Navigating the Mortgage Process: A Comprehensive Guide to Mortgages and Homeownership

Think you're ready to buy a home? Congratulations! Buying a home is one of life’s most stressful but rewarding decisions. By knowing and understanding the mortgage process from start to finish, it can help lower any stresses.

Over the past year, we’ve seen interest rates rise, resulting in lenders tightening up on borrowing policies. The 2023 market has an influx of individuals looking towards alternative lenders for lower mortgage rates.

If you’re an aspiring homeowner and feeling stressed with the mortgage process, this guide will cover everything you need to know, from what a mortgage is to how it works, in addition to tips for navigating the mortgage process.

What is a Mortgage?

A mortgage is a large loan that is used to purchase property. Since most people looking for a home are not able to buy it outright, you must secure a mortgage from a financial institution or private lender to help pay for the home. When buying a home, a down payment is required up front, which is deducted from your mortgage amount.

A mortgage is a legal agreement between the borrower and lender, where you agree to pay back the loan over time with interest. Once you have secured a loan, the lender has the right to take the property at any time you cannot make the monthly mortgage payments. The principal amount is the total amount borrowed, the interest rate is what the lender charges to borrow and the amortization period is the loan time frame. This usually ranges from 15-30 years but, most commonly at 25 years.

Mortgage Terminology

Before you begin looking around at different lenders, you should understand the terminology and definitions of the most important terms surrounding mortgages. Let’s go through some key words to know.

A Lender: A bank, mortgage broker, financial institution, credit union that funds the mortgage.
Interest Rates: Based on the prime rate from the Bank of Canada, is the cost of borrowing. They vary depending on which type of mortgage you choose, but each mortgage payment includes paying down the mortgage principal and interest added on. The sooner you pay a mortgage off, the less interest you will be paying.
Down Payment: The amount of money you have set aside to put down on a home. This large sum of money will be deducted from your mortgage and shows you have the ability to save and pay monthly payments. The minimum down payment varies depending on the purchase price of the home.

5% down on homes up to and including $500,000
10 % down on homes between $5,001,000 and $999,999
20% on homes $1,000,000 and above

Amortization Period: The length of time it takes to pay off a mortgage in full. There will be several different “terms” within an amortization period, and the payments may increase or decrease several times throughout the amortization period.
Mortgage Term: The general length of a mortgage agreement. Most terms are 5 years, meaning that every 5 years, you either have to renew your mortgage with the same lender, shop around for a different lender, or pay off the remaining balance. This process repeats itself every term until the amortization period ends.
Payment Frequency: How often you make payments towards your mortgage. Typically, payments are made monthly, which is 12 times a year. You have other options to pay semi-monthly, bi-weekly, weekly, accelerated bi-weekly, or accelerated weekly. The more often you pay, the better chance you have of paying off your mortgage sooner.

Types of Mortgages

When it comes to a mortgage, it's important to understand the different mortgage types and the pros and cons.

Fixed interest rate mortgages:

Where your interest rates remain the same throughout the amortization period.

Pro: It offers stability and consistency to your budget. You can plan accordingly and can predict your future financial situation better
Con: If the Bank of Canada lowers interest rates, you won’t get to take advantage of those lower rates until the renewal period.

Variable interest rate mortgages:

Where your interest rates fluctuate depending on the market conditions and Bank of Canada.

Pro: When the rates dip, you would be paying less per month
Con: If the rates go up, you could end up paying more than expected and having higher monthly payments

You will also need to decide between a closed or open mortgage. Most homeowners go with the closed-term mortgage but if your income varies each month, sometimes the open mortgage is the best option

Closed-term mortgage:

A type of mortgage where you cannot make additional payments on the mortgage. It usually offers a lower interest rate, but offers less flexibility in the fact you can only make one monthly payment

Open-term mortgage:

A type of mortgage where you are able to make multiple payments on your mortgage per month. If you have a job where your monthly income fluctuates, this may be the better option. It provides flexibility but often comes with higher interest rates.

As we mentioned earlier, the CMHC has minimum down payment requirements to avoid paying mortgage loan insurance. When it comes to mortgage insurance, it is split into two categories:

Conventional Mortgage:

A type of mortgage that requires at least 20% of the purchase price as a down payment. This type of mortgage does not require mortgage insurance. Since this option is less risky for a lender, typically the interest rates are lower but require a larger sum or money down up front.

High Ratio Mortgage:

A type of mortgage that does not require at least 20% of the purchase price. Since this makes the mortgage more risky for the lender, you pay mortgage insurance, and the interest rates are usually higher.

How does the mortgage process work?

Since the mortgage process can seem daunting and confusing, we’re going to break it down step-by-step in this section so you can have a clear understanding of what to expect when you begin the mortgage approval process.

Pre-Approval: The first thing to do before anything else is get a mortgage pre-approval. You are going to submit an application to a lender that outlines your income,assets and debts. The lender will provide you with a pre-approval letter stating how much you can borrow. Now you can start house hunting!
Home search: Now that you know your budget and have a better idea of what you can borrow in terms of limits, you can begin working with a real estate agent to find the perfect home that fits your needs and stays within your budget.
Offer and Acceptance: Once your find a home you like, you will make an offer and an agreement will be done up
Mortgage Approval: Once an agreement has been signed by both parties, the lender begins the mortgage process. They gather all necessary documents and financial information and perform a property analysis.
Completing mortgage paperwork: You will then fill an application and authorize a credit report. Once this is finalized, the lender will prepare confirmation of approval by sending you a “commitment letter” outlining the details of the approval.
Review and commitment: Once the letter has been received by you, take careful time reading it over and be sure to carefully read over the terms and conditions.

What factors play into me securing a mortgage?

There are many factors that will determine whether one is eligible for a mortgage or not. Lenders take everything into consideration from your credit score, to your outstanding debts. Some important factors include:

Credit Score: It is a representation of your financial health. It shows your credit history, how consistently you pay off your debts, any collections, and is represented in a number out of 900.
Debt-to-Income ratio: This is the ratio of your monthly debt payments to your monthly income. Lenders that you have the ability to cover not only your mortgage payment, but also your monthly debt payments.
Down Payment: The minimum down payment amount varies depending on the price of the home you are wanting a mortgage on. 5% is required for homes priced up to and including $500,000, 10% if required if the home is anywhere between $500,001-$999,999, and 20% is needed for homes anywhere after $1,000,000. The down payment is subtracted from the mortgage amount and will improve your approval odds with the more down payment you have.
Employment History: Lenders need to see that you have a stable source of income from a legitimate business. Typically, lenders prefer buyers who have been at the job for a minimum of 2 years, although this varies per lender. Be prepared with your pay stubs and usually a letter of employment.

Struggling to come up with a down payment?

Consider our Enhanced Homebuyers Program. Check out the 3 blog posts here for more information.

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Fill out this form below if you are interested in learning more about nesto: Mortgage Diagnostic. So, are you ready to navigate the world of mortgages in London, ON? Don’t forget to join the Locorum community today and start earning rewards on your home purchase. You're not just buying a home; you're investing in your future. Let Locorum and the Santa Sells Houses Real Estate Team help you make the most of it.