Mortgage Misconceptions

In this time of multiple information sources and slowly recovering economies, there are many misconceptions about mortgages.

My clients ask me great questions, and many of these have inspired this newsletter.

Allow me to clear up some mortgage misconceptions in the points below:

Misconception
A. There are no more 40-year amortizations

Fact
Within the mainstream lender community, the maximum amortization available is 35 years for purchases where the down payment is less than 20-25%.

However, some lenders are still offering 40-year amortizations with purchases (or refinances) where the down payment is higher than 20-25%.

Misconception
B. You can no longer buy property with zero down payment. The minimum down payment is now 5% or even 20-25%.

Fact
If your credit is strong enough, your income to debt ratios are acceptable, many lenders will allow you to borrow the 5% down payment from a bank, from them, or from a line of credit, and approve you for 95% financing. In this way, you can still buy property with zero down payment.

A down payment of 20-25% is usually only required when purchasing a rental property. When purchasing a principal residence, a 5% down payment is all that’s required as long as your income and credit are solid.

Misconception
C. It doesn’t matter where the down payment comes from, and it’s none of the lenders’ business.

Fact
Since the down payment is your investment in the property, and the lender is making it possible for you to own this property through their money, it’s absolutely their business.

In addition, the increase in mortgage fraud in Canada over the last few years has caused lenders to be even more cautious. Since they’re loaning you the money, they have every right to ask for verification of the down payment source.

It actually makes a big difference in the approval process if the down payment is from your own savings vs. borrowed or gifted to you from an outside source.

Misconception
D. In the mortgage market the variable rate and the fixed rate are linked to each other, and both are influenced by the same source.

Fact
The variable rate and the fixed rate are actually influenced by completely separate sources.

The variable rate is influenced by the Bank of Canada rate, which is decided by the Minister of Finance. This is posted on the Bank of Canada website, at: www.bank-banque-canada.ca.

The fixed rate is influenced by the bond market. You can also find information about the bond market on the Bank of Canada website, at: http://www.bankofcanada.ca/en/rates/bonds.html.

Misconception
E. If you have a line of credit secured against your property, you don’t have a mortgage.

Fact
When money is secured against a property, it is a mortgage regardless of how it’s structured or what it’s called.

Furthermore, unless people are excellent money managers, a secured home equity line of credit mortgage (often called a ‘heloc’) can be even more risky than a traditional mortgage in that it allows people to spend large amounts of money with interest-only payments.

With a traditional mortgage, you have far less flexibility for spending, yet it forces you to be disciplined by way of making principal and interest payments (not just interest-only payments).

Misconception
F. A completely open, Home Equity Line of Credit (a ‘heloc’) is easier to qualify for than a traditional, closed-term mortgage because it’s based solely on the equity in your property.

Fact
Although the equity in your property is a key part of getting approved for a ‘heloc’, your income and debt ratios are equally important.

In fact, a ‘heloc’ is usually even harder to qualify for than a closed-term, traditional mortgage because it’s a wide open product. Since the increased flexibility of a ‘heloc’ poses a greater risk for lenders, this risk is mitigated by making the qualifying guidelines that much tighter.

Misconception
G. You can still assume a mortgage without qualifying for approval.

Fact
While some lenders are still allowing people to assume or take over someone else’s mortgage, lenders now insist that you qualify completely in order to do so.

Therefore, the qualification process to assume a mortgage is now just as stringent as the process necessary to qualify for a brand new mortgage that you obtain on your own.

Because interest rates have dropped significantly over the last couple of years, most Borrowers today prefer to just obtain their own mortgage rather than assume someone else’s.

Misconception
H. Once you get pre-approved by a lender, you’re guaranteed approval when you make an offer.

Fact
While getting pre-approved is an extremely smart thing for Borrowers to do (please see my newsletter from last month), it does not guarantee approval once you make an offer on a property.

What getting properly pre-approved does allow you to do is to hold an interest rate for 2-4 months while you calmly search for the right property, identify any income or credit challenges early-on so that you can address them, and know your purchasing guidelines so that you can negotiate an offer with confidence.

Misconception
I. CMHC is the only mortgage insurer in Canada.

Fact
There are now 3 mortgage insurers in Canada, and all of them have different programs and policies that may work to your advantage:

-CMHC (www.cmhc-schl.gc.ca/en/index.cfm)
-Genworth
-Canada Guaranty, formerly AIG (www.canadaguaranty.ca)

Misconception
J. Mortgage insurance is a terrible thing that only benefits the lender, and it’s an insult to have to pay it.

Fact
The existence of mortgage insurance is the very thing that allows you to buy property with a mere 5% (or even 0%) down payment. Because mortgage insurance protects the lender, your lender then feels more comfortable about lending you the mortgage money.

Even in cases where your down payment is 20-25%, the lender may only feel comfortable approving you for financing when they are backed by the mortgage insurer. Again, the more comfortable the lender feels, the more easily you’ll get approved for the financing you want.

In addition, mortgage insurers have many different policies that benefit Borrowers in unique situations.

These include and are not limited to people who are new to Canada from other countries, self-employed for short or long periods of time, credit-challenged, or those with commission or non-typical income sources.

Because the mortgage insurers are usually behind the scenes, Borrowers are often times unaware that their approval was made possible solely by way of the mortgage insurer’s policies.

Misconception
K. You can avoid paying any mortgage insurance at all by putting a down payment on the property that is 20-25% of the purchase price

Fact
While this is true in most cases, sometimes unique situations will warrant the lender including mortgage insurance in your financing (see point above).

However, in these cases where the down payment is 20-25% or more, the lenders will charge a much smaller mortgage insurance premium than they would if your down payment was only 5%.

Misconception
L. Anyone can be a cosigner

Fact
Unless the cosigner is going to be living in the property with you, that person needs to be an immediate family member (such as mother, father, sister or brother). Lenders are far less likely to accept a cosigner that is a friend or a non-immediate family member.

I hope you found this information helpful, and I welcome any additional questions you have.

Warm Regards,

Ms. Anat Stapleton
Mortgage Broker Extraordinaire