MORTGAGES 101

Congratulations, your taking the step as a first time home buyer to ‘get on the property ladder’ as your parents have probably said to you multiple times! It’s exciting, the thought of owning your own home, forgetting about paying rent (essentially someone else’s mortgage) and having something of your own, maybe you’re even about to start a family?
Well to make this exciting time less stressful, we’re going to break things down to the bare bones so it’s easy for EVERYONE to understand! Real Estate and financing can use a lot of buzz words and sound much more complicated than what it is, so we want to lay this out, simple, easy and digestible. So let’s start with Mortgages.
First off, if you’re buying a home, unless you have been gifted a sum of money to pay cash (or are extremely good at saving) you’re likely going to need a Mortgage!

Put simply, a Mortgage is the borrowing of a sum of money.
You put the deposit down on your home, and the rest of the money is given by either a bank, credit union, private lender or mortgage broker etc.
This sum of money is called your ‘Mortgage’. It is typically secured against your home, basically meaning if you don’t pay. The lender takes possession of your home (bad.)




Mortgage Terms:
A mortgage can be over various terms, don’t get confused though, your mortgage term is not the total amount of time it takes you to pay off your mortgage, more on that below. Your term, say 5 years (common), is the length of time you are paying the agreed upon terms, such as interest rates, payment frequency etc.
So let’s say you’re mortgage is paid off after 25 years, and you’re on a 5 year term at a 5% fixed interest rate with monthly payments. This means for the next 5 years, you will be paying monthly, with a 5% interest rate. Once this time comes up for renewal, you will re-negotiate terms with either the same lender, or you can seek other lenders who could offer preferential rates.

Mortgage Amortization:
This is the period it takes you to pay off your mortgage entirely. This is typically for a long period of time such as 15, 25 or 30 years.

The difference between Fixed Rate vs. Variable Rate:
A fixed term mortgage is exactly that. For a fixed term. In order to get out of this, a penalty fee will be applied by the lender. If you are more on the cautious side, a fixed term means you’ll know your exact payments for the set term you have agreed upon and can plan accordingly.
Variable term, means the interest rate you can pay varies during your term. The interest rate can go up, based upon your lender's ‘prime rate’. This prime rate is influenced mostly by the Bank of Canada and various Treasury Bond Yields - treasury bonds are just loans to government corporations by investors. Here in Canada, we typically have more stable interest rates and with a variable rate, you can benefit from a lower interest rate based on the potential it can alter throughout your term.

Different Types Of Mortgages:
You can get a variety of different mortgages, to name a few:
- Interest Only
- Interest Accruing
- Open Mortgages
- Closed Mortgages
And more

The right mortgage is something that will be personal to your circumstance so it’s best to discuss this with your lender of choice. We’ll discuss Open Vs. Closed mortgages next though as they are important.

Open Vs. Closed Mortgages:
If you have a closed mortgage, you are locked into that agreement for the entire course of your term. This means you cannot pre pay the mortgage or renegotiate terms. For doing this you typically receive a lower interest rate. Should you choose this mortgage type, you will be given a penalty if you need to change any of these terms.
An Open Mortgage is the opposite, you have flexibility throughout your mortgage to renegotiate, however you will likely be paying a higher interest rate.

Early Payment of A Mortgage
Of course, everyone wants to pay their mortgage off as quickly a possible. Before taking a mortgage, make sure you check the terms on pre-payment as they can be quite substantial.

How Much can I Borrow?
This will depend on a variety of factors your lender will discuss with you. This includes your gross (before tax) income, living expenses, credit rating and more. Different lenders will provide different amounts called GDS (Gross Debt Service Ratio). This basically means the amount you are looking to borrow, cannot exceed a particular percentage of your income (monthly/annually).
Be extra cautious of this too, it’s always better to live UNDER your means. There are other small expenses that add up when buying a home (we’ll do another blog on this separately). As of 2018, our rules in Vancouver changed. Now first time home buyers must show they can afford a 2% rise in interest rates above the mortgage rate they qualify for, or the Bank of Canada’s 5 year benchmark rate (whichever is higher).

Who should I choose?
I’m glad you asked! This is a question we wish was MORE common. Millenials are known for sticking with their existing bank, assuming it is the best rate. However, just like purchasing any other goods, you should always shop around for the best rate. By not doing so, over the course of your mortgage, you could be spending $1,000’s you’re not needing too!
Just avoid these little outfits called ‘Mortgage Investment Corporations’ (MIC’s). They’ve got a nasty name in big cities like Vancouver as they offer financing to those who would traditionally be turned down by regular lenders. It sounds good until you see the interest rates in the double digit realm!! 

Pre-Approval
We always recommend a pre-approval. This is the process of visiting lenders before hand and having them provide you with a pre-approval amount for a mortgage. This drastically helps you stay within your budget and know what kind of price range you are able to shop in. It will also help you when purchasing your home- that you have finance already covered, a growing problem in home purchasing. You’re also not locked into a pre-approval, if interest rates go down, you can redo the process and hopefully obtain a cheaper rate.
Remember, if your life circumstances change, e.g. one person loses their job, this could affect the pre-approval so always keep your lender up to date of changes.




Recommendations
Throughout the ENTIRE home buying process, we work with particular Mortgage Brokers, Home Inspectors, Notaries/Lawyers etc. Who specialise in First Time Home Buyers. We have relationships with these particular people simply because we trust them to look after our clients best interests and to genuinely help you in buying your first home. If you have your own preferred choices, that’s totally fine. But if you need a helping hand with reputable professionals, we have got you covered!
Weirdly enough we actually LOVE this process and understand it’s a first for you. When we’re given the opportunity to represent a first time home buyer we are always there to hold hands. As a first, this can be nervous at times and confusing. We offer 24 hour availability to our clients, so call us WHENEVER you need to. 1am, that’s cool…….. 6pm…… Yup! We’re here to be of service and walk with you through this process! Communication is literally the key to making this a smooth process so we encourage it!
Check out some of our other blogs for more simple breakdowns on other aspects of the process. We’re open to calls,texts and email too, so reach out with any questions you may have.

Vancouver First Time Home Buyers, speak soon!

Jay Mcinnes
jay@mcinnesmarketing.com
T: 604.771.4606

Ben Robinson
ben@mcinnesmarketing.com
T: 604.353.8523