The home loan industry now has to adapt to new mortgage rules that offer borrowers much needed protection against lender abuses and reckless lending standards. But the changes may not please all borrowers.
Some of the new mortgage rules will influence qualification requirements and the types of mortgages that borrowers get. The regulations, drawn up in 2013 by the Consumer Financial Protection Bureau, are now in effect.
The gist of one of the main rules is simple: Lenders will be required to ensure that borrowers have the ability to repay their mortgages. In return, lenders will be protected from borrower lawsuits so long as they issue “safe” mortgages that follow guidelines.
Whether this is your first home or fourth, really understanding your mortgage and how it works is crucial. After all, it’ll probably be the biggest loan of your life!
What IS A Mortgage?
In the most basic sense a mortgage is a loan to buy a property. The process of securing a mortgage means lender approval based on your income, credit rating and other debt.
Understand Your Fixed Costs
Before you decide what you can—or should—spend on a mortgage it’s important to take stock of your habits and your true fixed costs. Be honest with yourself when putting together your household budget, if you’re going to be miserable without your daily premium cup of coffee, then along with your student debt and car payments, consider that a fixed cost.
Be PITH Safe
According to the CHMC (Canadian Housing & Mortgage Corporation), your monthly housing costs should be less than 32% of your gross monthly income. These are considered your PITH or Principle and Interest (of your mortgage payments), Property Tax, and Heating bills.
Get A Mortgage You Can Afford
If you pass the PITH test, the second test of what you can afford mortgage-wise is that your entire monthly debt load (car payments, credit card debt, student loans, etc) should be less than 40% of your gross monthly income. The CMHC even has a handy Mortgage Affordability Calculator on their site: cmhc.ca.
Paying Off Your Mortgage
Once you’re approved for a mortgage and buy your home (congratulations!), now you have to actually start paying off the loan. There are several factors involved in this like your interest rate, payment schedule (monthly, twice a month, every two weeks, or weekly) and your amortization period, which is the amount of time you’ve selected to pay back the mortgage (usually ranging from 15-25 years).
Picking The Right Interest Rate
The interest rate at which you select to pay off your mortgage varies from “fixed”—whereby the rate will NOT change for the term of the mortgage, and is generally a bit higher but considered more stable, or “variable” whereby the interest rate can fluctuate with the current state of the market.
Finally, owning a home can truly be an amazing thing. Thankfully there are many resources out there to help make the process a smooth one like mortgage brokers and financial advisors, so remember, you’re never alone through this daunting process!