Getting a Mortgage in Canada

Getting a mortgage in Canada is very easy these days. Mortgage means getting a loan as big as taken by real estate builders. But before taking a loan the burrower must be aware of key elements of the contract:

• Term: Term means the period of time in which the lender gives a mortgage on a fixed rate of interest. Ex: 8-year term.
• Amortization: It is the period of time, which can be taken by a borrower to pay off mortgage in full. Ex: 20-year amortization.
• Open Mortgage: This allows the borrower to pay off full mortgage at any time.
• Closed Mortgage: With the closed mortgage the ability of borrower to pay off mortgage early is limited.
• Variable Rate Mortgage: This is the mortgage in which during the term interest rate fluctuates.

The person is qualified for the mortgage equivalent to three times family’s gross annual income with the condition that the person’s must have a steady employment, decent credit history and very little debt. The banks qualify a person for the mortgage by calculating two ratios. First ratio is (GDSR) Gross Debt Service Ratio which is calculated be adding monthly mortgage payment + 1/12th of annual property tax + $75 for monthly heating costs and then this number is divided by Gross Monthly Income, if it works out to be less then 32% then the person is qualified for the mortgage.

The second ratio is Total debt Service Ratio (TDSR) is calculated by adding property taxes+ mortgage payments+ heat + lines of credit + cost of car lease + loans + minimum payment on credit card then this figure is divided by gross monthly income, and if this ratio turn out to be less then 40% then the person qualifies for the mortgage.

For calculating gross monthly income, banks generally consider basic salary like hourly salary 40 hours per week. And if the person in addition to this earns commission, overtime, bonus, tips etc then he will have to proof that he is getting them consistently for 2-3 years. Then only it will be included in gross monthly income.

For self-employed person to qualify for loan, banks will look at the average of net taxable income for 2-3 years. For this Notice of Assessments from the Canada Customs & Revenue Agency has to be submitted with bank.

Also the person must have a good credit history of min 5-6 years. If a person consistently late in making credit card or loan payments or even forgetting payments of departmental store credit card, then the person will have hard time in getting a mortgage.

If the person is giving 5% as down payment then the lending criteria of the bank will be strict but if it is 50% then they will adopt flexible policies. The most important is the real estate used as security. Banks will approve only highly marketable securities like in subdivision or large urban areas. One should have a pre-approved mortgage before buying a property.