In January 2018, the Trudeau government enacted stricter mortgage policies in order to slow down house price rises, so if you are planning on buying property in Canada, it is worth familiarising yourself with the mortgage system. It is also worth knowing that you won’t be able to get a loan under the same conditions, according to your status (Canadian citizen, work permit, permanent resident).
The principle of mortgage in Canada is the same as in the United States: your loan is linked to the property you buy.
Credits usually come with a variable rate, but you can ask for a fixed rate (often at a slightly higher cost). If you choose a variable rate, check that there is a ceiling and that it can be converted to a fixed rate. The principal advantage of a fixed rate is that you have peace of mind. In addition, the interest rates are currently low, and the extra cost of a fixed rates over a variable rate is minimal.
You can take out a long-term mortgage (between 10 to 25 years), but the difference with European countries is that you will have to renegotiate the amount of interest every five years (some bank offer other time-frames, but it’s rare). To give you an idea, in April 2018, the average of fixed interest rates offered by banks was 5.14% (over 5 years).
If you pay off your mortgage before its term, you may have to pay penalties. In general, banks accept anticipated reimbursement from 5% to 25% of the initial loan without penalties. However, if you sell your house before the end of the reimbursement, you will have to pay high penalties, which are usually around three to six months’ worth of interest. To avoid having to pay, remember to ask when you get your mortgage if it’s transferable to another property or to the next buyer.
If you don’t want to waste your time negotiating interest rates throughout the country’s banks, you can work with a mortgage broker. This person will take care of negotiating your interest rate from approximately 10 to 20 lenders, and this will ensure you get the best rates possible. Even better, it’s the lender who pays the broker, not you…
If you are a foreigner, conditions to obtain mortgage will be different according to your status. (It is also worth noting that the Ontario Providence has now passed a 15% non-resident speculation tax).
The first thing to do when you arrive in Canada is to form a credit history. The best way is to open a bank account with a credit card, and save each month. Paying your bills on time and having a stable job situation are also criteria that will work in your favour. All documents proving that you have a good credit history are welcome. For example, you can ask your former bank for a document certifying that you are a good client.
If you are a permanent resident, you will have to put down at least 5% of the value of the property up front. For non-permanent residents, you will need at least 10%. In any case, you will have to take mortgage insurance. If you don’t have a credit history in Canada, you will need to put down at least 35% of the value of the property.
According the new federal guidelines, anyone applying for a loan, regardless of the size of their down payment, will be closely scrutinized to ensure that they would be able to make payments, even in an environment of rising interest rates. Furthermore, those with down payments below 20% are required to purchase mortgage insurance, to protect the lending industry from a bursting bubble scenario. Before contracting a mortgage, take care about interest rates. The best solution is to take mortgage insurance, which will allow you to put down less money initially, and to have peace of mind. If you are interested, the only institutions able to offer it are the CMHC, Genworth and Canada Guaranty.
Photo Credits: Gringer (Wikipedia)