Mortgages in Canada
Canada is a lovely place to live. It boasts one of the lowest crime rates, has a world-renowned education system and has some of the best universities. Most healthcare services are paid entirely for through tax; Canada offers free healthcare.
So it’s a popular destination to move to, but is it easy to get a mortgage? In this article, we will be covering the intricacies of acquiring mortgages in Canada and we’ll also be attending to some frequently asked questions.
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The situation in Canada
As a non-resident, getting a mortgage in Canada is entirely possible. In fact, you don’t even need citizenship to purchase a property. Canada’s open-door policy grants non-residents the same ownership rights as Canadian citizens.
Lenders, however, expect that you don’t spend more than 32% of your gross income on housing-associated costs. These include property taxes, mortgage payments, and, if applicable, condominium fees. Additionally, you shouldn’t spend over 40% of your gross income on debt payments such as car loans and credit cards.
Mortgage criteria in Canada
Homebuyers are typically expected to pay around a 20% down payment on the purchase price. However, if you’re a low-risk buyer, then you may very well be able to get deals even better than that, up to 95% LTV. There’s always a pre-approval process before you can secure such terms.
Lenders consider various criteria when assessing whether you’re eligible for a Canada mortgage loan or not. These include but are not limited to the following:
- Your credit history in a credit report.
- Your income and whether you’re self-employed or employed by a company.
- Your age and whether you’re a first-time buyer.
- The type of property you wish to purchase.
- Whether you have enough for a down payment or not.
To consider the above, among other criteria, lenders will need the following documentation from you:
- Your government-issued identity document.
- Proof of address of your current residence.
- A six-month income statement or equivalent.
- A list of your assets and debts.
- Contact information of your current employer and your employment history.
Loan Corp can help with putting together all you’ll need to secure your loan and to get a walk-through of the mortgage pre-approval process. Our team of mortgage professionals is ready and willing to help.
Contact us at 0808 301 9509 or fill out this online form for a quote.
Mortgage terms
The typical Canadian mortgage contract is five years. However, it can be renewed repeatedly, typically until 25 years. Mortgages can also be as short as six months in certain situations. Remember that a longer amortization period will cost you more in interest.
Payment frequency
In Canada, how often you pay is up to you. As long as you make your mortgage payments at the time you agree upon, then there shouldn’t be an issue. You can opt for:
- Weekly payments: Your monthly payment is multiplied by 12 and divided by 52.
- Accelerated weekly payment: Here, it’s divided into four.
- Bi-weekly payments: In this case, it’s multiplied by 12 and divided by 26.
- Accelerated bi-weekly payments: Here, it’s divided by two.
- Monthly payments: You pay once each month.
Non-resident speculation tax
A non-Canadian citizen will have to pay a tax of 15-20% of the purchase price, known as a non-resident speculation tax. Although, this will vary from state to state. Quebec, for instance, has no such tax.
Remortgaging
Residents can get a remortgage of up to 80% of the property value. However, this can be higher depending on the equity you own. Non-residents can expect around 65%. Although, it’s not impossible to get better terms.
Getting a second mortgage for a property means you’d have fulfilled strict criteria, and the lender considers you able to afford two mortgages.
What if I have bad credit?
We know that some prospective borrowers may not have the best credit histories. But this doesn’t necessarily prevent them from getting a mortgage. Although, as you know, a history of poor money management and credit problems will make it harder (you can also attempt to improve your credit score).
Certain lenders may accept you, but this could come at the cost of higher mortgage interest rates. Sub-prime lenders may be able to assist, but unfortunately, they cannot help non-residents. Private lenders can also help, but they’ll likely only do interest-rate loans and require a minimum down payment of 35%.
So, for example, for a property worth $500,000 (£450,900) in Canada, you’ll need to place a payment of $175,000 (£157,800).
Mortgage types
Various mortgage types are available in Canada from mortgage lenders. It’s up to you to decide, based on your circumstances, which will suit you best. We’ve spent time explaining each to you to make this decision easier.
Interest-only mortgages
Interest-only mortgages are unique. Instead of paying both the mortgage amount and the interest, you’ll be paying the loan’s interest each month (or each week, as agreed upon).
You’re left to pay back the entire loan balance at the end of the mortgage term. This is a fantastic option for investors who have their money wrapped up in specific investments that they’re waiting to mature. It is, of course, a riskier choice.
Self-employed people may also prefer this kind of payment system as they may experience periods of low income and others of high income.
Repayment mortgages
Repayment mortgages require the borrower to pay both the interest and the capital of their loan after several fixed instalments. These are over quite a few years, usually up to around 25 years.
Although initially, you will spend most of your payments on interest (depending on the agreement), this later shifts to a focus on mortgage capital repayments.
1. Fixed interest rate mortgages
A fixed rate remains the same during the period of the mortgage agreement. Buyers can benefit from these mortgage agreements during times of low interest. You won’t be subject to increasing mortgage interest rates should Canada’s Prime Rate increase.
Although, in that same breath, you won’t benefit from decreasing interest rates either with fixed-rate mortgages.
2. Variable interest rate mortgages
Variable rate mortgages are those that align with the Prime Rate of Canada. This is not as stable a choice as a fixed interest rate, as you’ll be subject to interest rate fluctuations. But it does have the benefit of potentially benefiting from decreasing interest rates.
Other mortgages in Canada considerations
After you’ve decided what kind of mortgage rate interests you, you’ll want to consider whether you want an open or a closed mortgage. Open mortgages let you make further payments to pay them off your loan sooner.
A closed mortgage limits this, although it offers a lower interest rate as a benefit. You’ll usually incur prepayment penalties if you pay above a certain amount, as set out by your lender in the mortgage agreement.
Can you buy to let?
Foreign investors can buy to let in Canada. Bear in mind that there are quite a complex number of factors that’ll affect the deal you’re able to get, such as the size of the building. For instance, any building with more than five units is considered to be a commercial building.
The Canadian stress test
Canadian banks have to test every homebuyer in this way. It’s been introduced as a method of determining whether a buyer can afford their interest payments and mortgage. The test uses the customer’s mortgage interest rate + 2% or the Bank of Canada’s current five-year posted rate.
This stress test ensures that borrowers can continue their payments and handle rising interest rates.
FAQs
How are mortgages done in Canada?
Mortgages are available from mortgage lenders in Canada for both residents and non-residents with no restrictions. Getting a mortgage here is not unlike in other countries, where you’ll have to make a deposit of around 20% of the home’s purchase price.
How long is a typical mortgage in Canada?
Typically, homebuyers in Canada can get a mortgage term of 5 years. This is a very short term, but you can renew it for an additional five years, and so on, up to typically around 25 years.
Is it hard to get a mortgage in Canada?
It’s not difficult to get a mortgage in Canada as long you fulfil specific criteria (such as having a good credit history) and pass the Canadian stress test, which assesses whether you can make mortgage repayments. Ultimately, you won’t be able to get your mortgage faster than the process allows.
Contact us for mortgage advice
Are you looking for expert mortgage advice about mortgages in Canada? Search no further. Our mortgage team at Loan Corp is available for calls on 0808 301 9509. Alternatively, please fill out our contact us form for a quote now.