First Time Home Buyers

1. How does a mortgage work?

A mortgage is simply a loan to purchase a home. In the early years of a mortgage, a greater percentage of each payment goes towards interest charges and a smaller percentage covers the principal repayment. As the amount you owe decreases, more of each payment goes toward paying down the principal.

The more principal you pay down, the more equity you build up in your home. Basically, equity is the amount of your home that you own. If your home is worth $300,000 and your mortgage is for $250,000, that means you have $50,000 in equity.

2. What is amortization?

Amortization is how long it will take to pay your mortgage in full. Term refers to the length of a mortgage contract provided by a lender. The total length of a mortgage is usually made up of several terms. For example, a lender may offer a 5-year term though it may take 25 years to pay your mortgage completely.

Shorter Amortization

  • Less time to pay off your mortgage
  • Less interest paid overall
  • Higher mortgage payments

Longer Amortization

  • More time to pay off your mortgage
  • More interest paid overall
  • Lower mortgage payments

3. What’s the difference between a fixed rate and a variable rate?

Fixed Rate Mortgage

Your interest rate and mortgage payments remain the same throughout the term. This means you can budget and plan, knowing your mortgage payments are fixed.

Variable Rate Mortgage

Your interest rate changes with the prime rate while your mortgage payments remain the same throughout the term. This means that if interest rates fall, more of your mortgage payment is applied to the principal. If interest rates increase, more of your payment will go towards interest.

It’s important to note that interest rate fluctuations may also affect your amortization period (number of years required to pay off the mortgage), and if a rate increase results in a longer amortization period, your payments may have to increase.

4. What’s the difference between an open and closed mortgage?

Open Mortgage

You can repay all or part of your mortgage at any time without a prepayment charge. This means you can pay off your mortgage faster, but your interest rates may be higher than on a closed mortgage.

Closed Mortgage

You have fixed payments for a significant period of time, but your prepayment options are limited. This means that your interest rate is usually lower than on an open mortgage. If you wish to make a lump sum, you may be limited as to how much you can prepay without a prepayment charge being applied.

5. What do I need to know about the down payment?

The down payment is the amount used toward the purchase of the home that comes out of your own savings. Your down payment can be as little as 5%.

If you can afford to put down more, that’s great. The higher your down payment, the less you’ll have to borrow, which means less of your income every month will go toward repaying your mortgage. The more you put down, the less you’ll have to borrow, meaning lower payments every month.

Deposit vs down payment

The deposit is a portion of the down payment that is included, usually in the form of a certified cheque or bank draft, with the Offer to Purchase as a sign of good faith.

The amount varies by region and purchase price. The initial deposit is provided during the negotiation of the purchase of the property (for example, $5000 – $10,000).

The deposit cheque is made out to your real estate agent’s brokerage. If your offer is accepted, the cheque is deposited and held “in trust”, until the deal closes. Upon closing, the deposit amount is deducted from your down payment, and you pay the remainder, if any.

6. What is default insurance?

If your down payment is less than 20% of the purchase price, you’ll need to insure it with mortgage default insurance. Your mortgage provider has access to mortgage insurers in Canada and will apply the appropriate premiums as guided by that insurer. Insurance premiums are contingent upon the amount of down payment, and can be paid up front or added to your mortgage.

Mortgage default insurance is not available for homes with a purchase price of a million dollars or more and/or an amortization period greater than 25 years.

7. Should I use a Realtor?

A good Realtor will:

  • Sift through several listings to narrow your search to a select a few that meet your requirements
  • Have information on new properties even before they are listed
  • Provide you with a competitive market analysis of homes in your area of interest, so you can see what fair market value is
  • Provide information about the neighbourhood and community
  • Arrange private viewings of homes you are interested in
  • Point out advantages and disadvantages of specific homes
  • Guide you through the home buying process, including preparing the offer to purchase and other key documentation and negotiating on your behalf
  • Provide referrals to home inspectors, lawyers/notaries, movers, or lenders if you require them

Refinancing with BMO

I’m refinancing to access equity

You can refinance up to 80% of the value of your home. Value is established using either your most current municipal assessed value or the value provided by an independent appraiser. Once any existing mortgage, line of credit or any other lien or encumbrance or discharged, a new mortgage is registered against the property at the new amount. Any funds above what is required to discharge any existing liens are advanced to you in cash.

This may be an option for you if you have significant equity in your home and you wish to access cash for investment purposes, purchasing another property or consolidating debt.

It is important to remember there may be payout penalties associated with your current mortgage.

Switching to BMO

I’m interested in switching to BMO from another lender

Switching your existing mortgage from another lender to BMO is easy There is no cost or fee to conduct the switch. It is important to remember that your existing lender may charge a payout penalty to discharge the mortgage earlier than the contracted term and an appraisal fee may apply.

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