For a mortgage arrangement that's best for you, it's wise to understand your options before signing any documents. This section will help you make more informed decisions to suit your financial situation and tolerance for risk. 

	What is a Mortgage?
	Mortgage Qualifications
	Conventional & High Ratio Mortgages
	Mortgage Options
	Mortgage Refinancing

What is a Mortgage?

It's a contract that guarantees a property (home, cottage or other edifice) as collateral for a loan to purchase the property. Although you have possession of the home, the lender maintains a position on the home title until you pay off the mortgage. If you can’t repay it, the lender has the legal right to repossess your home.

Mortgages have a total amortization period of typically between 15 - 25 years for a new high ratio mortgage and up to 30 years for a new conventional mortgage. The mortgage must be repaid within the amortization period.

The amortization period is broken down into terms (each term usually running from 6 months to 5 years) for which the interest rate applies. When the term expires, the mortgage is renewed for another term at a new interest rate.

Mortgage payments are split between interest and capital reduction. Most of the initial payments go to interest costs, with only minor capital reduction. Interest costs can be significantly reduced by paying off the mortgage as quickly as possible (i.e. reducing the amortization period). Example: A $100,000 mortgage at 8% amortized over 20 years incurs interest costs of $98,804 versus only $44,769 if repaid in 10 years! 

Mortgage Qualifications

In addition to the current mortgage stress test for buyers with less than a 20% down payment (mortgage insurance needed), effective January 2018, Canada’s federal banking regulator (OSFI)  expanded its  stress test to borrowers with a minimum  20% down payment (i.e. mortgage insurance not needed).

Note: As this is a federal regulation for banks only, provincial lenders such as Credit Unions are not subject to this stress test.

All bank borrowers must now qualify for a mortgage at the greater of the 5-year Bank of Canada benchmark rate or the original negotiated rate plus 2 percentage points. (It's basically a minimum two-point rate hike).  Thus, a borrower could need upward of 20% more income for the same mortgage amount in 2017.

(TDS) Example: In 2022, a family with a $100,000 annual income and 20% down payment at a 5- year fixed rate of 2.83% amortized over 25 years can afford a home worth $726,939.

In 2023, they will need to qualify at 4.89% (i.e. 5-year benchmark rate) and can afford a home worth $570,970 - a difference of $155,969 (less 21.45%)

If a homebuyer doesn’t pass the new stress test, there are three options…

1. They can either increase their down payment to pass the stress test
2. They can decide not to purchase the home
3. They can add a co-signer onto the loan who has income as well

Mortgage renewals done with another bank lender must also qualify under the revised stress test standards because they require new underwriting.

Typically, mortgage payments, property taxes and heating costs must be less than 32% of your gross yearly family income, if both spouses own the home. Or, if one spouse owns the home, that the other has guaranteed the mortgage. If you have any personal loans outstanding requiring fixed monthly payments in addition to mortgage debt, your Total Debt Service (TDS) ratio must not exceed 40% of gross family income. To support future mortgage payments at potentially higher interest rates, borrowers qualifying for a mortgage amount must use the greater of the contract rate or the interest rate for a 5-year fixed rate mortgage when calculating the GDS and TDS ratios.

Mortgages also incur up-front administrative expenses including appraisal fee ($250 range), lawyer’s fee/disbursements, land transfer tax (generally, about 1% of purchase price), insurance, land survey fee (approx. $500) and closing adjustments on property taxes, insurance and heating costs;

Mortgage Funding Options

1) Home Buyers' Plan Withdrawals: First-time buyers (or those who haven't owned a home in the previous 5 years) may withdraw up to $35,000 tax-free from their RRSP as a down payment on a new principal residence ($70,000 per couple if both spouses have a RRSP). The withdrawal must be repaid within 15 years and the RRSP must be active for 90 days before the signed purchase agreement.

2) Lifelong Learning Plan Withdrawals: If returning to school full time, you may withdraw up to $10,00 a year over 4 years to a maximum of $40,000 tax-free from your RRSP. You must repay the money in equal installments over 10 years.

3) Effective June 20, 2022, CMHC's Green Home program is now CMHC Eco Plus. Now you can apply for a partial premium refund of 25% if you are CMHC insured and have an energy efficient  home. To qualify, your home must meet the eligible building standards and/or the EnerGuide and EnerGuide GJ ratings.

4) The New FHSA:

• A new registered account to help qualifying first-time home buyers save for their home.

• Contribute up to $8,000 per year, up to a lifetime maximum of $40,000.

• Combines the tax benefits of a Tax-Free Saving Account (TFSA) and a  Registered Retirement Saving Plan (RRSP), where your contributions are tax-deductible and any qualifying withdrawals from the account are tax-free.

Mortgage Types: Conventional and High Ratio

Conventional mortgages typically require a minimum down payment of 20% with an amortization of up to 30 years.  Individuals may refinance up to 80% of the property value less any outstanding loan amount. Mortgage insurance is not required, although it may be prudent to have in case of unforeseen issues such as unemployment, sickness, etc.

High ratio mortgages enable an individual to borrow up to 95% of the purchase price or property appraised value. However, the individual must be creditworthy and pay a mortgage insurance premium based on the loan size which can range from .05% of the loan to 2.75%. Effective July 9, 2012, the maximum amortization period is 25 years and lender insurance is only available on new mortgages under $1 million.

Effective February 15, 2016, new regulations increase the minimum down payment for high ratio mortgages from 5% to 10% for the portion of a home's value from $500,000 to $1 million. On a $700,000 home, the down payment increases from $35,000 (5% of $700,000) to $45,000 (i.e. 5% of $500,000 + 10% of $200,000).

Down payment rules for mortgages on properties selling for less than $500,000 are unchanged at 5%. The minimum down payment for more expensive homes is also unchanged at 20%.

Mortgage Options

There are three key renewal components:

• Amortization: the number of years to pay off your mortgage ranging from 10 to 30 years for a conventional mortgage and 25 years maximum for a new high ratio mortgage, effective July 9, 2012. Note, the amortization period is broken down to a series of term agreements (see below).
   
• Term is the length of the current mortgage agreement. A short term (6 months to 2 years) is more appropriate when interest rates are high and expected to fall at term renewal. A long term (2 + years) is better when current rates are low and can be ‘locked-in’ for a long time.
   
• Short term mortgages (6 months to 2years) are attractive if interest rates are likely to fall in future. Longer term mortgages (typically 3- 5 years) lock you in at a fixed rate/payments to provide more ‘peace of mind’. Generally, the longer the term, the higher the rate you’ll pay. At the end of the term, the entire balance may be paid off without penalty, or the mortgage can be renewed for another specified term;
   
• Fixed rate mortgages lock-in your interest rate and monthly payments for the entire term. Variable rate mortgages offer a lower interest rate than fixed but are potentially more risky. This is because interest rates will move up or down over the term even though monthly payments remain the same. This means, if rates fall, more of each payment goes to capital reduction for a faster amortization period. If rates rise, more goes to interest costs, lengthening the amortization period. Consequently, this options suits individuals who feel that rates will fall or remain stable and are less risk averse.
    
• Open mortgages permit capital pre-payments or unlimited monthly payment increases anytime during the term or a total discharge without penalty. If you are expecting a future cash windfall, this may be your best option. Closed mortgages offer a lower rate, but typically restrict your annual pre-payment to 10% to 20% of the original loan without penalty. Monthly payment increases are available at the lender's discretion;
   
• Mortgage payment options. Accelerated bi-weekly payments reduce debt significantly faster than monthly payments because it results in the equivalent of an extra month's payment yearly against capital (i.e. 13 payments vs. 12);
   
• Reverse mortgages enable seniors 60 years old and over to borrow money to a maximum of 40% of their home equity, although at a higher rate than a conventional mortgage or Line of Credit.  No payments are required on the outstanding loan balance until the home is sold or the owners move out. At that time, both the outstanding balance and accumulated interest costs are due and paid from the house sale proceeds.
   
• Portability privileges, if available, enable you to move your current mortgage to your new property should you sell;
   
• Mortgage pre-approval is important because it lets you know the amount you can borrow from your lender who typically will hold the interest rate for a minimum of 30 days. This maximizes your property shopping focus and purchasing flexibility;
   
• Title insurance protects you against frauds, forgeries, etc. that can affect the legal ownership of the property you have just purchased.
   
• If you sell your property and the buyer assumes your existing mortgage, you may still be liable if he/she defaults on payments. Ensure you are released from the personal covenant if your mortgage is assumed;

Mortgage Refinancing

Refinancing typically occurs when interest rate are declining. You apply for a new loan at a lower interest rate that pays off the current higher rate loan. Savings are generated because new loan payments are lower than current monthly payments. [Note: you also have the option of maintaining your current monthly payments to reduce total amortization  period/interest costs and build equity faster.] Effective July9, 2012, qualified individuals with a conventional mortgage may refinance up to 80% of the property value less any outstanding loan amount.

Refinancing viability depends on how long you plan to own the house, how much lower the new loan interest rate is, closing costs (typically about 2% of the new loan) and equity position in the home.

To calculate monthly savings, obtain the new loan interest rate and related monthly principal and interest payments (click here for mortgage calculator). Then subtract your current monthly principal and interest payments. Example: Assume a hypothetical refinancing with an existing 8% mortgage and a $3,000 refinancing cost. Reducing your rate by a full percent to 7% has a short 25 month payback period. If you live in the  house longer than 25 months, refinancing saves you money. If you plan to sell before that, keep your current mortgage.