You will need to consider whether or not you are more comfortable with a fixed monthly or biweekly payment. Or, whether or not you should take the risk of a variable or adjustable rate that may save you money, but may also cost you more money if rates rise. Normally, the interest rate for a variable rate mortgage is slightly lower.
Consideration needs to be given to where interest rates are at the time of this book’s printing because they are at affordable, low levels. Will interest rates drop much in the future? Who knows what will occur with rates. Conservative buyers often choose a fixed rate mortgage at these low-rate levels because they want the security and comfort of knowing that their monthly or biweekly mortgage payments will be the same over the term of their mortgage.
If you choose a variable rate mortgage, consider being qualified or approved for the higher fixed rate, just in case rates increase because you don’t want to be “house poor.” In other words, you don’t want to be in a situation where you are short of cash for discretionary items or have trouble meeting other financial obligations such as vehicle payments or credit card bills due to the fact that too large a portion of your income is being spent on home-related expenses (mortgage, property taxes, maintenance, and utilities).
Some lenders make it mandatory that you qualify for a higher fixed rate term. Be careful and budget conservatively in anticipation of a potential interest rate increase. Speak with a mortgage professional for the details and qualifying rules related to your situation.
1.10 Convertible mortgage
A convertible mortgage is a variable-rate or short-term (e.g., 6 to 12 months) fixed-rate mortgage that can be converted to a longer term fixed-rate mortgage (e.g., three, five, seven, or ten years) at any time during the term. If you would like to take advantage of lower rates on short-term or variable mortgages but feel that interest rates may rise, the convertible mortgage offers you the ability of being able to convert to a longer term fixed-rate mortgage. Usually these are closed mortgages as opposed to open mortgages. Again, be mindful of the difference in the mortgage payment when you convert, and budget accordingly.
Plan ahead and be prepared. Speak with your mortgage professional and ideally your lawyer to understand the terms, conditions, restrictions, and options you may have with your mortgage.
2. Getting Pre-Approved for a Mortgage
How much you can afford based on lender underwriting criteria, and how much you feel comfortable spending can be two different numbers. A good starting point is to find out what you are qualified to borrow based on lender underwriting ratios. This normally begins with completing a mortgage application with a bank, a lender, or through a mortgage broker.
2.1 Obtain your credit report
Before you apply for a loan, it is a good idea to obtain a copy of your credit report and check it to make sure that it is accurate. There are two main credit reporting agencies: Equifax Canada Inc. (www.equifax.ca), and TransUnion of Canada Inc. (www.transunion.ca). Contact either company to obtain your credit report.
You establish a credit file when you borrow money and pay it back. Your credit file details how you use credit and when you make payments. The information in your file is based on information given to the credit bureaus by creditors such as credit card companies and banks. Your credit report will show your payment history.
On your credit report you will notice an R or I preceding a number (e.g., R1, R2, I1, I2). The R indicates revolving credit such as a credit card, and an I means installment credit such as a vehicle loan or student loan. The number indicates the time you take to pay the minimum amount due. For example, R1 or I1 means that you have made at least the minimum payment (or more) when it was due. R3 or I3 means you are 60 days behind the due date. A higher number is not good because it means you have been even later with your payment obligations.
Your credit report will also give you a credit score, known as the “Beacon Score” if it was obtained from Equifax; or “TransRisk Score” if obtained from TransUnion (e.g., 580, 630, 800). For simplicity, we will refer to it as your “credit score.”
In the case of the credit score, the higher the number the better. Lenders and insurers have minimum credit score numbers in relation to down payment requirements and debt ratios. Having and maintaining good credit is important. Items that are used to calculate your credit score include your payment history (i.e., whether or not you make your payments on time), length of credit history, amounts you currently owe relative to your credit limits, number and frequency of new credit inquiries, as well as the type of credit loans you have (e.g., vehicle loans, credit card balances, lines of credit).
The lender will look at your credit report and credit score to determine the risk. If you have a credit score lower than 600, this will affect your ability to acquire a high-ratio mortgage with less than a 20 percent down payment. If your down payment is from non-traditional sources (e.g., a gift from family), the mortgage insurer may require a credit score of 650 for a high-ratio borrower with a loan value greater than 80 percent. Many variables are considered; the lender will look at the strength of the deal, especially if there is a co-borrower with a good credit score. Visit CMHC (www.cmhc-schl.gc.ca) for an outline of the criteria along with recommended credit scores for a variety of situations.
If you are obtaining a mortgage with other borrowers, the lender will look at each person’s credit score. If one of the borrowers has a low score, it may affect the terms of the loan.
Occasionally, there are errors in your credit report. Mistakes could include credit history that isn’t yours or inaccurate reporting of bill payment. Any inaccurate information or error may be used to calculate your credit score, which could be a problem for you. If you find any errors, you will need to contact the credit bureaus in writing. If you have any documents that can prove or support your situation, send the credit bureaus a copy with a written explanation. This could take a few months to investigate and resolve. Credit bureaus will correct false information only. If a situation occurred where you missed a payment due to a circumstance, you can ask that a comment be included on your credit file explaining the situation (e.g., credit fraud or identity theft). This may (or may not) be taken into consideration on your credit score. Your bank representative or mortgage broker may be able to provide guidance or assistance with respect to contacting the credit bureaus and remedying any errors efficiently.
Be careful when shopping for a mortgage not to trigger multiple credit checks, as your credit score on your credit report may be adversely affected by the number of credit check requests occurring — especially over a short time span. It could be interpreted as you opening many accounts due to financial difficulties and taking on too much debt. When working with a mortgage broker that shops the mortgage market on your behalf, request that only one credit check is performed and that this same credit report is used for all the lenders.
If you have no credit history, it is important to establish one because the lender will have no information to assess the risk. Consider obtaining a credit card, but make sure that you make timely payments. You will need to do this several months prior to applying for a mortgage to ensure that a period of time has passed in order to create a credit history.
If you need to repair and improve your credit history, it will take some time. Your credit score is weighted towards your most recent performance; however, historical information, positive and negative, stays on the file for many years — the number of years varies depending on the item (e.g., bankruptcy, judgment) and the province or territory. Set up methods to ensure that your bills are paid on time; timely payments will improve your credit score. Consider automatic payment plans. Try to keep balances low on credit cards. If you can afford it, double up on your minimum required payments.
