Mortgage Options In Canada: How to Get the Best Mortgage Product For You
Published on 26 Sep 2022
When it comes to selecting the perfect mortgage for you, it’s essential to realize that there’s much more that goes into it than just choosing between a fixed or variable rate mortgage and finding the best available rate. There are plenty of mortgage products available that you need to be aware of to ensure you find the one that best fits your needs. In this blog, we’ll tell you what those different options are and provide you with the tips and information that you need to help ensure you are getting the best mortgage product for your needs.
Let’s get started!
Canadian Mortgage Products Options
With mortgages, there isn’t a one size fits all solution. There are a multitude of different mortgage options that you should be aware of going into the buying process so that you can make an informed decision and pick one that is ideal for you. Here we’ll dive into each of the various mortgage products:
A blended rate mortgage is an excellent option for people who already have a mortgage and want to access equity without having to refinance or pay a prepayment penalty. With a blended rate option, you are combining your existing mortgage rate with the rate from a new mortgage –– there are options to blend the rates and extend the term or keep the term the same.
Hybrid mortgages combine two or more types of mortgage loans. For example, one portion of a hybrid mortgage loan could be a variable rate option while the other portion is a fixed rate. One thing that you should understand before choosing the hybrid mortgage option is that if the terms do not match, it can be challenging to switch to another lender.
Mortgage Plus HELOC Product
A home equity line of credit (HELOC) is a revolving line of credit that uses your home’s equity as collateral for the loan. HELOCs allow you to borrow up to 65% of your home’s value as long as the mortgage plus the HELOC does not exceed 80% of the home’s value.
For example, if your home has a value of $1,000,000 and you had a mortgage loan of $500,000 (50% of the value), you would be eligible for a HELOC of $300,000 (30% of the value). If the HELOC were any higher, it would exceed the 80% limit.
With a HELOC, you can withdraw the entire eligible amount at once or opt for smaller amounts throughout the mortgage term. HELOC products use a variable rate tied to the lender’s prime rate and will fluctuate with it.
This is a mortgage plus HELOC product where for every dollar in principal you pay down on the mortgage, you receive that amount toward the HELOC portion of the loan. With a STEP mortgage product, the amount registered against the home is often higher than the loan amount that was initially issued (typically upwards of 125%). This allows the lender to issue you more money if needed without having to refinance you, however, it can make obtaining access to another loan or switching to another lender difficult.
Purchase Plus Improvements
If you’re buying a fixer-upper or just a home that needs a few improvements to make it your own, then a purchase plus improvements option could be the right choice. A purchase plus improvements mortgage allows you to roll the costs of immediate home renovations into the amount of your mortgage. To qualify for this program, you must obtain quotes from contractors and a guarantee that the renovations will be complete within a timeframe approved by the lender. Once renovations have been completed and approved by the lender, they will release the funds to pay the contractor directly.
Business For Self Programs
Obtaining mortgage financing can be more difficult for self-employed individuals as they don’t have the traditional income or documentation required from a salaried person. Business for self programs are for self-employed earners to help them obtain mortgage financing approval.
Stated Income Programs
Some self-employed earners deduct much of their income when tax time rolls around. Stated income programs allow these self-employed earners to use annualized bank statements, invoices, or other proof of verifiable income to give a more accurate depiction of their income earned in a year for the approval process.
Cash Back Program
Down payments and closing costs can add up quickly, causing many Canadians to put all or a large chunk of their savings toward it. The Cash back program provides you with a lump sum of money (1%-7% of the mortgage amount) upfront when you move into the property. The amount received from this program gets rolled into the mortgage payment and is fixed to a rate that is slightly higher than the standard term.
Non-B20 Compliant Program
To qualify for a mortgage in Canada, you must pass the stress test. This type of mortgage loan product allows you to forgo the stress test. Instead, lenders will qualify you based on their contract rate at the time. Because this is an alternative mortgage product, lenders typically require you to pay a 20% down payment.
Net Worth Programs
This program is for borrowers who do not have the net income required for mortgage approval but have considerable wealth and liquid assets.
New To Canada Programs
If you’ve immigrated to Canada within the last five years and don’t yet have well-established credit or employment, this program allows you to purchase a property with a downpayment of as little as 5%. Qualification requirements for this program will differ for those considered permanent residents and those who have non-permanent with legal authorization to work in Canada (visa).
This mortgage product is for non-permanent residents that don’t work in Canada and are looking to purchase a home here. American residents can often qualify for these mortgages with a 20% down payment, while other countries must pay a downpayment of 35% to qualify.
Owner-Occupied Rental Programs
This program is designed for individuals purchasing a rental property with 2-4 units where they will be occupying one of them. The owner-occupied rental program often qualifies as an insured mortgage with lower down payment requirements.
Mortgage loan programs are available if you are purchasing a rental property with up to four units (five and above is considered a commercial property). Rental programs are typically uninsured, meaning a downpayment of at least 20% is required.
Multiple Rental Programs
Select lenders offer special financing programs when you have up to four or five (depending on the lender) rental properties. The multiple rental programs offer competitive rates and terms to help you pay off your mortgage faster. Just like the rental program, multiple rental programs are usually uninsured, requiring a minimum downpayment of 20%.
If you already own a single-family home with year-round access and occupy it for at least a portion of the year (or have a family member living there rent-free), you may qualify for a second home mortgage product. Some lenders offer mortgage loan options with as little as a 5% down payment with these products.
Qualifying for a vacation home mortgage differs from standard or secondary homes. Most lenders offer vacation home mortgage products that require a 20% downpayment. However, restrictions may apply based on:
- Property type
- Location and access
Construction and Vacant Land Financing
Plenty of financing options are available if you’re purchasing vacant land to build your dream home. Mortgages for vacant land typically require larger down payments and higher interest rates due to there being no collateral (the house) for the lender to use other than the land itself.
A construction mortgage will allow you to finance the land and the property being built on it. This type of mortgage typically has multiple draws throughout the build process.
2nd Mortgage Options
A second mortgage is a loan typically secured against the available equity in your home. Second mortgages are usually short-term interest-only options, meaning you are only required to pay the interest on the loan for a specified period of time before needing to pay off the principal of the loan.
Rates for a second mortgage are higher than a standard mortgage but less than a credit card or other high-interest debt, making it a great option to consolidate debt or access equity at a lower rate.
Getting The Best Mortgage Product For Your Needs
Now that we’ve covered the most common types of mortgage products available, let’s dive into the factors you should consider when deciding which one is best for you.
Determine Your Plans For The Property
Knowing what you will do with the property once you purchase is critical in identifying what mortgage product will best fit your needs. Before choosing your mortgage product, you should determine if you plan to:
- Live in it long term
- Convert the basement into a rental unit for extra income
- Rent out the property while you travel a few times a year
- Rent the property as a rental property now or in the near future
Determine Your Long-Term Goals
Determining your long-term goals is also vital in deciding what mortgage product is best for you. How long do you plan to stay in your home? Do you anticipate any significant life changes that might affect your living arrangements in the not-so-distant future? These are important factors in determining if you should apply for a variable or fixed rate mortgage.
If you plan to rent, do you wish to use the income to buy other investment properties in the future or do you plan to move into the property at some point?
Research The Area And The Loan Options Available
It’s important to realize that not all lenders will provide mortgage loans in certain municipalities or rural areas. They may also not have mortgage products for specific property types such as student rentals, mobile homes, or homes/condos under a specified square footage.
Be Realistic About Your Risk Tolerance
Identifying the level of risk you can handle is a key part of the mortgage buying process. The type of mortgage product you should select will vary depending on if your cash flow is tight vs. if you have wiggle room, allowing you to handle increased payments if the market fluctuates.
Determine If Renovations Are Needed
If you decide that your home needs a little work done to make it your own, you may want to consider a cash-back mortgage product to use the funds you receive to pay for the renovation. Another option is to go with a purchase plus improvements program mortgage to roll the renovation costs into the total mortgage amount.
Understand How Prepayment Privileges Can Benefit You
Understanding prepayment privileges and how they can benefit you is an extremely important factor when selecting your mortgage. Payment privileges vary depending on the lender and mortgage product, so ensure you understand what they are, especially if you plan to move, change your contract, or pay off your loan principal with lump sums.
Know The Difference Between A vs. B Lenders
Depending on your situation, you may not qualify for an A lender, but not to worry, plenty of other options are available. Alternative lenders provide:
- A more flexible debt servicing ratio requirement
- Higher loans
- Longer amortization schedules
- Smaller monthly payments (possibly)
Use A Broker
Your best bet to find the mortgage product that is best suited for your needs is to work with a broker! At Pineapple, our brokers are mortgage experts. They will perform a complete needs assessment to identify what type of mortgage product you require, then shop the market to find
a lender offering the ideal mortgage for you.
Give us a call today to learn more about the mortgage options available, and how to choose the one that’s perfect for you.
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