage is best for you?

Related: Conventional vs. High Ratio Mortgages

Let's explore these questions and lower the confusion around these two types of mortgages.

Open Mortgages

Open mortgages are set up in a way where you can make additional payments to your mortgage at any point during the mortgage term without being penalized. This can be a huge advantage if you are suddenly in a position to pay down your mortgage quicker than what you amortized your mortgage for.

Suppose you land a big promotion in your job and end up making an extra $20,000 per year. With an open mortgage, you can apply this extra $20,000 per year to your mortgage and no penalties will be incurred. This extra payment also goes straight toward the principal amount owing.

A different scenario might be a little less celebratory. Perhaps you find yourself suddenly receiving an inheritance as a result of a loss in your family. Despite this loss, you now have extra cash in hand and this can be used to pay down your mortgage. The entire extra payment can be directed at the principal amount owning and again, no penalties will be incurred because your mortgage is open.

With these advantages, open mortgages also come at a cost. Interest rates on open mortgages are typically 1-2% higher than closed mortgages. This can obviously be worthwhile if you are confident you will be able to make those extra payments, but you can also end up paying a lot more interest than you would in a closed mortgage if you can't make those extra payments.

Closed Mortgages

Simply put, closed mortgages are the opposite of open mortgages. Closed mortgages tighten up the restrictions when it comes to paying off your mortgage by means of making large lump sum payments.

To be fair, closed mortgages do allow for some accelerated amortization, but only up to a certain percentage of the borrowed amount. If you go beyond this limit, you are penalized and you end up working against your own efforts to accelerate paying off your mortgage.

The idea in mind with a closed mortgage is to maintain a stable, fixed rate that is manageable for the borrower. This is an advantage if you are on a tight budget and if you don't anticipate any excessive cash coming your way. The other benefit is a lower interest rate which helps with keeping those payments affordable.

Choosing Between Open and Closed Mortgages

For most people, it's safe to say that closed mortgages are a better option, especially if you are early in your home ownership career. When you are younger, it's less likely that a large amount of extra money will come your way. You will hopefully be in a secure job if you're signing mortgage documents, but it might take a few years before you land that big promotion with impressive salary benefits.

The lower interest rates that come with closed mortgages are notable. A 1-2% difference in interest rate might not sound like a lot, but depending on the amount you are borrowing and the length of your term, this can amount to thousands of dollars in interest savings.

Despite the title, closed mortgages do still allow for some flexibility when it comes to making extra payments. In the event that you do land that promotion at work or if you sell off some other assets that you don't need anymore, there's likely room for additional payments to be made without incurring a huge penalty.

That said, perhaps you are considering a big move across the country in the near future. Or perhaps you are in the stage of life where you might see some inheritance money come your way. These can be reasons to consider an open mortgage where you won't be penalized for making large lump sum payments or paying off your mortgage altogether.

Which One Is Best For You?

Decisions like these aren't always easy, but the important thing is to do your homework. Crunch the numbers and assess where you are at. Pay attention to the season of life you are in and try to anticipate any foreseeable financial changes you might encounter.

The banks or your mortgage broker can guide you through the best choice.

We can help you crunch the numbers too.

In the end, stay relaxed and enjoy the process. Determine a path that works for you and one that allows you to sleep at night. And then enjoy this place you get to call home!

These sorts of situations present a challenge when it comes to dealing with your mortgage, particularly if the timing doesn't line up well with your term. It was once assumed that a big move meant breaking your mortgage, but this doesn't have to be the case.

Porting a mortgage (often called transferring your mortgage) is a great way to avoid big mortgage penalties. Let's explain what porting a mortgage is, when you might do this and how to make it happen.

What is Porting Your Mortgage?

Porting a mortgage simply means transferring your current mortgage, including the current rate and term, to a new property that you are planning to purchase. No new down payment is required. No refinancing. You simply transfer your current agreement to a new property.

Porting your mortgage requires staying with your current lender. The primary advantage of this transfer is to avoid the fees of breaking your mortgage which is often the price you have to pay when needing to refinance your mortgage.

How Porting Your Mortgage Works

A common question that comes up with porting or transferring a mortgage is how to deal with the differential in the amount of money that is borrowed for the two properties. It is likely that the new property you are purchasing will be of higher value. There are a couple of ways to deal with this.

First, a lender may transfer your mortgage as it is and leave the rate and term on the current amount borrowed untouched. At that point, you would simply open up a second mortgage on the difference in price and pay both mortgage payments separately.

Let's say you are owing $275,000 on your current home. You are two years into your five year fixed term at 2.1%. The new home you are looking at is worth $350,000 and interest rates are now 2.59%.

Rather than breaking your current mortgage to sell your current home, your lender can transfer the current mortgage and add on a second smaller mortgage. The second mortgage amounts to the difference between the current amount owing and the new purchase price ($75,000).

By porting your mortgage, you maintain the same interest rate (2.1%) on the $275,000 you initially borrowed. The increased rate of 2.59% is only applied to the additional $75,000 you are now borrowing.

Alternatively, some lenders will develop what is referred to as a "Port-Blend-Add-On" mortgage. This option features the blending of your initial mortgage with the additional borrowed amount. They are morphed together into one new product with a blended rate.

In the scenario we have been working with, you are making payments on the $275,000 from the original mortgage plus the additional $75,000 on new property for a total mortgage amount of $350,000. Your lender will then come up with a blended interest rate somewhere between 2.1% and 2.59%.

Other Considerations When Porting A Mortgage

There are a few other stipulations to consider if you are looking to port your mortgage. Most lenders require that the turnaround time between selling your current home and purchasing your new home be within a 30-90 day window. 90 days is usually doable, but if your lender is limiting you to a 30 day window, that can be difficult.

Additionally, not every mortgage is portable. Porting is typically only possible with fixed rate mortgages with a longer term of 3-5 years.

Finally, porting your mortgage really only makes sense if interest rates are increasing. Porting your mortgage simply allows you to hang on to a lower interest rate for the amount borrowed instead of having to break your mortgage agreement and refinance.

Porting your mortgage is not helpful if interest rates are decreasing. In that situation, you may consider refinancing if the cost savings due to lower interest rates exceeds the penalties incurred from breaking your mortgage.

Is Porting a Mortgage For You?

If you are wondering if porting a mortgage is right for you, it's worthwhile to talk to a local mortgage specialist. Porting a mortgage can save you a lot of money both in terms of avoiding mortgage penalties as well as through hanging on to a lower interest rate.

If you are taking on a brand new mortgage, it is always worthwhile to ask if the mortgage product you are considering has the option to port at a later date within the term. Life has a way of being filled with uncertainty, so the option to port your mortgage can offer you some peace of mind in the midst of making big decisions like buying a home.

Always be sure to do your research and don't be scared to ask for help.

Perhaps one of the greatest hurdles with home buying, particularly for first time buyers, is the down payment. Depending on the housing market you are in across the country, building up enough money for a down payment can be a huge mountain to climb.

Over the years, down payment requirements have been adjusted to accommodate for the soaring house prices seen in some housing markets. This article will cover these adjustments and help you choose what's best for you as you consider what your next mortgage might look like.

Related: Open vs. Closed Mortgages

High Ratio vs. Conventional (Low Ratio) Mortgages

High ratio and conventional mortgages have to do with how much of a down payment you are able to pull together for the home you are buying. For years, the conventional amount required for purchasing a home was 20% - hence the name: a conventional mortgage.

For many people, coming up with a down payment of 20% takes some work, but it is often manageable. First time home buyers will often go the route of renting a cheaper apartment or townhouse in order to save up that big lump sum of money.

More recently though, with housing prices rising significantly in some areas, lenders have been forced to consider how to make home buying more accessible. In high-priced housing markets where homes are priced at nearly $1M or more, coming up with a conventional down payment of 20% is suddenly much more difficult.

What Is A High Ratio Mortgage?

High ratio mortgages include any mortgage that requires a down payment of less than 20%. Today, lenders are often willing to go as low as 5-10% down. This makes purchasing that $850,000 home in Vancouver or Toronto a little more accessible.

Lenders are typically willing to offer as low as 5% down on homes up to $500,000. For homes between $500,000 and $1M, lenders would typically require 10% down. For a home that is priced above $1M, lenders will stick to a conventional mortgage with a down payment requirement of 20%.

For homeowners, this kind of accessibility drives up the loan-to-value (LTV) as the mortgaged amount can often be between 90-95% instead of the conventional 80%. This is obviously a win for the homeowner as they can more easily get into homeownership and building equity. However this puts the lender at risk with such a large amount of money being borrowed.

Mortgage Default Insurance

With lenders finding themselves at risk as they offer lower down payment requirements, most will require mortgage default insurance from the homeowner in order to compensate for the high loan-to-value. To be clear, this insurance is to cover the LENDER in case the borrower cannot make payments on their mortgage.

When it comes to mortgage default insurance, The Canadian Mortgage and Housing Corporation (CMHC) is one of three institutions that offers this solution to homeowners and lenders. There are alternative private insurers, but because CMHC is a Crown corporation backed by tax-payers, it is by far the most commonly used.

How Much Does CMHC Insurance Cost?

Insurance premiums through CMHC range from 0.60% up to 4% depending on the loan-to-value ratio you are working with. A higher LTV will result in larger insurance premiums. If you are a home buyer, you can determine your CMHC insurance premium here.

Here are a few examples to consider.

Let's say you are purchasing a home that is worth $400,000. Most lenders will take the risk and forego mortgage default insurance if you are able to come up with $80,000 (20%).

If you are only able to put down $40,000 (10%), your loan-to-value works out to 90%. On top of the borrowed amount of $360,000, you will pay an extra $11,160 for insurance premiums.

If you go with an even smaller down payment of just $20,000 (5%), your loan-to-value works out to 95%. In this scenario, your initial borrowed amount is $380,000 and you will pay an extra $15,200 for insurance.

It's worth noting that the insurance amount you might owe if you put anything less than 20% down will be paid out over the full amortization period of the mortgage. Even with $15,000 of insurance on a $400,000 house at 5% down, your monthly mortgage payment (or bi-weekly payment if you choose) will be only marginally higher.

Read more about bi-weekly or monthly mortgage payments.

Is A High Ratio Mortgage For You?

A high ratio mortgage primarily comes down to the degree to which you are comfortable borrowing money. If saving up for a big down payment is a challenge in the market you are in and if mortgage default insurance is tolerable for you, a high ratio mortgage can be a great path to take.

Alternatively, not everyone likes putting themselves in a position of high risk. If this is you, it can be better to keep saving and wait until you are able to lock into a more conventional mortgage with 20% down.

Like any situation, numerous other factors like housing marketing and interest rates also play into the equation. Be sure to check in with a financial advisor or a mortgage specialist to assess your situation and see which approach is best for you.

One way that many people are getting around this challenge is by leveraging a joint mortgage. Let's look at how joint mortgages work and whether this type of co-ownership might be an option for you.

What Is A Joint Mortgage?

Simply put, a joint mortgage is a mortgage that is taken on by more than one individual person. Most commonly, a joint mortgage is taken on by partners who are married. It can also be taken on by multiple members of a family (like your parents or siblings), a collection of friends or business partners.

A joint mortgage leverages the increased financial well-being of multiple people to mortgage a home or property that wouldn't be attainable by an individual. This is particularly helpful in higher priced housing markets like Toronto, Vancouver and many other large Canadian cities.

Pros Of A Joint Mortgage

One of the biggest benefits of a joint mortgage is the notable jump in mortgage affordability. Mortgage affordability is largely dependent on income, so having multiple people on your "team" when applying for a mortgage can be very advantageous.

The combined income of multiple people not only gets you past a baseline threshold of qualifying for a mortgage, but also affords you the opportunity to qualify for higher loan amounts. This increase in buying power gives you more flexibility when it comes to the price ranges of homes you can look at.

Another perk of the joint mortgage is the ability to increase the down payment amount. While the minimum down payment amount is 5%, increasing this amount is advantageous in a few ways.

A larger down payment increases your loan-to-value ratio and decreases the amount borrowed on which you will be paying interest. It can give you access to lower interest rates. Finally a down payment surpassing 20% allows you to avoid the extra cost of mortgage default insurance which leaves more money in your pocket over the long haul.

Cons of a Joint Mortgage

Because joint mortgages involve multiple people, there's potential for interpersonal conflict to come in the way of the long term investment you are making together. Whether it's the natural ending of a friendship or a divorce, having to negotiate the legalities of a joint mortgage can be tricky.

To the degree that it's possible, it's best to talk through these potential situations before they happen. If you are taking on a joint mortgage with family members or friends, be sure to talk through all potential scenarios including how any of the partners might exit the investment.

Another risk that can cause strife with joint mortgages is when one partner loses income as a result of job loss. The original mortgage arrangement is of course highly dependent on multiple incomes and it can cause stress if one partner is not able to contribute to the mortgage payment.

Again, to the degree possible, it's helpful to prepare for this as much as possible. Perhaps you can develop an emergency fund for the partnership to tap into in this type of situation. If that isn't feasible, it is worthwhile to at least have a conversation early on about selling the home or property as soon as this happens in order to avoid defaulting on payments.

Alternatives To A Joint Mortgage

If finding a long term partner for a joint mortgage is a challenge for your situation, there are a few other alternatives that you can consider. Perhaps the most obvious choice is to wait it out and keep saving your money to the point where you can afford a mortgage single handedly.

Another option is to consider governmental incentives like the Canadian Home Buyers plan where you can withdraw up to $35,000 from your RRSP and put this toward the cost of your first home. This money must be paid back within 15 years, but it gives you the opportunity to have that down payment in hand without having to wait so long to build up a large down payment.

If you are not able to find a long term partner for a joint mortgage, you can consider having a cosigner on your mortgage. A cosigner is essentially in place to bail you out in case you can't make a mortgage payment. You will want to find someone (ideally a family member) who will be sticking close to you for many years to come.

Is A Joint Mortgage Right For You?

A joint mortgage is definitely a great way to get into the housing market sooner than you might be able to if you are on your own. This path offers some great benefits in terms of affordability, lower fees and lower overall payments, but also comes with some challenges in terms of finding the right people to go in with.

If you are considering this path, take some time to do your research. Talk with your partner, friends and family members who might be partnering with you and be clear about expectations.

Never hesitate to reach out to a mortgage specialist too if you have any questions. We are happy to help you through the process of taking advantage of the perks and avoiding some costly difficulties.

Whether you’re applying for your first mortgage or looking to secure a new one, getting a mortgage is a big financial commitment. That’s why it’s smart to have a safety net in place to protect your family financially in case something unexpected happens. This is where life insurance comes in.

Not sure what life insurance has to do with getting a mortgage? In this article, we break down the basics of how life insurance and mortgages go hand in hand.

What is Life Insurance?

Life insurance has a reputation of seeming complicated and daunting. But in reality, it’s a financial product that’s pretty simple to understand.

When it comes down to it, life insurance is a financial safety net that protects your family (or anyone who’s dependent on you) iff you die and your income disappears. When you buy a life insurance policy, you pay an insurance company a monthly fee (called a “premium”) for coverage. If you die while the policy is active, your insurance company will give your beneficiary a payout equal to your coverage amount (known as a “death benefit”).

Your beneficiary will receive the death benefit as a tax-free lump sum payment. And they can use the funds in any way they’d like to. For example, they can use the death benefit to complete a home renovation, make car loan payments, or cover the cost of daily expenses.

What is a Mortgage?

A mortgage is a loan that you take out to buy or refinance a home without having to pay the entire cost up front. Most people who get mortgages do so because they can’t pay the full purchase price of a home out of their pocket. However, it also makes sense to get a mortgage if you’re buying a property as an investment and don’t want to lock up all of your money in it.

When you get a mortgage, a lender loans you money to pay for a percentage of the cost of a home. You agree to pay this amount back with interest over several years. Because the lender pays for a big chunk of your home up front, you don’t fully own your home until you pay off the entire mortgage.

As a mortgagor, you pay the lender back by making regular payments based on the mortgage amount (or “principal”) and the interest rate. Your home is the collateral for the loan. So if you stop making mortgage payments, your lender can take possession of your home.

Why Should You Buy Life Insurance When You Have a Mortgage?

Okay, so now you know what life insurance is and what a mortgage is. But you might be wondering what they have to do with one another. In other words, why does life insurance matter when you have a mortgage?

Remember that when you take out a mortgage, you agree to pay your lender back the amount you borrowed plus interest. This won’t be a problem as long as you’re alive to earn a living and make those regular mortgage payments. But if you die before your mortgage is paid off and your income disappears with you, you could leave your family in a bind.

Specifically, if you’re partially or fully responsible for making the mortgage payments, your family depends on your income to fulfill the terms of the mortgage. If you die and you’re no longer around to contribute financially, your family will have to figure out how to afford the mortgage payments without your income. And if they’re unable to make the payments, they’ll have to sell the home and move.

Losing a loved one is traumatic enough. So the last thing you want is for your family to have to cope with your loss and struggle financially to keep a roof over their heads.

The good news is that there’s a way to protect your family from mortgage debt: by buying life insurance. If you have a life insurance policy that accounts for the value of your mortgage, you can make sure that your family won’t be in a bind if you’re no longer around to contribute to mortgage payments. They can use the death benefit they receive to continue making mortgage payments until the mortgage is paid off. Or they can choose to pay off the mortgage in full so they can focus on other expenses going forward.

Having life insurance that covers your mortgage is also important if someone co-signed the mortgage with you. You might need a cosigner to get a mortgage if you don’t have the credit history, assets, or income to secure a mortgage on your own. When someone cosigns a mortgage, they agree to take on responsibility for the loan if you don’t make payments. So if you die before your mortgage is paid off, your co-signer could end up on the hook for the remaining payments.

Life insurance protects your co-signer by ensuring that there will be funds available to pay off your mortgage if you’re no longer around to pay it off yourself. This way, your lender won’t go after your co-signer to get their money back.

For most people, term life insurance provides the best financial protection for mortgages. That’s because when you buy term life insurance, you pay for coverage for a certain number of years (usually 10, 20, or 30). You can select your policy length based on the amount of time you think it’ll take to pay off your mortgage. This way, you’ll pay insurance premiums only during the years when you need the financial protection.

Because term life insurance gives you coverage for a fixed number of years, it tends to be highly affordable. Insurers know that most people will outlive their term policies and won’t end up filing claims. As a result, insurers can charge lower premiums for coverage, making term life insurance policies cheaper than most people think.

What About Mortgage Life Insurance?

Some mortgage lenders will encourage you to buy mortgage life insurance when you take out a mortgage. Mortgage life insurance in Canada is insurance that’s specific to your mortgage. It ensures that if you die, your insurer will pay the remaining balance on your mortgage to your lender. This way, your family won’t have to worry about making payments without your income or selling the home.

Keep in mind, though, that mortgage life insurance has a number of limitations:

• It’s typically more expensive. When you apply for mortgage life insurance, you usually don’t have to undergo extensive medical underwriting. To compensate, your insurer will assume that you’re a high-risk applicant and charge you more for coverage.
• The beneficiary is your lender. If your family files a mortgage life insurance claim, the payout will go to the institution that gave you your mortgage. Unlike with standard life insurance, your family won’t see any of the money.
• The money can be used only to pay off your mortgage. Mortgage life insurance is dedicated insurance for your mortgage. So even if your family no longer needs the money to pay back the mortgage, they won’t be able to use the funds for other expenses.
• The payout amount decreases over time. For many mortgage life insurance policies, your payout decreases as you pay off your mortgage (even though your premiums remain the same). So unlike with life insurance, your policy actually decreases in value over time.
• You can’t transfer your policy. If you decide to switch banks before you pay off your mortgage, you won’t be able to transfer your mortgage life insurance policy to the new bank. You’ll have to apply for a new policy and because you’ll be older at this point, you might have to pay higher premiums. With life insurance, in comparison, you can switch banks while retaining your original coverage.

Life Insurance Protects Against Mortgage Debt

Applying for a mortgage is a great way to buy or refinance a home without having to pay for it all up front. But because holding a mortgage is a big financial commitment, it’s important to protect your family from the unexpected. Specifically, once you have a mortgage, you’ll want to make sure that there’s a financial safety net in place if you die and you’re no longer around to contribute to mortgage payments.

Both standard life insurance and mortgage life insurance can protect your family against mortgage debt. However, mortgage life insurance tends to be more expensive and restrictive. So if you’re looking for coverage that’s affordable, comprehensive, and flexible, standard life insurance (and, in particular, term life insurance) is your best bet.

Congratulations, you’ve bought a new home! This is one of the most exciting times of your life, but you’ve likely quickly realized that being a new homeowner can be expensive. From moving to getting new furniture, the costs can soon add up. That said, that doesn’t mean you need to be house poor.

By making some minor adjustments and using tools available to you, you can easily put more money into your pockets. Here are five ways you can save money as a new homeowner.

Rethink your services

Whenever you move, you’ll need to port over your internet to your new address. Why not take this time to see if there are any better offers out there that can help you reduce your monthly fees? Take a look at what the different internet providers are offering and see if there are any current promotions. You’ll also want to check with smaller companies who typically have lower prices. Even if it’s just $10 a month, the switch is worth it since you’re lowering your monthly expenses.

This is also an excellent time to look at any other monthly bills you can cut. Your cell phone is an obvious place to start, but what about your gym membership or fitness classes? If your new home gives you access to cheaper options, making the switch just makes sense. Also, consider looking at your streaming services. If you’re subscribing to multiple services such as Netflix, Disney+, HBO Max, Spotify, and YouTube Music, you’re spending a lot each month. Cut where you can and pocket the difference.

Increase your mortgage payments

Admittedly, increasing your mortgage payments when you first buy a home is a low priority, but the amount you can save can make quite the difference. For example, let’s say you’re currently making monthly mortgage payments, but you decide to switch to an accelerated bi-weekly schedule. Your monthly mortgage costs would go up, but you would shave years off your mortgage. That’s because the extra payments you make go 100% towards the interest.

Even if you can’t quite afford to increase your payments, you could consider one-time prepayments. Many mortgages allow homeowners to make lump sum payments once a year. Some mortgages also allow you to increase your payments by a certain percentage. For example, you might be able to up your monthly payment by up to 15%. These additional payments can go a long way.

Meal plan

It’s estimated that the average household wastes $1,100 per year in food. If you’re concerned about how much money you’re throwing into the garbage, consider meal planning. The concept is simple, plan your meals out every week, so you’re only buying what you need at the grocery store. The key thing is to not get tempted to order takeout or say yes to last-minute dinner invites when you already have food prepared.

If you really want to turbocharge your savings, you could look at the weekly flyers and plan your meals around what’s on sale. This could significantly reduce the amount of money you’re spending on food. You could also join a grocery store loyalty program such as PC Optimum since it allows you to earn points when you make purchases. Those points could be used later to redeem free groceries.

Buy used

When you move into a new home, you’ll likely need to buy some new items. While it may be tempting to buy everything brand new, getting things used can be an easy way to save money. Coffee tables, chairs, home decor, outdoor furniture, dining sets, and storage bins can often be found used online at a fraction of their original price. Some of the most common websites to source these items include Kijiji, Craigslist, and Facebook Marketplace.

It’s also worth noting that going with the used mentality can save you a lot of money overall. Let’s say you’re about to expand your family. Baby clothes and baby accessories are often the number one seller on many websites. Need a bike or fitness equipment? Check online first to see if anyone is looking to get rid of their gear.

Use credit cards when you can

Typically, when you buy a new home, you’re going to have many expenses that come up. That could range from lawyer fees to renovations. If you use a travel credit card or cash back credit card to pay for everything, you can reap the benefits. The trick is to take advantage of any generous welcome offers that are currently available.

For example, the American Express Platinum Card typically comes with a welcome bonus that can be worth more than $1,000, depending on how you use your points. Alternatively, many cash back credit cards come with a sign up bonus of 10% cash back on all purchases for the first three months of card membership (although there’s usually a cap).

These welcome offers usually have a minimum spend requirement, which is why you want to time your applications right before you have any significant expenses. While earning a bunch of travel points or cash back is appealing, you need to make sure you’re always paying off the entire balance of your bill when your statement arrives. The last thing you want is to incur interest charges.

Final thoughts

Don’t worry if you’re finding it tricky to balance your budget when you first move in. It’s pretty typical for new homeowners. Adjusting to the cost of your mortgage and additional expenses takes time. By making some small adjustments to your spending, you can free up some of your cash flow, making your finances more manageable.

About Barry Choi

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Moneywehave.com is one of Canada’s most trusted sources when it comes to money and travel.

One of the things that relieves some pressure with home buying is government funded programs and incentives. There are incentives for first time home buyers, tax credits, home upgrade rebates and several other programs.

For first time buyers, having some knowledge of how the First-Time Home Buyers Tax Credit works can be very advantageous. Let's take a look at it and see if it can be helpful for you.

What Is The Home Buyers Tax Credit?

The first time home buyers tax credit is a government funded program that allows eligible first-time home buyers to claim a non-refundable $5000 tax credit. This tax credit typically amounts to a rebate of $750.

Who Is Eligible for First Time Home Buyer Tax Credit?

There are several eligibility criteria when it comes to the tax credit for first time buyers.

1. You must be purchasing a qualifying property registered in your name (or your partner's name). It can be a new build or an existing property. It can be a single family home, townhouse, condo, etc.
2. You must be a first time home buyer. This means you or your partner have not resided in a home that you owned within the last four years.
3. The home you are purchasing must be your primary residence within one year of the purchase date or construction completion date.

How The Tax Credit Works

The first time home buyers tax credit is very simple to attain. There is no application process or approval required. All you need to do is enter the amount of $5000 on Line 31270 of your income tax return. This amount can be split between you and your partner if you wish, but the total for both cannot exceed $5000. This credit turns into a $750 rebate on whatever you owe in taxes for that particular calendar year.

It's worth noting again that this rebate is non-refundable. This means that if you owe less than $750 in taxes, your amount owing will simply be zeroed out. You won't get a refund of the difference.

While a rebate of $750 might not seem like a lot compared to a $350,000 mortgage, every little bit of money coming in helps. Perhaps that's equivalent to a monthly mortgage payment or your grocery bill for the month. At any rate, it's a small win that requires almost no effort on your part other than being eligible.

There are other incentives like the first time home buyers tax credit that can be helpful for anyone looking to take on their first mortgage. Talking to a mortgage specialist is a great way to get more familiar with these opportunities. As always, don't hesitate to reach out if you have any questions. We are happy to help.

Types of Mortgage Payment Frequency

Monthly Mortgage Payments

A monthly mortgage payment is the most common payment option that lenders provide and the standard by which all other payment options are measured against. With this option, your mortgage payment is withdrawn from your account once a month -- twelve times per year.

Semi-Monthly Mortgage Payments

The semi-monthly mortgage payment option is a simple variation of the monthly payment option. Instead of the payment occurring on a monthly basis, the amount owing is simply divided into two separate payments.

To calculate your semi-monthly payments, simply multiply your monthly payments by 12 and then divide that amount by 24 pay periods. The total amount paid within a calendar year will be equal to what you pay with a monthly payment option.

Bi-Weekly Mortgage Payments

A bi-weekly payment option is calculated by taking your monthly payment amount, multiplying it by 12 months, but then dividing it by 26 pay periods (half of 52 weeks in a year). Again, the total payment amount within a calendar year will be the same as the monthly payment option.

Weekly Mortgage Payments

Similar to the bi-weekly payment option, weekly payments are calculated by multiplying your monthly payment amount by 12, but then dividing that amount by 52 pay periods. The total amount paid within a calendar year will again be the same as the monthly payment amount.

Bi-Weekly Accelerated Mortgage Payments

Bi-weekly accelerated mortgage payments are calculated slightly differently than bi-weekly payments. Instead of multiplying your monthly payment by 12 and then dividing it by 26, you will divide your monthly payment by 2 and then multiply it by 26. This gives you a slightly larger monthly payment but it is advantageous in that it accelerates the amount of time in which your mortgage will be paid down. It's also worth noting that with accelerated payments, over the long haul you will direct more of your payment toward principal than interest.

Weekly Accelerated Mortgage Payments

Weekly accelerated mortgage payments are calculated in the same manner as bi-weekly accelerated payments. Instead of multiplying the monthly payment and dividing it by the pay period, you first divide your monthly payment and then multiply it by the pay period -- in this case 52 weeks. Again, this gives you a slightly higher payment amount than weekly payments, but the advantage is in paying down your mortgage quicker and having more of your money directed toward the principal amount owing.

Which Mortgage Frequency Should You Choose?

Deciding which mortgage payment option is best for you depends on a number of factors that might vary from person to person. For the most part, monthly, semi-monthly, bi-weekly and weekly payment options are the same over a big picture 25 year amortization period. What it comes down to is what you are comfortable with in terms of your personal cash flow on a monthly basis.

If you are comfortable with a large mortgage payment coming out all at once on the 1st day of the month, the monthly payment option might be fine for you. However, if you get paid semi-monthly and if your cashflow is tight, you might want your mortgage payment divided into smaller amounts -- semi-monthly, bi-weekly or even weekly.

What's notable and advantageous about the accelerated mortgage payment options (both bi-weekly and weekly) is that you can actually pay down your mortgage quicker and with less interest. By dividing your monthly payment first and then multiplying it by the desired pay period frequency, your payments are slightly higher which will accelerate how quickly you pay down your mortgage. This is obviously advantageous if you indeed want to pay down your mortgage quicker and if you can handle the slightly higher mortgage payments.

That said, not everyone can manage both extra and increased mortgage payments. Many people would rather opt for consistency within their financial means.

Additionally, some people might not see paying down a mortgage as their primary financial goal. For some, investing and seeing a bigger return on investment than the interest rate they are trying to eliminate is the best approach. This can be especially advantageous when mortgage interest rates are low. This obviously comes with risk too though and should be carefully thought out.

As it is with many things related to mortgages, it's best to take your time and be calculated in your decision making. Having a trusted advisor or a mortgage broker is always helpful too. If you are looking for consultation of any kind, we are happy to help you out.

What Is A Vendor Take Back Mortgage?

A vendor take back mortgage is when the seller of a property extends a loan to the buyer in order to secure the sale of that property. This is unique and advantageous in a number of ways.

First, this benefits you as the home buyer in that you don't need to come up with a full down payment all on your own. Imagine you are looking to purchase an investment property that is listed at $400,000. With investment properties, a 20% down payment is required, so this means you would need to come up with $80,000 cash. Rather than struggling to come up with this amount, you could consider a vendor take back mortgage.

With a vendor take back mortgage, the seller might agree to extend a loan of $40,000 to you which would make up half of your down payment. In essence, you have two different loans -- one to your big back for $320,000 and one to the seller for $40,000.

In addition to this arrangement being advantageous to the buyer, it is also advantageous to the seller. With vendor take back mortgages, sellers will typically be offered what their property is actually listed for rather than needing to sort through lowball offers.

With vendor take back mortgages, the seller's name remains on title as they continue to have a stake in the property. Additionally, they will also collect interest (approximately 6%) on the money they have lent to the buyer. This type of scenario might be suitable for a property owner who is looking to free up some cash but may still want to keep some money invested in the property they own.

When To Consider a Vendor Take Back Mortgage

As a home buyer, you might consider a vendor take back mortgage any time you are struggling to come up with a down payment for a desired property. Perhaps you are just breaking into the income property market and a larger commercial market and it's difficult to come up with a larger down payment. Negotiating a vendor take back mortgage can be advantageous to you if you're looking to get over that initial hump getting into the market.

The negative component to this is that you will be paying a higher interest rate directly to the seller for the amount you are borrowing for that portion of the down payment. This is generally paid over a short period of time though.

As a home owner, you might consider a vendor take back mortgage if you are looking to sell your property but don't need all the money right away. Leaving money in the property you are selling and collecting higher interest payments on it is a great way to let your money work for you. This type of arrangement also protects you from getting taxed heavily on the sale of a higher priced property.

Additionally, arranging a vendor take back mortgage almost always confirms that you will get the full listing price for your property. If you are selling your property and want to avoid dealing with multiple offers and negotiating all sorts of conditions, a vendor take back mortgage might be a good solution. These types of mortgages often lead to a quicker time frame for selling your property too.

If you are in a position where this type of mortgage might be beneficial to you, don't hesitate to reach out. We are happy to provide any assistance you might need including answering questions you might have or figuring out the particular logistics to make a deal happen.

One of the lesser known options when it comes to taking on a mortgage is the collateral mortgage. Because it is less familiar to many, it is often misunderstood as well. Let's unpack how this type of mortgage works compared to a conventional mortgage (aka standard charge) and see if it's something that could benefit you.

How a Conventional Mortgage Works

To start, let's review a conventional mortgage so we know what we're comparing a collateral mortgage against. A conventional mortgage is a document that is registered against the title of your property. This document highlights all the details of your mortgage including the original borrowed amount, the term length, amortization period and interest rate.

In terms of how this type of mortgage functions, as you pay down this mortgage, the amount borrowed decreases over time. What's also really important is that the amount the lender can claim against you in the case of a default also decreases as you pay down your mortgage.

What Is A Collateral Mortgage?

A collateral mortgage differs from a conventional mortgage in that you can borrow beyond the initial amount needed to gain a property. You can borrow up to the total value of the property and sometimes even up to 125% of the value of the property.

Additionally, with a collateral mortgage, the details of the mortgage aren't registered against the title of the property. The documentation will only name the amount of money available to be borrowed.

Benefits Of A Collateral Mortgage

A collateral mortgage can be advantageous if you are in a situation where you are wanting to borrow for more than just a single property. Perhaps you have two properties you are wanting to mortgage or maybe you are wanting a line of credit alongside your mortgage to finance other expenses. Maybe you are wanting to use the equity in your home to invest. A collateral mortgage can be helpful in these situations as it's essentially one charge for multiple loans.

Risks Of A Collateral Mortgage

While there are some helpful benefits that come with a collateral mortgage, there are also some notable risks.

First, collateral mortgages are difficult to move if you are ever wanting to change lenders or if your circumstances change drastically. While you only have one charge against your property title, you may have multiple loans within that charge and it can be difficult to transition multiple loans smoothly.

A second notable risk is that lenders can register other borrowed products under the collateral mortgage charge. These other products can include lines of credit, vehicle loans and even credit cards. This can become risky in the event where you fail to make a payment on one of those other lending products and suddenly your primary mortgage is subject to foreclosure. To be fair, this is extremely unlikely with no documented cases yet, but the potential is there which might be enough risk for some borrowers.

Is A Collateral Mortgage Right For You?

While a collateral mortgage has some intriguing features, it's pretty fair to say that most homeowners will likely find a conventional mortgage to be sufficient for their borrowing needs. Conventional mortgages are cheaper products to get into with a lot of flexibility and peace of mind. If you are a typical homeowner without a great need to leverage all the equity in your home, a conventional mortgage can be a great thing to stick to.

On the other hand, if you are self-employed and need access to extra funds for your business, lifestyle expenses or investing, tapping into a collateral mortgage can be advantageous. It's important to be aware of the risks associated with this type of mortgage product, but if you assess things properly with mortgage professionals, this can be a helpful path to take.

As always, we are available to help you in assessing these things. If you have any questions or are curious about whether this lending product might be a good fit for you, we are happy to connect with you and offer assistance as needed.

What is Interest Rate Differential?

Simply put, interest rate differential is the difference between your current interest rate on your mortgage and the new interest rate you will be locking into.

Let's say you have a mortgage for $250,000. When your mortgage term started, you locked into a five year term at 3.29%. At this point, you have 2 years left on your term. Interest rates are now 2.79%. The interest rate differential between these two mortgages is 0.5%. Fairly simple.

Interest Rate Differential and Mortgage Penalties

The question of interest rate differential is most often couched in the question of "How much will it cost to get out of my mortgage?"

The next step in determining this is to take the interest rate differential and pair it with the number of years left in your mortgage term.

With the example above, there are 2 years left in the mortgage term. To calculate the penalty, you multiply the mortgage amount ($250,000) by the interest rate differential (0.5%) and then multiply that number by the number of years remaining in the term (2).

( $250,000 x 0.005 ) x 2 = $2500

In this example, the cost of getting out of your mortgage is $2500.

Obviously any of these numbers are interchangeable. You might have a mortgage of $400,000 and an interest rate differential of 1% with 2 years remaining.

( $400,000 x 0.01 ) x 2 = $8000

The cost of getting out of your mortgage then will be $8000.

How to Minimize Mortgage Penalties

If you are in a position where you are needing to refinance, there are a number of things you can do to keep the cost of refinancing down.

Avoid "Discounted" Mortgage Rates

One of the tricky things mortgage lenders can do is manipulate how the interest rate differential is calculated. This is often done by larger lending institutions like any of the big banks in Canada.

These institutions will have an advertised interest rate but will often give you a "discounted" rate in order to compete with their competitors. Let's say this "discounted" rate is 1% lower than the advertised rate.

What often happens with a refinance scenario is this. The interest rate differential is calculated using the advertised rate instead of the "discount" rate that you thought was so amazing. What you thought was great news for your mortgage is suddenly a thorn in your side!

Looking back at the example of the $400,000 mortgage with 2 years left in the term, the interest rate differential is now 2% and your mortgage penalty is $16,000!

( $400,000 x 0.02 ) x 2 = $16,000

Unless you can recoup the cost of that with your new mortgage term, that is a big price to pay.

Variable Rate Mortgages

A second way to keep the cost of refinancing down is to stay away from fixed-rate mortgages where the cost of refinancing is highly dependent on how long your term is.

Instead, variable rate mortgage penalties are calculated using a three month interest payment formula. This type of penalty often ends up being significantly less than an interest rate differential penalty.

You can read more on variable vs fixed rate mortgages here.

Monoline Lenders

A third way to stay away from large refinancing penalties is to avoid large lenders. The saying "big bank, big penalties" is very true when it comes to refinancing. The "discounted" rates of big lenders aren't so friendly when it comes to a refinance situation.

An alternative is to go with monoline lenders such as First National, MCAP and the like for your mortgage needs. These smaller institutions specialize in mortgages and don't distinguish between an advertised rate and a discounted rate. With these lenders, there are no surprises when it comes to calculating your interest rate differential.

Finally, if possible, avoid refinancing altogether or keep the window of time before your term expires minimal (if possible). Obviously life can throw you curveballs and you can't always control when you might need to renew your mortgage term. But when possible, be aware of where you are at in your term and think carefully about the cost of refinancing.

As always, never hesitate to reach out to a professional mortgage broker to assist you with this process or even to analyze whatever scenario you are facing. We are always here to help and will be glad to assist you with any questions you might have when it comes to your mortgage.

While it is such a necessary question when taking on a new mortgage, many people are confused about what mortgage insurance actually is. Let's take a look at what mortgage insurance is, whether you need it and how it can benefit you when you do need it.

What Is Mortgage Insurance?

When you take on a mortgage, you as the homeowner are borrowing a substantial amount of money from a lender. Mortgage lenders want to be careful about who and how much they lend money to. One of the things they put in place to protect themselves is mortgage insurance.

Mortgage insurance (also called mortgage default insurance) protects lenders in a situation where you can't make mortgage payments. If you can't make payments, the lender will turn to the insurance company to see that the amount of money they lent out will return to them. Additionally, while the insurance covers the lender, it is paid for by you as the homeowner.

It's important to note that mortgage insurance has nothing to do with protecting you as the homeowner. If you're looking for protection against fire, theft or other damage to your home or property, you will be needing separate homeowners insurance for that.

How Does Mortgage Insurance Benefit Me?

This is a fair question to ask as mortgage insurance might seem like an insurance scam at first glance. However, with soaring housing prices across the country and lenders being willing to work with down payments as little as 5%, it's understandable that they might want protection.

Historically, lenders have required a 20% down payment on the purchase price of a new home. With many starter homes in certain parts of the country being priced so high, it's nearly impossible for homeowners to reach that threshold putting 20% down.

To level the playing field for you as a homeowner, lenders have lowered the down payment requirement on homes but require mortgage insurance instead. This benefits you as the homeowner in a significant way as mortgage insurance is notably cheaper than having to come up with an extra 10-15% for a downpayment.

How Much Does Mortgage Insurance Cost?

Let's suppose you are looking to purchase a home that is worth $400,000. Traditionally you would be required to come up with a down payment of $80,000 (20%). This is a large lump sum to come up with, so instead you agree with your lender to put down $40,000 (10%) leaving you with a mortgage of $360,000.

A mortgage insurance rate of 3.5% on that amount demands that you pay $12,600 in insurance premiums. While this isn't a small amount of money, it's less than the additional $40,000 you would need if your lender required a 20% downpayment. This gets you in the housing market sooner so you can start or continue building equity through your home.

Mortgage Insurance Providers

In Canada, there are several mortgage insurance providers. Canadian Mortgage and Housing Corporation (CMHC) is by far the most popular to the point where the term mortgage insurance and CMHC insurance are almost interchangeable. Canada Guaranty is another insurance provider as well as Sagan (formerly Genworth).

The primary difference between these providers is that CMHC is a publicly owned corporation while Sagan and Guaranty are private. While insurance rates are generally quite comparable between the three providers, many homeowners and lenders work with CMHC because of their public status.

Is Mortgage Insurance For You?

Unlike other factors you need to weigh when purchasing a new home, the need for mortgage insurance is fairly simple to evaluate. Any time you are putting less than 20% down on the purchase price of your home, you will need mortgage insurance.

Whether this helps you out financially or whether you should wait until you can save up for that larger down payment is up to you. Don't hesitate to chat with a financial advisor or mortgage specialist if you are questioning what might be the best option for you.

Lenders are in competition with each other to offer the lowest interest rate that will attract homeowners. One of the ways they can position themselves as having the lowest rate is by offering something called a bona fide sale clause.

Let's look at what a bona fide sale clause is and when it might be advantageous to lock into this type of mortgage term.

What Is A Bona Fide Sale Clause?

A bona fide sale clause is a clause in your mortgage that says you are not allowed to leave your lender until your mortgage term is up unless you sell the property. This means no shopping around for better rates halfway through your term. This also means no refinancing unless you are willing to pay a hefty penalty.

Bona fide sale clause mortgage terms are offered by low-rate lenders like MCAP and Motusbank. BMO also has a product called a Smart Fixed Mortgage that allows for this type of contract.

At this point though, you might be asking why anyone would agree to this kind of contract. What's in it for the homeowner?

Is a Bona Fide Sale Clause Beneficial?

In exchange for this kind of security on the lender's side, the homeowner gets access to an interest rate that is lower than what is being advertised to the general public. This lower interest rate can be in the ballpark of 10-20 basis points meaning you might have access to an interest rate of 2.49% instead of the advertised 2.69%.

A difference of 20 basis points (0.2%) on your interest rate might not sound substantial. However, when you apply that difference to a borrowed amount of $350,000 over a five year term, it can work out to a notable amount of cash left in your pocket.

When To Consider a Bona Fide Sale Clause

Because a bona fide sale clause forces you to lock into your mortgage term unless you sell your property, it's important to know that the potential for breaking your mortgage term is highly unlikely. This requires a high degree of financial stability as well as a willingness to accept the interest rate you get even if rates drop at a later point.

If mortgage rates are extremely low and if you're confident they can't get any lower, this may be an option to consider. This can be challenging to predict, but with the potential of saving a fair amount of money on interest payments, it can be something to consider.

Things To Watch Out For With Bona Fide Sale Clauses

If you're dealing with a low-rate mortgage provider, it's important to pay close attention to the contract you are signing with your lender. It's fair to expect your lender to carefully disclose all the elements within a mortgage contract. However, the process of buying a home and signing mortgage documents can be overwhelming. Sometimes these elements can be agreed upon without fully understanding what you are getting into.

It's important not to rush anything regardless of whether you're taking on your first mortgage or whether you're simply renewing your term. Pay attention and be aware of the conditions on which you are agreeing with your lender.

Is A Bona Fide Sale Clause For You?

As we've noted, a bona fide sale clause can be a helpful thing to consider if you are financially stable and confident you won't need to consider refinancing within your mortgage term. Saving a substantial amount of money on interest payments is always a win for a homeowner.

At the same time, locking yourself into something that can cost a lot of money to get out of can be a huge loss if you ever found yourself in that situation. Consider what you are willing to risk and be well aware of your long term plans as a homeowner.

If you ever need assistance in analyzing a possible bona fide sale clause mortgage, don't hesitate to reach out to one of our mortgage professionals. We would be happy to help you out and guide you through the process if it's right for you.

Similar reading: Conventional vs. High Ratio

Fixed Rate Mortgages

A fixed rate mortgage simply means that the interest rate you are paying on the principal amount borrowed will stay the same over the length of the term you have agreed to. Mortgage terms (which are different than the amortization period) can range anywhere from 6 months to up to 10 years. Most fixed rate terms are 3 to 5 years long though.

With a fixed rate term, you can anticipate your mortgage payment being exactly the same every time. There's no guessing or worrying about whether your payment will be higher than the previous payment. The only thing that will shift over the length of your mortgage term is the ratio of principal to interest within each payment. The front end of your fixed rate term is slanted toward paying more interest than principal while the back end is slanted toward paying off more of the principal amount borrowed. Again, this has no bearing on your payment amount. If you're looking for predictability and consistency, a fixed rate term can be the way to go.

Variable Rate Mortgages

Variable rate mortgages function differently than fixed rate mortgages in that the interest rate fluctuates over the course of the term. The interest rate on a variable rate mortgage is based on prime interest rates. As the prime interest rate rises, so will your mortgage interest rate. If the prime interest rate decreases, your mortgage interest rate will as well.

Variable rate mortgages typically offer a cheaper rate because of the risk associated with them. The difference may be as minimal as 0.5%, but that can be substantial when you consider how much interest you pay on several hundred thousand dollars of borrowed money.

Benefits Of A Fixed Rate Mortgage

Fixed rate mortgages are advantageous for a couple reasons. The biggest win with fixed rate mortgages is consistency. If you're not wanting any surprises with your mortgage payment because of a tight budget, a fixed rate mortgage can be a good option.

Additionally, if mortgage rates are extremely low and you feel confident they are about to climb, perhaps you might want to lock into a fixed rate mortgage with a 5-10 year term. A long mortgage term can come with other risks, but if you are confident you won't be needing to sell and if you feel a particular interest rate is the lowest you might see in a long time, this can be a possible solution for you.

Benefits Of A Variable Rate Mortgage

Variable rate mortgages typically offer the benefit of a lower interest rate because they are subject to the risk of rising down the road. While there is potential for the interest rate on a variable rate mortgage to rise above the fixed rate percentage, the chances are slim. Historically, this is very rare and shouldn't be much of a cause for concern.

Additionally, if interest rates do rise, you are likely to see very little change in your actual mortgage payments. Instead, the ratio of principal to interest payments within your mortgage payment might shift to favour the interest portion of your payment. On the flip side, if interest rates drop, your overall mortgage payment likely won't change substantially. Instead, your payments will favour paying back the principal amount borrowed over the interest portion.

In addition to these benefits, variable rate mortgages also give you the option to lock into a longer term at a certain rate. If you notice prime interest climbing at an alarming rate, you have the option to lock into a fixed rate at that particular interest rate for the remainder of the term.

Which Mortgage Is Right For You?

Statistically, variable rate mortgages have outperformed fixed rate mortgages for the last thirty years or so. However, many people prefer the peace of mind that comes with a fixed rate mortgage. When you're choosing between the two, it's best to know your risk tolerance and decide accordingly. Always do your homework by consulting multiple lenders for quotes and never be scared to sit down with a mortgage professional who can guide you through the process.

Note: Mortgage renewals are similar but not quite the same as refinancing. You can read more about that here.

Why Would You Consider Refinancing Your Mortgage?

Simply put, refinancing your mortgage means paying off an existing loan on your house and replacing that loan with a new one. This new loan will come with a new term, new amortization if you wish, new interest rates and the like.

As mentioned, there are some unfortunate reasons why you may need to refinance your mortgage. These situations may include a sudden change in steady income because of job loss or some sort of other financial stressor that changes your ability to make regular mortgage payments.

Aside from these situations, there are other more fortunate reasons for you to consider refinancing your mortgage. Perhaps you are noticing lower interest rates compared to what you are currently paying or maybe you want to flip from a fixed-rate mortgage to a variable rate mortgage. Perhaps you want to tap into the equity you've built up in your home for investing reasons or maybe you want to tackle a renovation that would further increase the value of your home.

These are all good reasons to consider refinancing. The important thing is to do your homework, take a look at the numbers and evaluate whether this is the right move for you.

Getting Started With Refinancing Your Mortgage

As you are looking at your current mortgage and whether it's an appropriate time to refinance, one of the first things you will want to be aware of is the cost of getting out of your current mortgage. Depending on where you are at in your current term, it can cost anywhere from 3-6% of what you have left owing on the principal of your mortgage.

Refinancing also requires an appraisal of what your home is currently valued at, a title search as well as application fees for the refinance process. Additionally, refinancing your mortgage requires a hard credit check which can affect your credit score in the long run.

As much as possible, you will want to be sure refinancing is a strong possibility for you before you do the work of getting an appraisal and going ahead with the application process.

Taking Advantage Of Lower Interest Rates

One of the most common reasons for refinancing your mortgage is to take advantage of lower interest rates. Lenders these days are suggesting that an interest rate drop in as little as 1% is enough of an incentive to consider refinancing.

A lower interest rate on your mortgage can improve your cash flow situation by stretching out the term to a new 25 to 30 year length making your monthly payment notably lower. On the flip side, refinancing can also be a way to decrease the overall term of your mortgage if you are willing to keep your mortgage payments the same and direct more of those payments toward the principal amount owing.

Both of these options can be a major win depending on your situation and what your goals are.

Taking Advantage of Equity Through Refinancing

One of the other common reasons for refinancing your mortgage is to tap into the equity within your home. The equity in your home can be used for a variety of things including home renovations, further investing strategies or even financing education expenses for your children.

Borrowing money against the equity of your home is by far cheaper than financing home renovations by credit card and likely cheaper than other lines of credit too. Using equity from your home for investment purposes like The Smith Manoeuvre or other investing strategies can be a great way to get ahead financially too.

At the same time, granting yourself access to a large amount of credit can be quite a slippery slope. It's important to keep in mind that this is still borrowed money that must be repaid. Refinancing for the purposes of leveraging home equity requires wisdom and discipline.

Is Refinancing Your Mortgage Right For You?

The answer to most difficult questions is, "it depends" and the answer is no different when it comes to refinancing your mortgage. We've noted that the upfront cost of refinancing can be substantial. Additionally, it takes a fair amount of time to recoup this cost. Refinancing requires a degree of stability, predictability and a long term commitment to your situation and your goals.

Before you take any steps toward refinancing, it's best to consult a mortgage specialist or financial advisor to assess your situation and see what might be best for you. If you feel like this might be something you'd like to consider, we would be happy to provide any amount of consultation and guide you through the process.

How do you know whether paying down your mortgage is best? Is there value in trying to invest at the same time? Let's look at a few factors to see what kind of options are out there.

Paying Off Your Mortgage First: Pros and Cons

The idea of paying off your mortgage and living debt free is often an ideal for Canadians even if it seems lofty when you first sign those mortgage documents. The thought of paying thousands of dollars in interest on top of a large mortgage amount can be cringe worthy.

A mortgage payment is likely your largest monthly expense and who wouldn't want to get rid of that? With that big monthly expense out of the way, you have access to more money on a monthly basis to invest which might feel like you can make more progress quicker.

That said, this approach can also neglect the power of long-term, compound interest. You will likely remember from any basic financial management course that compound interest over a long period of time can produce a surprising amount of growth.

So which is better? Eliminating interest payments or leveraging interest that can work in your favour?

Knowing Your Interest Rates

Knowing your interest rates and how they are working for you or against you is a good place to start in trying to determine the best path forward. One of the benefits of mortgages these days is how low the borrowing interest rate is with lenders across the country.

Only a few short decades ago, interest rates below 5% were unheard of. These days, interest rates of 2-3% and sometimes even lower are quite common. This is a really important factor in deciding whether to pay down your mortgage or invest.

On the flip side, conservative returns on RRSPs, TFSAs or other non-registered investment options are often between 5-7%. This might not sound significant as you're receiving this return on only a small amount of money initially, but it's important to remember the power of compound growth.

Additionally, investment options like RRSPs and TFSAs are tax sheltered. You can use this tax benefit as either a single lump sum payment on your mortgage or to put right back into these investment funds which will increase the power of the compound growth that is happening.

It's generally safe to say that if the interest rate you are borrowing at is less than the rate of return on a potential investment, it's likely worthwhile to invest at the same time as paying down your mortgage. Throwing your Christmas bonus money or your wage increase money at your mortgage can feel like you're making big strides, but in reality, you're maybe saving yourself $10-20,000 in interest payments. That's commendable, but the flip side is that those Christmas bonuses can be invested and interest can be compounded over a long period of time giving you returns of nearly $100,000!

Alternative Investing Options: The Smith Manoeuvre

If you're especially interested in the power of compound interest and willing to let the interest payments on your mortgage be what they are, many Canadians are leveraging what is known as The Smith Manoeuvre. The Smith Manoeuvre is a relatively new investment strategy that leverages compound interest on the investing side of things as well as huge tax savings.

The Smith Manoeuvre in its simplest form allows you to borrow money against the equity you have built up in your home. For this, you need a Home Equity Line of Credit (HELOC) instead of a traditional mortgage. With this in place, you are able to borrow the equivalent of your equity. This borrowed amount must be invested in non-registered investments products with a reasonable expectation of return on your investment.

In Canada, there is a tax rule where if you borrow money to invest in an income-producing investment like a rental property or a particularly promising stock that pays dividends, you can deduct the annual interest paid on that investment loan from your income tax. This annual deduction can then be used to pay down your mortgage which increases your equity and ability to invest further.

This process can accelerate quickly meaning you can pay down the mortgage side of your HELOC much quicker than the traditional ways people attempt to accelerate their mortgage payments. At the same time, The Smith Manoeuvre is a fairly high risk form of investing. All of your investment money is "borrowed money." In a way, it might feel like you're gambling your home on the stock market. If you are considering this, it's incredibly important to do further study on this first so you know what you are getting into. It's also important to be very aware of how comfortable you are with investment risk.

Is Investing The Right Move For You?

For the most part, investing at the same time as paying down your mortgage will put you in a position of greater financial success. This is largely dependent on interest rates as well as your ability to stay disciplined with your spending. As always, talk to a financial advisor or a mortgage professional who can help you crunch the numbers to see what a long term outlook might look like for you.

Many lenders provide a solution that gives you the option to purchase something cheaper while at the same time offering you some extra cash to dump into renovations without having to wait a few years. These solutions are called purchase-plus-improvement mortgages.

With purchase-plus-improvement mortgages, you can go ahead with buying an older home that might require some handyman efforts. On top of the mortgage amount on the purchase price of the home, an extra lump sum of money is made available for you to use to get started on renovations right away. This means those nasty coloured walls or dated cabinets or 1970's carpets can disappear before you even move in!

The process for taking on a purchase-plus-improvement mortgage is relatively simple and straightforward. Important to consider especially if you're a first-time homebuyer.

Determining Initial Mortgage Amount

Housing prices vary all over the country of course, but for the sake of simplicity, let's imagine you are purchasing an older home for $250,000. This is notably less expensive than many brand new homes on the market for $450,000, but with the lower price point comes an older home that is requiring some work.

Determining Costs of Improvements

For the purchase-plus-improvement mortgage to work, your lender will want to know what sort of improvements you are planning to do on your new home. At this point, you will need to walk through the home you are planning to purchase and make a list of what kind of improvements you are planning to go ahead with.

Once you have your list, you need to get in touch with a contractor and come up with firm price quotes on the work you need done. This could look like the following.

• New roof - $7000
• Bathroom renovation - $9,500
• New kitchen cabinets and appliances - $14,000
• New flooring on main floor - $3,500

This adds up to a total of $34,000 in additional funds you would want to borrow on top of the mortgage for the purchase price of the home. These renovations will get you to the point where your house is comfortable to live in for the first couple of years while you save up more money for further renovations down the road.

Revise The Original Mortgage

Once you've gathered the data from your contractor, you will meet with your mortgage broker again to determine the revised mortgage amount. This is a simple calculation of your initial mortgage amount ($250,000) plus the calculated home improvement costs ($34,000). Your new mortgage amount is set at $284,000.

It's important to note that the down payment requirement will be based on the total amount borrowed and not just on the initial mortgage calculation. Many lenders are willing to take a minimum of 5-10% down.

On the closing date, the $34,000 for home improvement spending is typically sent to a lawyer who will hold that amount of money until you've completed the renovations. This ensures that the extra home renovation money isn't put into your hands to be suddenly used for something else like a brand new vehicle or travel plans.

The home renovation cost is initially paid for out of pocket by you as the homeowner (perhaps with a line of credit). The money will be transferred from the lawyer to you to pay off the renovation expense at the completion of the construction inspection.

Take Possession and Start Renovating!

With your mortgage in place, your possession date arrives. You've lined up your contractor and the renovation projects begin. Lenders often give a 90-180 day window in which the work must be completed. This is a huge win for you as the homeowner. Not only do you immediately improve the value of your home, you also get to live in it right away!

Renovation Inspections and Fund Transfer

Following the completion of the home renovations, a home inspection is required to approve that you spent the money borrowed on the renovations you set out to complete. Once the home is inspected and the lender is satisfied with the paperwork, the funds from the lawyer are released and you can reimburse yourself for the money you spent.

Renovation Financing Made Easy

In a lot of ways, purchase-plus-improvement mortgages are one of the easiest ways to finance the renovation of your home. It requires some foresight into finding the home that needs some work and calculating the cost of renovations. However, it can be an easier approach than putting a down payment on your home and having to wait an additional few years to save up enough money for renovations. With a purchase-plus-improvement mortgage, your expenses are covered and you get the immediate satisfaction of a renovated home that is more comfortable to live in.

If you're wondering if a purchase-plus-improvement mortgage might be right for you, don't hesitate to reach out to a mortgage broker. With a quick assessment of your situation and which homes you might be looking at, it's likely that a solution can be found for you.

Credit score is measured numerically on a scale of 300-900 with a higher number being a better credit score. Mortgage lenders will typically look for a credit score of at least 700 to qualify you for a mortgage.

There is often some confusion around how your credit score can be negatively affected aside from the obvious ways like missing payments. People often wonder if mortgage applications or applying to multiple lenders affects your credit score. Does refinancing hurt your credit score? What's the difference between a hard check and soft check when it comes to your credit score?

This article is going to cover some of these background questions that come up if you're wondering about the process for obtaining a mortgage.

Mortgage Applications: Does Applying to Multiple Lenders Affect My Credit Score?

Applying for a mortgage will obviously require your lender to check your credit score to see if they are comfortable lending money to you. Most home buyers will shop around to see which lender might give them the best deal on a minimum down payment, interest rate and the like. With your credit score being partially affected by how often it is checked, this raises the question of whether applying to multiple lenders will negatively affect your credit score.

Generally speaking, having your credit score checked by multiple lenders while shopping for the best mortgage will not negatively affect your credit score. Of course, one of those credit checks will be etched into your credit history, but because multiple requests with the same reasoning fall within a tight time period, credit bureaus recognize them as a single request.

Unless someone is getting into real estate investing, it's unlikely that a home buyer is requesting multiple mortgages at the same time. It makes sense for a credit bureau to consider multiple credit checks within a short period of time to be for a single purchase.

On the other hand, your credit score may be affected negatively by multiple smaller-scale credit checks. A typical example of this might be multiple credit checks related to requests for credit cards. Credit checks related to credit cards can be a red flag to credit bureaus as this is a potential sign of taking on excessive debt. This can have obvious negative implications for your credit score moving forward.

Do Mortgage Pre-Approvals or Refinancing Hurt Your Credit Score?

Another question that comes up related to credit rating is whether mortgage pre-approvals or refinancing have any bearing on your credit score. This gets into something called Hard Credit Checks vs Soft Credit Checks.

When it comes to mortgage pre-approval, it's likely that a soft credit check will be done. A soft credit check is different from a hard credit check in that it's a simple and quick look at what your credit rating is without doing a deep dive into your financial history. This quick look at your credit rating is often all that is needed in order for a lender to determine whether you can be pre-approved for a mortgage.

Refinancing on the other hand, generally requires a hard credit check which includes a deeper dive into your financial history and credit rating. Any time a hard credit check is done, your credit rating takes a small hit.

Additionally, the nature of refinancing is that you are likely in a situation where you are not able to afford to make mortgage payments. If you are refinancing for other reasons (eg. sudden drop in interest rates), be sure to factor the cost of a slightly lower credit rating into your analysis. The reduced mortgage payments and lower interest rates may be appealing for cash flow reasons, but your credit rating taking a hit can have longer term implications that you will want to keep in mind.

Here's a simple calculator to calculate your monthly mortgage payments.

The Impact of Car and Credit Loans on Your Mortgage

Car loans and other credit loans can be an interesting factor as you approach applying for a mortgage. Most mortgage lenders require a credit rating of at least 700. One of the ways of achieving a high credit rating like this is to borrow money and pay it back on time, every time. A credit loan, including credit cards, or a car loan can be an effective way of proving your ability to do this.

On the other hand, credit loans and car loans can be an easy way to eat up your cash flow and inhibit your ability to build up a down payment. On top of that, failure to make a payment on a car loan or credit loan can be detrimental to your credit score. A lender that sees you missing car payments might not be too willing to offer you a mortgage and be at risk for having you miss payments on something much more sizeable.

Setting Yourself Up For Success

The best thing to do is to stay away from being in a rush situation where you need to decide quickly on something as big as a mortgage. Whenever possible, take your time. You can't rush a good credit score. It requires time, perseverance and discipline so make sure you have the big picture in mind.

Don't be afraid to reach out to a professional who will have your best interest in mind. Avoid anyone who wants to quickly sell you a product that will only put money in their own pockets. Do your research and continue to get as educated as you can.