If you want to own your dream home, you probably need a mortgage to finance your first home purchase. Getting a mortgage like any other financial decision requires some careful thinking. There are several steps that you must take along with support documentation to get approved for a mortgage.
Remember that you are only eligible for mortgage if you are a permanent resident in Canada and have a good credit rating. Furthermore, the type of mortgage you choose also depends on how much you have saved for a down payment.
New To Canada Mortgage Plans
The top three mortgage providers in Canada have their own ‘New to Canada mortgage programs’ to help people who are new to the region. These programs help newcomers get approved for a mortgage so that they can purchase their own home.
Your Credit History
The first step to getting approved for a mortgage is to build a strong credit rating. Remember that having a strong credit rating not only increases your chances of getting approved but you can also get the best interest rates which can save you almost thousands of dollars over the entire mortgage period.
How you can build a strong credit history:
The easiest way to build a strong credit rating is to use a credit card responsibly and make your payments in full every month.
Financial experts also recommend that you make your bill payments on time and this includes your rent, phone bills, as well as utilities. You can also apply for small loans from your bank and make your payments on time to show that you are a credit worthy person.
Last, you need to prove that you have a consistent source of income. It is recommended that you stay with the same employer for an extended period of time to build a strong source of income.
The good news is that if you don’t have a strong Canadian rating, you can use your credit rating from the UK, Australia or the United States to establish your credit history.
1. Get Support Documentation
If you have just arrived in Canada and still don’t have a strong credit history, you will be required to provide support documentation. Some of the documents that you need to show up include:
- Landed immigrant status
- A valid legal work permit
- A proof of income – you can submit your employment contract or your pay slips
- Proof of your rental payments
- A confirmation letter from your landlord
- Proof of your bill payments
- Your bank statement
- Records of personal savings
- An international credit report
- Reference letter from any reputable financial institution
How Much Do I Need to Save for a Down Payment?
While you are building your credit history, you can also start saving money to make a down payment. If you are new to Canada and have a permanent resident status, you are required to put downpayment of at least 5% of the purchase value of your home. All non-permanent Canadian residents are required to put down at least 10% of the purchase price.
For example, if the purchase price of your home is $500,000, you have to pay at least 5% of the value as down payment. On the other hand, you have to pay at least 10% of the total value if your house is priced more than $500,000. This rule applies to all home purchases in Canada regardless of your residency status.
Choosing the Right Mortgage Provider
You can get approved for mortgage either through a lender or a bank or a credit union. You can also decide to work with a mortgage broker to shop around for the best mortgage interest rates and find the deal that best suits your needs. Remember that mortgage brokers don’t issue mortgages but they will negotiate on your behalf to help you get the best rates and products.
Choosing the Type of Mortgage
You will have to decide whether you want a fixed rate mortgage or a variable rate mortgage. A fixed mortgage rate means your interest payments and mortgage rate will remain the same throughout your mortgage term. A variable mortgage plan means your interest rate might fluctuate throughout the term depending on the changes in the Prime rate.
Basically the decision to go for a fixed mortgage rate or a variable mortgage rate depends on your unique risk tolerance and whether mortgage interest rates are expected to go up or down in the near future.
Choosing Your Amortization Period
The amortization period basically is the amount of time it takes to pay off your entire mortgage. The minimum amortization period for all mortgages approved after July 09, 2012 is 25 years. If you are willing to put down more than 20% of the purchase value of your home, you might be able to get a mortgage for a long period i.e. up to 30 years from most lenders.
Remember that having a longer amortization period is beneficial for the fact that your mortgage payments will be lower and spread out over a longer time frame. The only downside of having a longer amortization period is that you will be required to pay more interest over the entire duration of the mortgage.
How Do I Select my Mortgage Term?
Mortgage term is the period of time you will be committed to a certain set of conditions and a particular mortgage rate. Generally mortgage terms range from 6 months for up to ten years and mortgage term for 5 years is the most common. Once your mortgage term is up, you can negotiate with your lender and come up with new mortgage rates and a new set of conditions for the remaining principal.
While you are likely to have several mortgage terms over your entire amortization period and like any other financial decision, you have to choose the term very carefully. Remember, breaking your mortgage term early can result in hefty penalties.