It is indeed a rare occurrence when a buyer pays its condo, in one single payment. Most of them must obtain a mortgage loan to finance their purchase. What are the criteria and conditions to get a mortgage loan? Whom should you get it from? Banks, credit unions or other sources? What are the policies of the major financial institutions in this market? What are the limitations when planning the financing of your new property?
You must, without fail, address these questions. To achieve your final goal of obtaining a mortgage loan, it is necessary to know your options and to prepare a sound financing plan.
The term of the loan
Either with your broker or a lender, you must first choose the term of the loan. It can be made payable at any times or spread out over a period from three months to many years. At the end of the term, you will need to renegotiate the interest rate of the loan, which is a standard condition of renewal of the loan agreement with your lender. If you cannot reach an agreement with your lender, you will be compelled to obtain a new loan with another financial institution.
Keep in mind that notwithstanding the type of loan, you must choose its amortization period which could be as long as 30 years. This will allow you to know precisely the amount of your payments on a weekly, by-monthly or monthly basis, as the case may be, to reimburse the entire loan. However, whichever period of amortization is chosen, you will nevertheless have to renegotiate the terms and conditions of the loan at the expiration of the term, and more particularly, the interest rate.
The following are the various types of loans available:
THE STANDARD OR INSURED MORTGAGE LOAN
Financial institutions offer standard hypothecs, which means loans that are guaranteed by a mortgage registered on your unit, up to a maximum of 80% of the sale’s price. These loans benefit from low interest rates, which may be a fixed rate for up to 10 years.
If you do not have, on hand the funds necessary to make a down payment equivalent to 20% of the value of the immovable, you will then have to consider the possibility that your lender will obtain, on your behalf, loan insurance from Canada Mortgage and Housing Corporation (CMHC) or with a private insurer Sagen (formerly named Genworth). You will then be able to finance your purchase up to 95% of the sale’s price. It goes without saying that a hypothecary insurer will charge a premium, the payment of which will allow your financial institution to lend to you the amount you wish to obtain. This premium varies between 0.50% and 4.25% of the price paid, and can be added to the amount of your loan.
In theory, it is not possible to reimburse the capital before the expiry of the term, and the interest rate is fixed for its duration. The closed loan is appreciated for its stability, as if interest rates increase, the borrower has the assurance that the amount of its payments will not fluctuate. On the other hand, the lender may ask for the payment of a penalty if you reimburse the capital of the loan before its due date.
Open loan (for a maximum term from three months to one year)
Regarding an open loan, it will allow you the option of paying it, partially or in totality, or to transform it into a closed loan at any time, without charges or penalties. This type of financing gives you greater flexibility if, down the road, you sell your property or if interest rates go down. But to benefit from the advantages of an open mortgage loan, you will pay higher interest rates than those charged for a closed mortgage loan.
Mortgage loan margin
You may also choose a margin of credit, also secured by a mortgage on your immovable instead of a standard mortgage loan. This method of financing is very advantageous, because it allows you to reimburse your loan, partially or in totality, without being penalized. You also have the possibility of paying only the interests, on a monthly basis, without having to pay any amount whatsoever towards the reduction of the capital. This product is extremely flexible and is more and more popular.
Generally, a margin of credit cannot exceed 80% of the market value of the property. Even though the interest rate is usually based on the prime rate, to which is added a premium of a few percentage points, it is subject to the interest rates variations of the market.
WHAT YOU SHOULD KNOW! The cost of the premium for mortgage loan insurance is calculated based on the size of the down payment in relation to the requested loan. This premium can be paid immediately by the buyer or added to the mortgage amount.
WHAT TO KEEP IN MIND: Only buyers who make a down payment of less than 20% of the purchase price of a property must purchase mortgage loan insurance, which protects the lender against default.
CONSULT THE PUBLICATION: Purchase and sale of a condo: Everything you should know, at pages 109 and following.