NEW TO CANADA MORTGAGE

To qualify for a new mortgage in Canada, the first thing you have to do is to build a credit rating. Strong credit ratings will enable you to get amazing mortgage rates. This will help you save thousands of dollars that would otherwise be spent paying high interest. For you to get a better credit rating, you should consider doing the following:

• Apply for a credit card, use it and pay off debts on time.
• Pay all your bills on time and in full. This includes your utilities, telecommunication services and rent.
• Apply for small bank loans and pay them on time.
• Prove you have a dependable source of income. You can do this by staying with one employer for a long period.

If you lack a strong Canadian credit rating, you can use credit ratings from commonwealth countries. These countries include Australia, the United Kingdom and the United States.

If you lack a strong Canadian credit history, you will have to provide specific supporting documents that prove you have built credit in other ways. The key documents you will be required to provide include the following:

• Landed immigrant status or valid work permit.
• Proof of having an income. This can be through pay stubs or employment contracts.
• Proof of at least 12 months of making rental payments. You may need to provide a letter of confirmation from your landlord.
• Regular payments on your bills including telecommunications, utilities, and insurance. You may be required to provide a confirmation letter fromyour service providers.
• Months of bank statements.
• International credit report.
• Reference letter from recognized financial institutions.
• Documented regular savings for not less than 12 months.

To streamline the application process for a new mortgage in Canada, you should gather all of these documents in advance.

While building your credit, it is wise to start saving up money to put down as a down payment. This is because if you have a new permanent resident status in Canada, you will be required to put a down payment of not less than 5% of the total buying price of your target home. For non-permanent residents, the required down payment is 10% of the buying price.

It is also good to note that certain rules apply irrespective of your residency status. For starters, if you are buying a home priced at $500,000 or more, you will be required to pay a minimum down payment of 5% and 10% for any amount over $500,000.

Putting down a down payment below 20% of a home’s buying price means you are taking out a high-ratio mortgage. A high-ratio mortgage requires mortgage default insurance. The insurance protects the lender against default. You will not need default insurance if your down payment is 20% or more.

Case Study

If you are buying a home priced at $350,000 and you pay a 10% down payment ($35,000), here is how you calculate the premium.

Step 1: Mortgage Amount

$350,000 – $35,000 = $315,000

Home price Down payment Mortgage amount

Step 2: Insurance Premium

$315,000 X 2.40% = $7,560

Mortgage amount Insurance premium % Insurance premium

Step 3: New Mortgage Amount

$315,000 + $7,560 = $322,560

Original mortgage Insurance premium New mortgage amount

There are three providers in Canada offering mortgage default insurance through the New to Canada Programs. They are Genworth Financial, Canada Guaranty and CMHC. CMHC is more popular, but all three providers charge the same premium rates.

When you need a new to Canada mortgage, you will have to choose a mortgage provider. You can work with a lender (credit union or bank) directly or use a mortgage broker. Mortgage brokers are a safe bet because they will shop around to help you find the best products in the market and the best mortgage rates. Brokers don’t give mortgage loans. They simply negotiate with lenders on your behalf. Make sure you select a mortgage broker that is approved by the newcomer program you plan on using. For example, if you prefer CMHC, the broker should be approved by CMHC.

The amortization period is the time it will take for you to pay the entire mortgage off. Starting 9th July 2012, the maximum amortization period in Canada for a mortgage that requires mortgage default insurance is 25 years. The good news is you can get a much longer amortization period of up to 30 years if you put a down payment of 20% or more. The beauty of a longer amortization period is you will make lower, more manageable monthly payments on your mortgage. This is because the loan is spread out over a long time frame. The drawback is getting a longer amortization period leads to you paying more in interest.

You have to be careful when choosing a mortgage term. This is the time you plan on committing to a single mortgage rate and a single set of conditions from the lender. Mortgage terms can be between 6 months and 10 years. The most common mortgage term is 5 years. Once the term is over, you can negotiate new terms and conditions. There can be multiple mortgage terms throughout the amortization period. Select your mortgage term carefully because expensive prepayment penalties apply if you break the term early.

When applying for a newcomer mortgage in Canada, the last decision you have to make is to decide on the type of mortgage rate you want. You have two options: fixed and variable rates.

With a fixed mortgage rate, the mortgage rate and payments remain the same throughout the mortgage term. With a variable mortgage rate, your mortgage rate (your payments) will be attached to a prime rate and might fluctuate throughout the mortgage term. Whether you need a fixed rate or a variable rate is all up to you. However, your choice should be based on your tolerance for risk and if you think the interest rates will either go down or up in the near future.