Home Mortgages in Canada (500-1000 words, 5 references, 1 video)

What is a home mortgage?

A home mortgage is a type of loan utilized by individuals to get a house or apartment.Mortgages are
generally provided by banks or other financial institutions. The collateral for this loan is the home
itself that is purchased. This means if the the borrower cant make his/her mortgage payments on
time, the bank has a legal claim on the property. Regarding the term of payments, mortgages are
typically long-term with a maturity from 10 to 30 years,. Repayments usually can be in the form of
regular installments, on a monthly basis. Lastly interest rates on mortgages can be fixed or variable
and depends on the type of mortgage, and the borrower's credit score.

Types of mortgages ( insured -uninsured)

In Canada, there are 2 types of mortgages: insured mortgages and uninsured mortgages.

1. Insured Mortgages

An insured mortgage is applied when the borrower makes a down payment of less than 20% of the
buying price. In such low levels of down payment, lenders require mortgage insurance to protect
themselves against credit default (Non performing loans). The insurance is generally provided by the
Canada Mortgage and Housing Corporation (CMHC), Genworth Canada, or Canada Guaranty. The
cost of mortgage insurance will be added to the mortgage amount and will be paid through the life of
the loan.

2. Uninsured Mortgages

Contrary to insured mortgages, an uninsured mortgage occurs when the borrower can make a down
payment more than 20% of purchasing price of property.These mortgages are generally offered to
buyers with a strong financial wealth, who has good credit ratings. The cost of these mortgages may
be lower when compared to insured mortgages, as they carry less risk for the lender.

Home Mortgage Process Download mortgage video and mortgage calculator

The process of getting a home mortgage in Canada has the following steps,

1. Pre-Approval: The first step involves the lender’s assessing your financial situation, credit
score, income, and buyer’s ability to repay the loan. Pre-approval gives you a general idea
about how much you can borrow. (Loan to value)
2. Choosing a Mortgage Type: After first step , buyer should choose between an insured or
uninsured mortgage, depending mainly on the amount of down payment. Also interest rate
type (fixed or variable) is selected in this step.
 3. Making an Offer: Once the buyer find a home and make an offer to purchase, lender will
review the eligibility of the property, and may require an appraisal to assess its value.

4. Final Approval: If the lender approves the property appraisal report and buyer’s financials,
final mortgage approval is done. Mortgage agreements are signed and the closing costs are
paid in this step.

5. Closing: The last step is closing, which means mortgage funds are released, and ownership
of the property is transferred to buyer formally.

Video: https://www.youtube.com/watch?v=tgXZZyvbhVw (Canadian Mortgage Basics)

Mortgage Calculator: https://www.scotiabank.com/ca/en/personal/mortgages/mortgage-

calculator.html?cid=ps_aw_LEN_MortgageCalculator_1_LF_1_BNS-24-
098_0224_KWS&gad_source=1&gclid=CjwKCAiAxKy5BhBbEiwAYiW--
61cKeh2xGUZIGZDBQvopW3fK6C2FE82-2yvtJ8ABcBQzJCkuvaCVxoCe-0QAvD_BwE&gclsrc=aw.ds

New regulations for first home buyer (down payment, role of CMHC)

In Canada, there are some specific regulations for first-time homebuyers. Firstly, first-time
homebuyers are required to have a minimum down payment of 5% for properties priced up to
$500,000. If the home is priced between $500,000 and $1 M, the down payment increases to 5% for
the first $500,000 and 10% for the remaining part. Homes priced over $1 million do not qualify for
CMHC insurance.

Role of CMHC

The Canada Mortgage and Housing Corporation (CMHC) is an institution which plays a significant
role in facilitating homeownership for Canadians. CMHC offers mortgage loan insurance to lenders
and homebuyers.This insurance protects the lender in case of a credit default. The borrower pays an
insurance premium that is added to the mortgage balance.

Tax saving plans for home purchase(First Home Saving Account, Registered Retirement Saving
Plan, Tax Free Saving Plan)

There are several savings programs in Canada to help homebuyers save for their down payment:

1. First Home Savings Account (FHSA): The FHSA, the newest saving tool is introduced in
2023.This account allows first-time homebuyers to save for a home tax-free. Contributions
made to this account are tax-deductible as in the RRSP. Also if you are withdrawing from
that account in order to buy a home, this is also tax free
2. Registered Retirement Savings Plan (RRSP): By referring to Home Buyers' Plan (HBP),
individuals can withdraw up to $35,000 from their RRSP accounts to use as a down payment
for buying a home. This amount further should be repaid to the RRSP within 15 years.

3. Tax-Free Savings Account (TFSA): TFSAs are generally used for long-term savings but they
can also be used for home down payments. Contributions to a TFSA are not tax-deductible,
but withdrawals are tax-free when using it for buying a property.
Risk Management (payment structure - variable versus fixed and home insurance-)

There are 2 primary concerns regarding the mortgages. These are the payment structure (fixed vs.
variable rates) and home insurance. Regarding the mortgage rates, firstly fix rate remains constant
over the term of the loan. This provides stability payments, Fixed-rate mortgages are preferred
when interest rates are low, as it will guarantee a good rate for the long term. However, variable
interest rate fluctuates with market conditions. While a variable-rate mortgage may start with a
lower interest rate than a fixed-rate mortgage, it could increase over time parallel to macro
economic conditions, leading to higher monthly payments.

In addition to mortgage insurance, homebuyers are encouraged to have home insurance. This
protects the property against potential risks like fire, theft, and natural disasters.

Stress Test for home buyers

A stress test is a simulation used to evaluate how the related party withstands adverse economic
conditions, such as recessions or market shocks

Canada has implemented a mortgage stress test to ensure buyers can afford their mortgage
payments even if interest rates rise. The stress test tries to find out if the buyer can qualify for a
mortgage in higher interest rates. This measure shows that borrowers can still repay their mortgages
in economic shifts.

References

Canada Mortgage and Housing Corporation. (2023). Mortgage insurance. https://www.cmhc-

schl.gc.ca/en/insurance/mortgage-insurance

Canada Revenue Agency. (CRA). (2023). Tax-free savings account (TFSA).

https://www.canada.ca/en/revenue-agency/services/tax/businesses/tax-free-savings-
account.html

Government of Canada. (2023). First home savings account.

https://www.canada.ca/en/revenue-agency/services/tax/businesses/first-home-savings-
account.html

Investopedia. (2023). Fixed vs. variable rate mortgages in Canada.

https://www.investopedia.com/fixed-vs-variable-rate-mortgages-canada-5187151

Royal Bank of Canada. (RBC). (2023). Home buyers' plan (HBP).

https://www.rbcroyalbank.com/mortgages/home-buyers-plan.html