also have the option of working with a mortgage broker — an independent licensed mortgage professional not directly employed or tied to one individual bank or lending institution. Depending on licensing, independent mortgage professionals are known by a few titles (e.g., mortgage broker, mortgage agent). For ease of clarity, an independent non-bank representative and non-bank mobile representative will be called a mortgage broker.
Most mortgage brokers work with a number of financial institutions, including banks, trust companies, insurance companies, and even private lenders. Mortgage brokers work on a commission basis. Their goal is to get you the best deal — a combination of interest rate and terms and conditions. Typically, the mortgage process with a mortgage broker involves you providing him or her with financial information (similar to what you would give to a bank representative) that he or she translates into a mortgage application. The mortgage broker will also need your permission to obtain your credit report. Most lenders will take the broker’s credit report into their system (normally only one credit report is required); however lenders have their own “stale date” periods when they consider the credit report not usable, and a new one must be acquired. Discuss this with the mortgage broker in advance to minimize inquiries on your credit, which could affect your credit score.
Mortgage brokers understand the underwriting policy of the lenders, and generally know in advance how the lender will evaluate your application. His or her job is to put together your application, complete with the required financial information and documents, and present it to several prospective lenders. Once the mortgage application and data collection has been completed, a mortgage broker can shop for your mortgage using technology.
Your application can be sent electronically to a number of lenders, all of whom have the opportunity to review your application and determine if they will make a mortgage offer, and what kind. These individual lenders understand that other lenders are also reviewing and evaluating your application at the same time. If you look good on paper, the lenders will want your business.
Once all the mortgage offers are back (usually within 24 to 48 hours) you and your mortgage broker can review the offers and decide which mortgage is best for you. This allows you to select a mortgage product best suited to your individual financial needs.
Some lenders offer “performance” benefits to mortgage brokers, which can be a benefit to the home buyer. These same lenders assess the mortgage broker’s volume of written mortgages, combined with their default and cancellation rate. When a mortgage broker acquires this status, he or she has the discretionary capability to give rate discounts below what is given to others.
Normally, as long as you are considered a good or “A” borrower, there is no additional out-of-pocket cost for the mortgage broker’s service because he or she is paid by whatever lender you choose. Having said this, it is still recommended that prior to using the services of a mortgage broker you ask up front if there are any fees that you will need to pay for his or her services. More complicated or difficult mortgages, especially if private lenders are involved, may involve paying a mortgage broker fee. Get everything in writing.
Experienced, good mortgage brokers are knowledgeable about the products offered by most banks, trust companies, insurance companies, and private lenders, and are able to recommend a variety of different mortgage options for your consideration. Most mortgage brokers are very motivated and work hard to get their clients a good deal.
3.2 Mortgage term and interest rates
You will need to decide on both your amortization period (time frame to pay off the mortgage) and your mortgage term. Most first-time buyers choose a longer amortization (e.g., 25 or 30 years). Amortization length is usually the easy decision.
The term (or time frame for which you borrow the money at the interest rate you’ve agreed to) can be more difficult to decide upon. The shorter the time, the lower the interest rate and the greater the risk, as upon renewal, rates may have increased and it could cost you more to pay off your mortgage. With a low-interest rate environment, and the concern that rates may rise at some point in the future, many first-time buyers decide to lock in their interest rate for a longer term (often five, seven, or ten years), giving them the comfort and security that their mortgage payments will remain unchanged for a longer time frame. The attractive lower interest rate with shorter term mortgages comes with greater risk. You will need to determine your own risk tolerance and ability to carry and qualify for a higher rate mortgage upon renewal, if interest rates increase.
Regardless of which term you choose, and especially if you want a shorter term, some lenders, especially with respect to high-ratio borrowers (and depending on your credit score) will mandate a pre-approval using a longer term interest rate. Some lenders use an average of the five major Canadian banks’ five-year posted interest rates to qualify a borrower. Other lenders use a five-year discounted variable rate. It depends on whether you are a conventional or high-ratio borrower, and what your credit score is. It varies and is up to the lender to decide. Of course, this plays a part in the underwriting criteria that a lender uses to determine the mortgage amount it will pre-approve. Your mortgage professional will discuss the criteria specific to your situation.
4. Plan Your Budget
Most first-time buyers have never experienced the costs associated with owning and maintaining a home and, for the most part, referring to mortgage amounts and numbers in the $300,000 to $400,000+ range can be a little intimidating and frightening. Of course, outside of your housing costs and potential other monthly liabilities (e.g., vehicle loan, student loan, credit cards), you also need to budget for day-to-day living expenses such as food, transportation, insurance, gas, clothing, entertainment, and savings.
Set up a budget that includes all of your anticipated living expenses in advance. Factor in what you expect to pay each month for mortgage, taxes, utilities, monthly strata or condominium/maintenance fees where applicable, and all other anticipated living expenses. Try using your budget for a few months.
You can use Worksheet 1 to help you create a monthly budget. This way you will be able to track your spending and determine, prior to committing to a certain mortgage amount, how comfortable you will be. It will also enable you to decide if there are expenses or items that can be eliminated to reduce your spending (e.g., entertainment or travel).
It is not recommended that you become “house poor” and max out on credit cards or loans in order to make your monthly debt commitments — this is neither healthy nor fiscally responsible. Owning a home and building equity is a long-term plan that requires discipline and sacrifice. However, the long-term results are future security and building net worth. Many buyers decide to purchase for less than their maximum pre-qualification amount; they build in a “cushion” for unexpected expenses or life in general. This conservative approach is certainly something to consider. Remember: Short-term pain (and discipline) fosters long-term gain.
Worksheet 1: Monthly Budget
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