You'll need a combination of a down payment and closing costs.

DOWN PAYMENT

The money that you pay up front for a house is the down payment. These payments typically range from 5 to 20% of the total value of the home. The obvious source of money for your down payment is either your savings or the proceeds from the sale of a home you already own.

While it is possible to buy a home with as little as 5% down, the amount of your down payment will determine whether you will have a conventional mortgage or an insured, high-ratio mortgage.

What's the difference?

• Conventional mortgage: Your down payment is at least 20% of the purchase price.
• High-ratio mortgage: Your down payment is less than 20% of the purchase price and must be insured by CMHC or GEMI. An insurance premium will apply.

CLOSING COSTS

For high-ratio or insured mortgages, the mortgage provider requires the borrower to demonstrate his or her ability to cover closing costs in the amount of 1.5% of the value of the property. Closing costs can be as high as 3% of the value of the property being purchased and can vary widely depending on:

• The property being purchased
• Services required
• Taxes
• Applicable insurances
• Whether the home is new or old
• Closing dates affecting interest adjustments
• The balances of any prepaid expenses

What Is My Credit Rating?

There are a number of steps to getting mortgage financing. A particularly important step – and one many people don't give much thought to is the credit check. As a routine part of the application process the lender will order a copy of your credit history.

Your personal credit history is compiled by credit bureaus that collect information from various sources including banks, retailers, and other public records, creating a credit report. Information such as what credit and debit cards you have, the types of accounts you have at various financial institutions, information about personal loans, mortgages, student loans, etc., is all part of the report. The report shows the creditors' names, account numbers, the date accounts were started, the current balance, as well as a detailed payment history (for example, how many times you were over 30, 60, or 90 days late in paying bills). Generally, credit reports show information going back six to seven years.

Because the report contains information about you, you have a right to inspect a copy of it. Equifax, one of Canada's largest credit bureaus, will mail consumers a free copy of their personal credit file upon request. The request can be made by mail, fax, or online. Certain information must be supplied with the request. For more information, call Equifax at 1 800 465‑7166.

How Do Lenders Assess How Much I Can Afford Per Month?

Generally, lenders calculate that the homebuyer shouldn't pay more than 30 to 32% of gross income for principal, interest, taxes, and insurance (PITI), or 40 to 42% for both PITI and monthly debts combined.

The easiest way to make a quick estimate of the mortgage amount you may qualify for requires applying the two basic formulas used by lenders for loan application. Keep in mind that the loan balance will vary over the term of the loan, although the monthly payment remains the same.

Two Lender Formulas:

Why Should I Apply For A Mortgage Pre-Approval?

Having a pre-approved mortgage will give you the confidence of knowing exactly what you can spend on a home before you start looking. You will also be protected against interest rate increases while you look for your new home.

How Much Can You Afford?

How much house you can afford depends on two things: how much you can afford for the monthly mortgage payment, and how much you can invest in the down payment. Monthly payments include the principal and interest on the mortgage loan and property taxes and insurance against fire and other hazards. These four costs are often abbreviated PITI.

The key items are the size of the down payment, the amount of the mortgage and the term – or length – of the loan.

HLC Home Loans Canada offers a Mortgage Affordability Calculator to determine how much you can afford and a  Mortgage Comparison Calculator  to compare different payment options.

The amortization period on a mortgage is the total length of time it will take you to pay off your mortgage. A typical amortization period is 25 years, but it can be longer or shorter.

In comparison, the term of a mortgage (which ranges from six months to 10 years) represents the length of time for which your mortgage agreement with a lender is valid.

Benefits and costs of a longer amortization period

Some people choose a longer amortization period because it lowers their mortgage payments: the longer the amortization, the lower the mortgage payments. This can mean, for some, the difference between buying and not buying a home.

However, the longer it takes you to pay back the mortgage principal to the lender, the more interest you will pay — which can affect your ability to save for other important things, such as retirement.

Examples of interest costs

The table below shows how much interest you would have to pay on a $200,000 mortgage, depending on the monthly payment and amortization period chosen:

Another way to look at it is to compare how much of the amount borrowed (the principal) would be paid off in the first few years, depending on the amortization period. Using the above mortgage as an example, the table below shows how much of the principal would be paid off in the first five years:

Reducing total interest costs

Here are ways to reduce your total interest costs over the long run, no matter what amortization period you choose:

• Increase the frequency of your payments. Consider making accelerated biweekly payments rather than monthly payments. For example, with monthly payments, if your payment was $500 each month, by the end of the year you would have made $6,000 in mortgage payments. With accelerated biweekly payments, you would pay $250 every two weeks for a total of $6,500 a year ($250 x 52 weeks ÷ 2). The interest savings come from making more frequent payments and also paying $500 more each year.
   
• Know and use the prepayment privileges on your mortgage. Most mortgage lenders will let you prepay a certain amount every year, without penalty. Some lenders also allow you to make larger mortgage payments from time to time when you can afford it.
  
  Making prepayments as often as possible helps you lower the principal balance outstanding on your mortgage and therefore saves you money in interest charges.
   
• At renewal time, shop around to make sure you still have the right mortgage for your needs. Consider the interest rate, term, prepayment privileges and other options that best suit your particular situation.
  
  It is also a good time to increase your mortgage payment to the highest amount that you can afford, and increase your payment frequency to save in interest charges. If you change lenders, make sure you verify whether there are costs associated with doing so.

A variable interest rate mortgage is a mortgage loan with an interest rate that can change during the term. The interest rate varies with changes in market interest rates (typically the bank's prime lending rate). The mortgage payments can be fixed, or they could change if the interest rate changes — it depends on the lender and type of product.

What are the benefits?

If market interest rates are stable or go down during your term, you could pay less in interest than with a fixed interest rate mortgage. By the end of your term, it is possible that you could have paid more toward your principal than expected and less towards interest, which would reduce the balance owing and shorten the time needed to pay off your mortgage.

What are the risks?

If market interest rates go up during your term, your interest rate would increase and you would pay more in interest to the lender. As a result, by the end of the term, you might have paid more in interest than if you had chosen a fixed interest rate mortgage. It also means that by the end of your term, you might pay less of the principal than expected, which would lengthen the time needed to pay off the mortgage.

Depending on the lender and the terms of the variable rate mortgage, another risk is that your payment could increase if the interest rates increase. Consider how much of an increase in mortgage payments you could handle. If you don't think you can handle the risk of your mortgage payment increasing, or do not have enough cash flow, you may be better off with a fixed interest rate mortgage. Below, you can see an example of how interest rate changes can affect a mortgage.

What makes variable interest rate mortgages attractive?

The interest rates on variable rate mortgages are often lower than the fixed interest rate offered at the time you sign the contract. However, whether you are better off with a variable interest rate mortgage compared to a fixed interest rate mortgage depends on the movement of market interest rates during the life of your mortgage, called the "term". This movement is difficult to predict. For example, between 2000 and 2009, the Bank of Canada Bank Rate varied from 0.5% to 6.00%¹.

What happens to mortgage payments when interest rates change?

When interest rates change, depending on the lender and the terms of your mortgage, the following scenarios are possible:

1. Your payment goes up or down each time market interest rates change.
    
2. Your payment stays the same when market interest rates go down, but increases when market interest rates go up. In this scenario, more of your payment goes toward paying down the principal when the interest rate falls.
    
3. Your payment does not change unless market interest rates increase to a "trigger" point (shown in your mortgage agreement). Only at that point will the lender increase your payment.

The Devil In The Fine Print

Mortgages sometimes have costly or irritating restrictions that you won’t know about unless you read the fine print or ask a mortgage professional.

Some examples:

·       Restrictions on breaking your mortgage before the term is up

·       Restrictions on breaking your mortgage for the first 3 years

·       A penalty surcharge of 1% for mortgages broken within the first 12 or 36 months

·       “Reinvestment fees” (on top of mortgage penalties)

·       Interest rate differential (IRD) penalties based on an onerous bond yield calculation

·       IRD penalties on variable-rate mortgages (usually IRD penalties apply to fixed mortgages)

·       IRD penalties based on a costly posted vs. discounted rate formula

·       Inability to port unless the purchase and sale take place on the exact same day (which can be hard to arrange)

·       A poor conversion rate guarantee

·       No refinances during the first year

·       No free switches (for transfer-eligible mortgages)

·       Amortization limits of 25 years

·       Minimum amortizations of 15-18 years

·       Restrictions on converting from a variable rate to a fixed rate for the first six months

·       No ability to break your “open” HELOC without a penalty

·       Inability to port across provincial lines

·       High administrative fees when porting

·       100% clawback of cash-back if the mortgage is broken before maturity

·       Requirement for a full banking relationship with the lender

·       No lump-sum pre-payment privileges

·       No annual payment increase allowance

·       Pre-payments restricted to one specific day a year (instead of any payment date)

And the list could go on…

Keep a lookout for restrictions like this when comparing different mortgages.

Glossary of Terms

Amortization period: The actual number of years it will take to pay back your mortgage loan.

Anniversary: Many mortgage products allow you to make payments against the principal on the anniversary of the mortgage.

Appraisal: The process of determining the lending value of a property.

Assumability: Allows the buyer to take over the seller's mortgage on the property.

CMHC: Canada Mortgage and Housing Corporation, a Crown corporation that administers the National Housing Act for the federal government and encourages the improvement of housing and living conditions for Canadians. CMHC is one of two sources for high-ratio mortgage insurance.

Capped rate: An interest rate with a pre-determined ceiling, usually associated with a variable-rate mortgage.

Closed mortgage: Locks you into a specific payment schedule. A penalty usually applies if you repay the loan in full before the end of a closed term.

Closing costs: Costs in addition to the purchase price of a property and which are payable on the closing date. Examples include legal fees, land transfer taxes, and disbursements.

Closing date: The date on which the sale of a property becomes final and the buyer takes possession.

Conditional offer: An offer subject to conditions such as loan approval.

Condominium fee: A fee paid by the condo owner that is allocated to pay building expenses.

Conventional mortgage: A loan issued for up to 75% of the property's appraised value or purchase price, whichever is less.

Convertible mortgage: A mortgage that you can change from short-term to long-term.

Deed: A legal document, signed by both parties, that transfers ownership.

Default: Failure to abide by the terms of the mortgage; may result in legal action such as foreclosure.

Deposit: A sum paid to the seller and held by a third party upon the offer to purchase.

Down payment: The buyer's cash payment toward the property; the difference between the purchase price and the mortgage loan.

Easement: The right to use another's property for a specific purpose (e.g. a shared driveway).

Encroachment: A physical intrusion from one property to an adjoining property.

Equity: The difference between your home's value and the money you owe against it.

GEMI: GE Capital Mortgage Insurance Company of Canada, a private mortgage insurance company; one of two sources of high-ratio mortgage insurance.

Gross debt service ratio: The percentage of a borrower's monthly income to go to mortgage payments, utilities, taxes, and half of condo fees.

High-ratio mortgage: A mortgage that exceeds 75% of the home's appraised value. (These mortgages must be insured for payment.)

Home insurance: Insurance to cover both your home and its contents in the event of fire, theft, vandalism, etc. (also referred to as property insurance). This is different from mortgage life insurance, which pays the outstanding balance of your mortgage in full if you die.

Inspection: The process of having a qualified home inspector identify potential strengths and weaknesses in the property you are interested in so that you may have a good idea of its functional condition.

I nterest adjustment: The amount of interest due between the date your mortgage starts and the date the first mortgage payment is calculated from. Avoid it by arranging to make your first mortgage payment exactly one payment period after your closing date.

Interest rate: The value charged by the lender for the use of the lender's money, expressed as a percentage.

Land transfer tax, deed tax, or property purchase tax: A fee paid to the municipal and/or provincial government for the transferring of property from seller to buyer.

Legal fees and disbursements: Some of the legal costs associated with the sale or purchase of a property. It's in your best interest to engage the services of a real estate lawyer (or a notary in Quebec).

Lien: A claim for money owed by a property owner to a supplier or contractor.

Listing agreement: A legal agreement between the listing broker and the seller describing the property for sale and stating the services to be provided and the terms of payment. A commission is generally payable to the broker upon closing.

Lump-sum payment: An extra payment that you make to reduce the amount of your mortgage. This is the same as pre-paying, which you cannot do if you have a closed mortgage.

Maturity date: The end of the term of the loan, at which time you can pay off the mortgage or renew it.

MLS®: Multiple Listing Service®, trademarks owned by the Canadian Real Estate Association. They are used in conjunction with a real estate database service, operated by local real estate boards, under which properties may be listed, purchased, or sold.

Mortgage: A loan that you take out in order to buy property. The collateral is the property itself.

Mortgage broker: A person or company offering mortgage products from several financial institutions.

Mortgage insurance: Applies to high-ratio mortgages. It protects the lender against loss if the borrower is unable to repay the mortgage.

Mortgage life insurance: Pays off the mortgage if the borrower dies so that his or her heirs do not assume the debt.

Mortgage rate: The percentage interest that you pay on top of the loan principal.

Mortgagee: The lender.

Mortgagor: The borrower.

Moving expenses: The cost of hiring packers, movers, or renting a van.

Offer to purchase: A legally binding agreement between you and the person who owns the house you want to buy. It includes the price you are offering, what you expect to be included with the house, and the financial conditions of sale (your financing arrangements, the closing date, etc.).

Open mortgage: Allows partial or full payment of the principal at any time, without penalty.

Portability: A mortgage option that enables borrowers to take their current mortgage with them to another property without penalty.

Pre-approved mortgage: Qualifies you for a mortgage amount before you start shopping.

Pre-approved mortgage certificate: A written agreement stating that you will get a mortgage for a set amount of money at a set interest rate.

Prepaid property tax and utility adjustments: The amount you will owe if the person selling you the home has prepaid any property taxes or utility bills.

Prepayments: Voluntary payments in addition to regular mortgage payments.

Principal: The amount borrowed or still owing on a mortgage loan.

Property survey: A legal description of your property and its location and dimensions (usually required by your mortgage lender).

Realtor: Trademark identifying real estate professionals in Canada who are members of the Canadian Real Estate Association, and as such, who subscribe to a high standard of professional service and to a strict code of ethics.

Refinancing: Increasing the amount of your current mortgage (at a new interest rate). The term of the new mortgage must be equal to or greater than the term remaining on your current mortgage.

Renewal: Renegotiation of a mortgage loan at the end of a term for a new term.

Sales taxes: Taxes applied to the purchase cost of a property. Some properties are exempt from sales tax and some are not. For instance, residential resale properties are usually GST exempt, while new properties require GST.

Service charges: Extra costs incurred when hooking up hydro, gas, phone, etc. to a new address.

Second mortgage: Additional financing, which usually has a shorter term and a higher interest rate than the first mortgage.

Survey: A document that shows the boundaries of the property and specifies encroachments, easements, and the placement of buildings on the property.

Term: The period for which the conditions of the mortgage apply and after which must be renegotiated.

Title: Legal ownership in a property.

Total debt service ratio: The percentage of the buyer or owner's gross annual income required to pay mortgage, utilities, insurance, debts, and all other payments.

Variable-rate mortgage: A mortgage with an interest rate that changes with the market.

Vendor take-back mortgage: When the seller provides some or all of the mortgage financing in order to sell the property.

Paying Off Your Mortgage Faster

Overview

You have choices that can help you pay off your mortgage faster and save a lot of money in interest charges. It all starts with understanding how your payment is applied to the principal and interest you owe, and the options your mortgage lender can offer you.

Understanding principal versus interest

For each mortgage payment you make, the money is first used to pay the interest on your mortgage loan. The remaining portion of your payment is then used to reduce the principal, which is the amount that you borrowed from the lender.

In the first years of the mortgage, most of the payment normally goes toward the interest costs. As a result, the principal, or the amount that you owe, may decrease by only a small amount. As the mortgage balance decreases over time, more of each payment goes toward paying off the principal.

During a 25-year mortgage, depending on the interest rates charged on your mortgage, the total amount of your payments could be double the principal amount that you originally borrowed, or even more.

The key to saving money on your mortgage is to pay off the principal as fast as possible. If your household budget allows you to reduce the time you need to pay your mortgage in full, you could save thousands, or even tens of thousands of dollars in interest charges.

One of the ways to pay off your mortgage faster is to increase the amount of your regular payments. Normally, once you increase your payments, you will not be allowed to lower your payments until the end of the term. Check your mortgage agreement or contact your mortgage lender for your payment options.

2. If you renew with a lower rate, keep the monthly payments the same

At the end of your mortgage term, when you renew or renegotiate your mortgage, you may be able to obtain a lower interest rate. Although you would have the option of reducing the amount of your regular payments, you can take advantage of this situation to pay off your mortgage faster. Simply keeping the amount of your payments the same will make you mortgage-free sooner.

3. Choose an "accelerated" option for your mortgage payment

You can spend approximately the same amount of money on your mortgage each month and still save money by choosing an accelerated option for making your payments.

Most financial institutions offer a number of payment frequency options:

- monthly
- semi-monthly
- biweekly
- accelerated biweekly
- weekly, and
- accelerated weekly

Accelerated payment options

Accelerated weekly and accelerated biweekly payments can save you thousands, or even tens of thousands in interest charges, because you'll pay off your mortgage much faster using these options.

The reason is that you make the equivalent of one extra monthly payment per year.

Standard payment options

The standard payment options are

• monthly
• semi-monthly
• biweekly
• weekly.

For these four payment options, there is no difference in the total amount you will pay over a year. This means that there is very little extra savings if you switch from a monthly payment option to one of the other standard payment options.

Example: Impact of changing the payment frequency

The table below shows the payment frequency options offered to John by his lender, their impact on his mortgage payments and how much he can save over the amortization period.

Mortgage details

• Mortgage principal of $150,000 amortized over 25 years
• Interest rate of 6.45% for the entire amortization period

	Payment frequency	Number of payments per year	Payment amount	Total payments per year	Interest saved on mortgage
Less frequent More frequent	Monthly	12	$1,000	$12,000	-
	Semi-monthly (twice a month)	24	$500 ($1,000 ÷ 2)	$12,000	$162
	Biweekly (every two weeks)	26	$462 ($1,000 x 12 ÷ 26)	$12,012	$174
	Accelerated bi-weekly	26	$500 ($1,000 ÷ 2)	$13,000	$29,407
	Weekly	52	$231 ($1,000 x 12 ÷ 52)	$12,012	$249
	Accelerated weekly	52	$250 ($1,000 ÷ 4)	$13,000	$29,751

Note: This example assumes a mortgage of $150,000, amortized over 25 years, with a constant interest rate of 6.45%.

By choosing an accelerated payment frequency, John makes the equivalent of one extra monthly payment a year. John will pay off his mortgage over four years sooner and will save over $29,000 in interest over the amortization period.

4. Making lump-sum payments: Prepayments

A prepayment is a lump-sum payment that you make, in addition to your regular mortgage payments, before the end of your mortgage term. The prepayment reduces your outstanding balance and allows you to pay off your mortgage faster.

The sooner you can make the prepayment, the less interest you will pay over the long term, and the sooner you will be mortgage-free.

Questions to ask

When shopping for a mortgage, make sure that you understand the prepayment options and conditions before you sign the contract. Ask the lender the following questions:

• How much can I prepay without paying a fee or penalty?
• Is there a minimum amount for a prepayment?
• When can I make prepayments?
• Are there any conditions?
• If there are fees or penalties, how much are they, and how are they calculated?

Conclusion

You can save thousands of dollars in interest by paying off your mortgage as fast as your household budget allows. These four ways will help you to achieve the goal of being mortgage-free sooner:

• increasing the amount of your payments
• keeping your payments the same amount if you renew or renegotiate your mortgage with a lower interest rate
• choosing an accelerated payment schedule
• making lump-sum prepayments.