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What is a fixed rate mortgage?
The interest rate on a fixed-rate mortgage is set for a pre-determined term. The interest rate for various terms will vary, but the bottom line is that once you decide on a term the interest rate for that term will not change. This offers the security of knowing what you will be paying for the term selected.
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What is a variable rate mortgage?
The key difference between a fixed rate mortgage and a variable rate mortgage is that the interest rate may vary during the term of your variable rate mortgage based on changes in a benchmark interest rate which is usually the “prime rate”. The prime rate is the interest rate charged by financial institutions to their most creditworthy customers. If the prime rate goes down, the interest rate on your mortgage will drop resulting in more money being applied to principal. If the prime rate goes up, the interest rate on your mortgage will also go up. This may result in your payment increasing to allow the increased interest component of your payment to be covered.
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What’s the difference between Pre-Qualification and Pre-approval?
Pre-qualification is the first step in obtaining the mortgage that you need to purchase the home of your dreams. It’s a simple step where we examine your financial situation in terms of income and liabilities in order to establish how much you can borrow on a “qualified” basis. This is a very important concept at it allows you borrow money at the lowest available rate and allows you to qualify for high ratio mortgage insurance. The two concepts that are relevant here are your GDS ratio, which is the ratio of the total carrying costs of the house you want to buy (including mortgage payment, realty taxes and insurance) divided by your total family monthly income, and your TDS ratio, which is the ratio of your total monthly debt payments (including the carrying costs of your house) divided by your total family income. As a rule, your GDS ratio cannot exceed 32% and your TDS ratio cannot exceed 42%. This sets the parameters for the amount you can borrow. However it is not the same as pre-approval, as credit has not been reviewed and income has not been verified and funds for closing are not verified.
Pre-approval refers to the verification of the applicant’s ability to borrow. At this stage you must provide evidence to prove your income and the amount of the down payment you have available, and a credit check is done to confirm your credit score. A pre-approval gives a potential home-buyer the advantage of knowing how big a mortgage they will qualify for and the ability to use this information in negotiating the final selling price of a home.
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How much do I need for a down payment?
According to the guidelines of the Canada Mortgage and Housing a Corporation (CMHC), one must have a minimum down payment of at least 5% of the total cost of the prospective property. If the amount of your down payment is less than 20% of the value of the house, the mortgage is deemed “high ratio”. A high ratio mortgage is subject to a CMHC mortgage default insurance premium. However this premium is added to the amount of your mortgage and can be repaid over the term of the mortgage. In addition you can obtain a gift of funds from a family member to come up with down payment. You will however have to provide a “gift letter” to establish where the money has come from. In addition maximum house price ceilings apply if you want to buy with only a 5% down payment. You can check the CMHC webpage or give us a call on this issue.
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What happens if I’m not satisfied with a mortgage offer?
Don’t accept it. You have no obligation to accept any of the offers that are made to you by any lending organization. We will be more than happy to give you a competitive quote. Simply fill out our Two Minute Residential Application and we will get back to you within hours.
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What is the difference between Term and Amortization?
The “term” of the mortgage should not be confused with the “amortization period”. The amortization period refers to the length of time that it will take for the mortgage to be paid in full, assuming the interest rate and payment remain constant. The term is the period for which your current payment obligations are fixed. In other words, you may choose a five year term and a 25-year amortization. This would mean that your interest rate, your payments, and your pre-payment options would be the same for the next five years. At the end of these five years you would re-negotiate the term and the amortization would now be 20 years. Fixed rate Mortgages can be “ closed” or “open”.
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What is an Open Mortgage?
An “open mortgage” means you can pay down the mortgage whenever you want by making additional principal payments. Most mortgages are not open. A “closed mortgage” means you cannot make any payments against the principal for the term of the mortgage. Most residential mortgages are hybrid of these two: the terms of the mortgage will give limited rights to prepay principal during the term without penalty. However if you want to pay off the mortgage if full before the end of the term you will have to pay a pre-payment bonus. This is a very important term of your mortgage and you need to have full disclosure of this issue before signing on the dotted line.
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What is a Closed Mortgage?
Generally, closed mortgages are offered in terms ranging from six-months to ten years. Generally- closed mortgages offer more stringent pre-payment options subject to various pre-set regulations. For most people, such pre-payment options can be vital to reducing the amortization of one’s mortgage and should be properly discussed with one’s lender/agent.
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What is Mortgage Portability?
This is another very important concept. It relates to your ability to move a mortgage from one property to another within having to pay a prepayment bonus to the mortgage company. You always want to have this right, as you never know when you may have to move for work or family related reasons.
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Can I use my RRSP for a down payment?
Today, about 50% of first time homebuyers use their RRSP savings to help finance a down payment through the federal Home Buyer’s Plan. The most recent federal budget increased this amount to $25,000.00 per person. You then have 15 years to repay your RRSP.
Even if you have already saved for your down payment, it may make good financial sense to access your savings through the Home Buyer’s Plan. For example, if you had already saved $2,000 for a down payment, and assuming you still had enough “contribution room” in your RRSP for a contribution of that amount, you could move your savings into a registered investment at least 90 days before your closing date and than take the tax deduction on your tax return. You can than use the tax refund you receive to repay back your RRSP or buy that new living set you have had your eye on.
Effective in 2009, there is also a new $5,000.00 tax credit for first time home buyers. This will generate about an additional $750 in tax savings.
While using your RRSP for a down payment may help you buy a home sooner, it can also mean missing out on some tax-sheltered growth. So be sure to ask your financial planner whether this strategy makes sense for you, given your personal financial situation.
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What are the benefits of using a Mortgage Broker?
A mortgage broker is an independent real estate financing professional who specializes in finding individuals and businesses the money they need. We are an independent contractor working, on average, with 40 wholesale lenders at any one time. By combining professional expertise with direct access to hundreds of loan products, a broker provides consumers the most efficient and cost effective method of offering suitable financing options tailored to the consumer’s specific financial goals. This is why in the United States 3 of every 4 mortgages are placed through mortgage brokers. The simple reason is that the U.S. consumer knows that using a mortgage broker is the intelligent way of finding a mortgage.
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What do I do next?
For a no obligation evaluation of your financing needs, fill out our Two Minute Application: Residential” if you are looking for a residential mortgage, or our Two Minute Application: Commercial and Business Loans” if you are looking for a commercial product. Tell us who you are, and what you're looking for, and you will be on your way to getting the money you need.
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What if I already have an offer?
If you've already received a written offer from your bank or another lender, fax it to us at 905-568-102 and we'll canvass the other lender’s we deal with to see if we can get you a better deal. The way we see it, the big banks in Canada make enough money! Let us make them compete for your business when it comes to mortgage shopping!
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