Just the thought of owning your own home can be a tremendously exciting thing,while the thought of taking on a mortgage,not so much. After all this is your single biggest investment so it represents a large financial commitment.  It’s okay to be a little overwhelmed at the thought of it.

To minimize your anxiety do your homework in advance.

You will need to choose a lender/mortgage broker and make an application for pre-approval first.  They will give you several payment options which are talked about below.

How much house you can afford?

Your lender decides what they will lend you to buy your home, but YOU decide what you can afford.

Lenders are certainly careful, but they will make their decisions based on averages and formulas. They likely will not understand the subtle differences of your lifestyle and what you consider normal spending on day-to-day items. That’s up to you to have a handle on.  So, leave a little room for the unexpected as there are always going to be things to spend money on with your new home.  Whether its things you choose like furniture, appliances or landscaping or it’s the repairs that will eventually come with home ownership.

In Canada lenders apply formulas to determine how much you can afford.  The Gross Debt Service ratio (GDS) which is your mortgage payment, interest & taxes (PIT) compared with the buyer’s gross monthly income and it cannot exceed 32 percent.  And the Total Debt Service ratio (TDS) or debt load, including car payments, student loans, and credit card payments, is not to exceed 40 percent of the buyer’s gross monthly income.   As home prices have risen, some lenders have responded by stretching these ratios to as high as 50 percent. No matter how expensive your market though, we urge you to think carefully before stretching your budget quite so much.

Deciding how much you can afford should involve some careful attention to how your financial profile will change in the upcoming years. In the long run, your own peace of mind and security will matter most.

How are mortgage brokers paid?

Their commission is paid by the bank or lender providing the mortgage product based on how much money the consumer borrows. Mortgage brokers aren’t compensated on the interest the bank makes, so they don’t receive a higher commission if the client chooses a higher rate. It varies a bit, but the commission generally works out to an average of $80 per $10,000 of the consumer’s loan.

What is a fixed mortgage rate?

‘Fixed’ means your interest rate and regular payments will be the same for the duration of your mortgage term, whether rates rise or fall. It offers you stability and the least financial anxiety. But if interest rates drop significantly, you may be stuck paying a higher rate for the duration of your term, depending on the flexibility and features of your mortgage.

What is a variable mortgage rate?

Your mortgage payments will go up or down with the fluctuations in the ‘prime rate’, which is the market interest rate. The danger here is that a significant increase in the ‘prime rate’ increases your interest payable as well. But if it decreases, you’ll pay less.

What‘s better? Fixed or variable?

While over 60 percent of Canadians opted for a fixed mortgage rate in 2011, variable rates tend to be cheaper over time. Conversely, you may sleep better knowing you’re not subject to interest rate fluctuations. Making the right choice depends largely on the current rates at the time you’re taking out your mortgage. When interest rates are low and aren’t expected to drop further, locking into a fixed rate may be your best option. However, if experts are projecting that interest rates may fall, you’re probably better off with a variable rate, especially if there’s a significant difference between the fixed and variable rates.

What is a closed mortgage rate?

A closed mortgage can be fixed or variable. Closed mortgage rates are popular because they’re lower than open mortgage rates but unlike an open mortgage, you’re restricted on how much principal you can pay down annually and there will be a penalty to pay a closed mortgage out early. Terms range from six months to 10 years. Despite their low rates and relative stability, there are disadvantages so read the fine print before signing.

What is an open mortgage rate?

An open mortgage can also be fixed or variable. The interest rate will be higher than for a closed mortgage but it’s more flexible. Generally, you can pay an open mortgage off anytime or make additional payments without penalties. Terms range from six months to five years so you can’t lock in for as long as a closed mortgage. If you want to get rid of your mortgage quickly, or think you may be selling or moving in the near future, this is a good option.

What is CMHC?

Canada Mortgage and Housing Corporation (CMHC) is a Crown corporation that mainly provides mortgage loan insurance to residential home buyers. It was originally set up in 1946 to arrange post-war housing for veterans. Today it helps Canadians who can’t easily afford buying a house through their mortgage default insurance program.

What is mortgage default insurance?

It’s a type of mortgage insurance that’s mandatory in Canada if your down payment for a residential property is less than 20 per cent of the purchase price. The major provider of this insurance is the Canada Mortgage and Housing Corporation.

The insurance will cost you between 1.75% and 3.6% of your mortgage amount and the insurance cost will be added to your mortgage. It protects the banks and the money lenders if a home owner defaults on their mortgage but doesn’t protect the homeowner. However, lenders do offer lower mortgage rates because their risk is decreased.