Best Mortgages in Canada | What is a Mortgage Underwriter?

August 3, 2021 | Editorial Team

A mortgage is a loan for buying a home. Most people are not financially able to buy a house outright, so financial institutions provide loans. The recipient makes monthly payments for an extended period of time until the loan is repaid. Typically ranging from 15-25 years in duration.

When buying a home, your bank can most of the money. You will still need a down payment. Depending on the purchase price, you need to put at least 5% down.

What Mortgage Can I Afford?

But how do you know how much you can afford? This depends on a few things. The first thing to consider is your total household income. This combines your annual income with the others on the application. Monthly household expenses are also factored in.

This includes credit card expenses, car payments, and more. Then there are expenses connected to buying and owning a home. This includes heating, property taxes, and perhaps condo fees. A great tool to use when figuring this all out is a mortgage affordability calculator. We have our own calculator for mortgage to help you.

You will need to start by gathering the relevant information required. Once added, the calculator will give you information on how much of a mortgage you can afford. It can also help with amortization, land transfer tax, and more. The entire process should take less than five minutes to do.

Mortgage Calculator

Mortgage calculators are one type of calculator you might find useful. The other is the mortgage affordability calculator.

You will need to input some information to get started. Ideally, you would have an idea around the length of years you want to pay off your home. You will also need to know the amount you are applying for and the interest rate. Is it a 5 year, a 5 year fixed, or a different term? Perhaps an open mortgage?

It’s helpful to know your annual property taxes and insurance for your new home. These numbers can be approximate to give you a ballpark idea. Once you have submitted the information, a monthly payment is presented. The entire process takes about five minutes.

Go with a bank that offers excellent prepayment privileges. This will help you pay off your home sooner. Most lenders provide added payments on your mortgage throughout the year. No penalties are added.

While monthly payments are significant, bi-weekly and weekly payments can be better. They help to pay off your mortgage much sooner. You end up paying more off the principal amount and less on mortgage rates.

What are the Best Mortgage Rates?

One more thing to consider is interest rates. Do you want fixed or variable mortgage rates? A fixed rate allows the rate to stay the same throughout the term of the mortgage. This is different from a variable mortgage rate, where your rate can change. It fluctuates depending on Canada’s prime rate. Most times, you’ll pay less with a variable rate than a fixed. But it can increase, depending on how the Canadian economy is doing.

Canadian mortgage rates are posted daily and can differ from each financial institution. These numbers can be found online. Some banks offer different mortgage rates based on amortization length. Longer mortgage terms have higher mortgage rates. This is because they offer predictability. While shorter terms only offer a specific rate for a smaller amount of time.

For example, 10 year term mortgage rates will be higher than that of 1 year terms. If you are a risk-taker, then a short-term rate is the way to go. You will save money, but with risk. Once your term ends, you may only have high mortgage rates available to you.

Mortgage Penalties In Canada

When you are buying a home, it is easy to focus only on the mortgage rate. While rates do matter, there are other important factors to consider.

If there is a good chance you could move, you will want a portable mortgage. “Portable” means you can take the mortgage with you without paying a costly penalty.

Speaking of costly penalties, this is something to be aware of when signing up for a mortgage. Not all lenders calculate their penalties the same way. Be sure to ask about penalties before signing up, so you are not blindsided.

Finding a Mortgage Broker

There are thousands of mortgage brokers across Canada (see also brokers in Ottawa), ready to help you! A good broker helps clients find the best terms, mortgage rates, and conditions. The best part? Mortgage brokers get paid by their lender, so they offer their services to you for free.

Comparing banking rates can be time-consuming. A broker can review your situation to help you find the best rate. They also take care of all the paperwork needed for mortgages. As well, a mortgage broker helps to explain the ins and outs of mortgages to their clients.

When looking for a broker, ask friends and family first. You can pool your network on social media, too. If you have no choice but to start from scratch, think of doing a search on the internet.

Mortgage brokers must be licensed in the provinces that they are securing mortgages in. They must take courses to prepare them for their job. Ensure to go with a licensed mortgage broker. Ask for their credentials before working with them. This will protect your best interests in the long run.

Do I Need Mortgage Protection Insurance?

Mortgage protection insurance is like life insurance attached to your mortgage. It covers the rest of the amount owed on your dwelling if someone on the account becomes disabled or dies.

If you opt for this, lenders add premiums to your mortgage payment. There are many pros and cons when it comes to this type of insurance. The obvious “pro” is it offers a layer of protection should something occur.

One negative is your payout shrinks as you pay off your house. That means you’ll be paying the same premium amount, but what you can get back lowers over time. Premiums can also increase over time even when your mortgage payments lower. It may also be challenging for someone to get approved for coverage. Especially those who suffer from health issues.

Sometimes it makes much more sense to buy life insurance instead. Go with a policy which will not only cover your home but other areas in your life. In some cases, life insurance premiums can cost less than protection insurance.

What are the Most Popular Mortgage Terms?

Amortization: the time it takes to pay off your house in full. This is calculated by continued and equal payments.

Appraisal: an estimated property value assessed by an “appraiser.”

Closing: the last step within the process. This involves the purchaser, vendor, and lender. A meeting between the three is scheduled. This is when money and title ownership legally transfer over.

Closing Costs: all costs needed in your home’s financing. These include appraisal fees, transfer taxes, and legal fees. This can add up to 1.5% of the home’s selling price.

Default: when a borrower fails to make their monthly mortgage payment.

Delinquency: when a borrower does not make their monthly mortgage payment on time.

Down Payment: the amount you put down for your home. This is the difference between your home’s purchase price and the mortgage amount.

Equity: the difference between a homeowner’s house value and how much they owe on their home.

Mortgage Term: the length of time in a mortgage agreement that an agreed rate is set. Mortgage terms typically range from 6 months to 10 years. A 5-year mortgage term is the most common. This differs from amortization, as this signifies the time it takes to pay off your mortgage in full.

Principal: The amount owed on a mortgage. This does not include paid or accrued mortgage rate interest.

What is a Mortgage Underwriter?

In Canada, mortgage underwriting is the process a bank uses to approve or decline a mortgage. An underwriter gathers information so lenders can evaluate your application. They present your application to lenders. There is a specific set of guidelines used when gathering the application.

There are four key factors used during this consideration process. They include:

Household Income: can your income support current financial obligations and a new mortgage?

Credit: do you have any outstanding debut? How well have you managed credit cards and loan debt? What does your credit score look like?

Down Payment: Money saved to place down on your home. It can also include equity from an old home to invest in your new house.

The House Itself: can the current property be used as collateral?

An underwriter assesses the four above factors. In fact, they act as a support system for your application. If one factor is weak, the other three can help your application “stand” up to approval. If one or more are not strong elements in your application, you can risk getting declined.

If one lender declines your application, it can be re-submitted to another lender.

The Bottom Line

They say a home can be the biggest investment in a person’s life. That makes it no wonder there are so many elements to consider when taking on a mortgage. From the house itself to how much you can afford, and more. Not to mention penalties and interest rates!

There can also be many obstacles along the way when purchasing a new house. Still, once you are settled in your home, it is all worth it in the end.