Getting a mortgage is often the largest financial commitment you will make.
Being ready for a mortgage involves a lot more than just qualifying for a loan. Because of the amount of money you borrow, and the time it takes to pay it back, getting a mortgage comes with certain risks. It’s important to know what these risks are and to be financially prepared for them.
This is true whether you work with a mortgage broker/agent or deal with the lender directly. But, if you do use a mortgage broker/agent, he or she can help you better understand these risks and how they may relate to you personally.
Below are some of the possible risks and how to manage them.
Will you be able to afford the mortgage?
Before shopping for a mortgage, take a close look at your situation – your finances, future plans and lifestyle – and consider how much debt you can comfortably handle.
Consider not just how much money you have today, but your financial position for the length of the mortgage. Ask yourself if you will be able to continue to make the full payments on time. Even if you can, consider how the payments will affect your spending money and your ability to deal with sudden or unexpected financial needs. Will you have difficulties making sure you have enough left for other things you need?
When deciding how much money you can afford to borrow, consider:
- Your current financial situation
- Your future financial situation
- How long you plan to own a home, have a mortgage or sell and buy a different home
- Any extra expenses you plan to incur (e.g. buying a car, starting a family etc.)
- The economic climate
- Interest rates
- The total cost of owning a home (e.g., property taxes, home repairs, condominium fees, etc.)
- How much your home may increase or decrease in value over time
- The potential for higher mortgage payments
- The risks of a drop in your income
- Your personal tolerance for debt and risk
How stable is your income and employment?
You may be able to afford a mortgage now, but your financial situation can change. Financial set-backs can happen at any time – not just when the economy is weak. Consider how you would manage if your income fell, your expenses rose and/or your mortgage payments increased. This is especially important for seasonal and contract workers. A decrease in pay or losing your job could seriously change what you can afford and your ability to pay back the mortgage.
Your income could fall and/or your expenses could rise if you:
- Start a family
- Change careers/return to school
- Assume caregiver responsibilities
- Have an income based on sale commissions, tips, bonuses or other incentives
- Lose your job(s)
- Get into debt
- Become ill or disabled, or get injured
- Run into business or legal problems
- Get divorced or separated
- Lose a spouse, partner or family member
- Depending on the type of mortgage you have, your payments could also increase if your interest rate rises, or if you have to renew your mortgage at a significantly higher interest rate.
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Have you planned ahead?
When faced with financial trouble, meeting your mortgage payments can be stressful – or even impossible – without prior planning.
Before shopping for a mortgage, you should find out what sources of income and alternative funding options are available to you, and develop a plan for making payments in hard times.
To make a plan for meeting your payments:
- Create a detailed budget for your household (including housing, food, utilities etc.)
- Build up emergency savings for mortgage payments, usually six months.
- Clarify what payment options are available in your mortgage contract (e.g., some mortgage providers’ give you the option of applying pre-payments you have made to a current payment that is due.)
- Investigate insurance products that may help you or your estate cover the mortgage if you become ill or disabled, get injured or die (e.g., disability insurance, critical illness insurance, term insurance etc.)
- Find out what tax credits you are entitled to.
- Ask your mortgage provider, broker or agent if a better interest can be offered when your current term ends.
- Know what employment and government benefits you’re entitled to.
- Know whether or not, and how, you can access any other funds or investments (e.g., money in your registered pension plan or RRSPs).
- Consider consulting a team of professionals, which could include a real estate agent, mortgage provider, financial adviser, accountant and/or lawyer.
Do you have a good credit history?
Your credit history determines your credit worthiness and your ability to get a mortgage. Lenders will ask to check your credit history to decide if they want to offer you a mortgage. But be careful not to agree to too many credit checks over a prolonged period of time – that could have a negative effect on your credit score as it is an indication that you’ve actively applied for new credit.
You can always get a copy of your own credit history and make sure it is complete and accurate. There are two main credit-reporting agencies: Equifax Canada Inc. and TransUnion of Canada . You’ll pay a small fee for this service.
How much does owning a home cost?
Owning a home costs more than the amount of the mortgage. When you purchase a home, there are closing costs, including legal and other fees such as home inspection, along with appraisals and land transfer taxes to be paid. Once the home is yours, there are moving expenses, property taxes, insurance, condo fees, home repairs, and so on. Make sure to include all of these expenses as part of the total cost when you are considering if you can afford a mortgage.
Will owning a home affect your other financial and life decisions?
Mortgage payments could limit your ability to manage other expenses. After making your mortgage payments, would you have enough money to also pay for the things you might need in the years ahead? You might need a vehicle, wish to travel, have children or add to your family in the future. Consider if a mortgage could prevent you from being able to manage other commitments or goals.
Do you understand your mortgage contract?
Like most legal contracts, a mortgage can be very complicated. It is important to know and understand what you are committing to and if it’s right for you. Before signing a mortgage contract, you need to be sure that you understand all of the terms and conditions. Read all of the information and ask questions if you don’t understand something. You may also wish to seek legal advice before signing a mortgage agreement.
In Ontario, mortgage brokerages, brokers and agents are required to disclose to you the material risks of your mortgage in writing and in plain language. You are also entitled to have at least two business days to review a mortgage disclosure statement before you sign a mortgage agreement with a mortgage brokerage, or before you make a payment under a mortgage, whichever is earlier.
What happens if you can't pay for the mortgage?
Not being able to meet your mortgage payments in full and on time can have serious consequences including penalty fees, default and even foreclosure. It is important to be aware of these consequences before taking on a mortgage.
If you cannot make your mortgage payments:
- You may have to pay late charges
- You will damage your credit rating. Having a poor credit rating will make it difficult for you to obtain loans and make certain purchases in the future
- Your mortgage may go into default and your mortgage lender may sell your home through Power of Sale to cover your debt, or become the owner through foreclosure.
- If through Power of Sale the lender has the right to sell the property to recover the money still owed on the mortgage. Depending on the circumstances, you may never get the home back. If the lender sells the home for a price that is more than what is left on the mortgage, extra money is given back to the homeowner. In the case of a shortfall, the owner will have to pay the difference. Also, it will be harder in the future to find a lender that will offer you another mortgage.
- If through foreclosure the lender gets a court order to take over the property. If this happens, all of the previous mortgage payments you have already made, all the money you have invested into the home and any equity (value beyond what is owed on the mortgage) in the home is lost.
Will your property value increase or decrease?
A home is often a good asset. But not always. The value of a home can go up or down. Decreases in value can result in losses of equity.
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Finding payment options that work for you
Mortgages can be paid every week, every two weeks, once a month or twice a month. Make sure that you can handle the frequency, timing and amount of the mortgage payments. Can you afford them and do you understand how they will affect the total cost of the mortgage? Having larger payments will let you pay off the mortgage faster and reduce the total cost of the mortgage. But make sure you can afford the payments, plus all of your other expenses. For more information on finding payment options that work for you read Paying for Your Mortgage.
The interest rate will also affect the total cost of the mortgage. Choosing a variable, fixed or convertible rate will have an impact. Ask yourself if the interest rate is reasonable for you and if you can afford it.
If the interest rate is variable, there is the risk that it might go up. Even if the rate is fixed, the interest rate can still increase when you renew the mortgage. Increasing interest rates can raise your payment amounts and can make the total cost of the mortgage much higher in the long run. Read more on what kind of mortgage should I choose?
Watch out for fees and penalties
Not all mortgages are the same. There are often fees and chargeable penalties included in a mortgage contract. Be sure to understand not only which fees and penalties may apply and when, but also how the amounts are calculated. Lenders have to provide you with information on fees and penalties.
A pre-payment is when you pay more than the scheduled payment amount or pay off the entire mortgage ahead of schedule. Pre-payments can help you pay your mortgage back faster, but most mortgages have rules and restrictions. Some don’t allow pre-payments at all. Depending on the mortgage, pre-payments can come with costly penalties. Make sure you understand the pre-payment privileges, rules and penalties included in your mortgage and whether they are suitable for you.
With some mortgages, the borrower agrees to continue to make payments for a specific period of time (“term”). Leaving a mortgage before the term has finished can lead to penalties and fees. The amount of penalties and fees depends on the lender and the mortgage contract.
Review the services that might be included in the mortgage agreement. Services usually come at a cost. It’s possible that you may not want all of them. Find out what the costs are, if some of the services are optional, and if you can cancel the ones you don’t want.
Administration & Discharge Fees
If you decide to exit a mortgage agreement, renew the mortgage with another lender or pay the entire mortgage amount early, you may have to pay for the administrative work needed to make the change. Make sure you understand these fees if you are considering changing lenders or exiting the mortgage.
Late Payment Penalties
Your lender may charge you fees and penalties if you are late making a mortgage payment. When these penalties apply and the amount charged depends on the lender. You should understand both the triggers and the amount of these penalties. Also, if you continue to make late payments, your lender may not want to renew the mortgage with you at the end of term. It’s always best to make your payments on time and in full.
Most mortgages allow home owners to keep the same mortgage contract and mortgage amount and have it transferred to a new home if they move. This is called mortgage portability. But, if your mortgage does not have a portability feature, your lender could charge a fee if you want your mortgage transferred to a new property.
Change in Use
Your mortgage might include an agreement on how the property can be used. There can be penalties or you might not be allowed to change how the property is used (e.g., changing your property from a residence to a place of business or a rental property).
Be prepared for renewal
The agreement with the lender is usually for a limited term (usually one, three or five years) and not for the entire length of the mortgage (i.e., the amortization period). At the end of the term, your mortgage will have to be renewed or paid out/discharged. There are no guarantees that the lender will renew your mortgage. And, the terms and conditions could change.
It is a good idea to contact your mortgage broker well before you have to renew. If you do not use a mortgage broker, be prepared to look elsewhere to negotiate the interest rate and other terms and conditions.
Be completely honest
It is important you are honest when you are applying for a mortgage. All of the information you give to a mortgage broker or a lender, including information on the mortgage application documents, must be accurate, complete and truthful. Errors in your application can easily lead to a mortgage that is not right for you. Misstating facts or providing false information in your mortgage application is illegal and can have serious consequences. Make sure you review everything carefully before signing.
Don’t become a straw borrower
Never pose as the purchaser of a home or apply for a mortgage for someone else. Applying for a mortgage that is for someone else is called being a “straw borrower” and it is illegal. You will end up being responsible for the mortgage, in trouble with the law and possibly sued by the lender. If someone asks or offers you money to apply for a mortgage for someone else, say “no”.
Say “no” to cash payments
Never make payments, especially cash payments, without receiving a receipt. For example, all payments for mortgage broker services should be made to the brokerage or company and not to an individual. And there should not be any surprise fees - you must be advised of these costs in advance and invoiced. If a mortgage broker, agent or sub-broker asks for cash or payment made directly to them, say “no” and contact the brokerage and the Financial Services Commission of Ontario (FSCO).
Think before using a mortgage to invest in something else
If you are being encouraged to take out a mortgage in order to invest into something, be sure that you understand all of the risks of the investment. Any investment involves a risk that you can lose some or all of your invested money. However, your mortgage loan will remain no matter what happens with the investment.
Beware of offers that are too good to be true
You may be approached with offers and services to help you save money on your mortgage. Be careful before agreeing to any plan promising you mortgage savings, especially if it sounds too good to be true. These plans can come with fees and charges that cost more than the promised savings. Also, your mortgage broker might be able to provide the same advice for free and your lender might be able to offer you the same savings by increasing the amount of your payments. When in doubt, ask another financial professional or mortgage broker for a second opinion.
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