One of the reasons why people in Canada can afford to have their own houses is a well-developed system of mortgage lending. You can get a mortgage loan (mortgage) under main condition that acquiring real estate will play a role of collateral. A person who has taken a mortgage loan is obligated to make regular payments during amortization period, including actual interest of the bank and balance of the debt. The amortization period is usually established for a period of 25 years. Before real estate purchase, it is recommended to obtain the prior consent of the bank to issue you a loan. Since you already know about the value of property, which you can purchase and the amount of down payment then you know the loan amount. Referring to the bank, you can get the prior consent of the bank to issue you a loan at a certain percentage of bank interest. Bank guarantees this percentage up to 90 days or until the deal is done, if it comes first. If at the time of transaction closing, when the buyer becomes the legal owner of a particular real estate, interest rates increase – this prior consent protects the buyer from possible rate increasing. If interest rates went down to this moment, the buyer will receive a correspondingly lower percentage.
If you buy a real estate in Canada for the first time, you can pay only 5 % of purchased property total cost. However, there are numbers of limitations. First, you must be an employee and get sufficient stable income. In other cases the bank will not issue you a loan at 95 % of purchased property cost. For example, if you work on contract or run your own business, the bank will not issue you such a loan. Also, the bank can refuse to issue a loan if the value of purchased real estate is more than 300 thousand dollars. But even if you can get a loan for a formal 95% cost of purchased property, it is better to make the first installment at 25% or more. This will allow you to save on insurance in case of insolvency as well as on interest payments to the bank during loan repayment term.
Another important factor is the choice of mortgage depreciation period. You can choose 5, 10, 15, 20, 25 or 30 years as depreciation period. The most popular period is 25 years. The shorter the period is the lower amount of bank interest you have to pay. However, monthly payments will be higher. Accordingly, a longer depreciation period will make monthly payments lower, but due obligatory bank interest payments you will pay for your house more than with a shorter depreciation period.
In a case that the buyer has an opportunity to pay off the loan before the established term, it is recommended to get an open-end loan. When taking an open-end loan a buyer is able to repay part or the entire amount of the loan at any time without penalty. Open-end loan is usually short-term – from six months to one year. Due to the fact that open-end loan provides greater freedom and flexibility, bank interest rate on this type of loan is higher than in case with closed-end loan. If the buyer has taken a closed loan, but wants to close it before established term, he will be obliged to pay a penalty. When applying for a loan you should also choose the repayment schedule. Typically, the buyer has the opportunity to make bank payments once a month, once every two weeks and once a week.
Jackie Holfsman for http://www.pm-consultinggroup.com/ with assistance from Prepareforcanada.com portal for listing Canadian mortgage rules and explaining Canadian housing market in detail.