Whether you're a first-time home buyer or you're an experienced homeowner, applying for a mortgage in Canada can be stressful, especially with all the options and terms that you'll see and choose from. This step-by-step guide will provide you with the information that you need to know on how to apply for a mortgage in Canada and how to navigate the Canadian mortgage application process. With a bit of preparation and knowledge, you can ensure that your mortgage application goes smoothly.
First, it’s important to get your finances in tip-top shape: your lender will review your credit score, debt levels, and other financial information, so you’ll want to make sure that you’re considered creditworthy. This applies even if you’re just renewing your mortgage, as you’re not guaranteed to be approved for a mortgage renewal even with the same lender.
Start by getting a free credit report from the major credit bureaus, Equifax and TransUnion, and make sure that all of the information is accurate. Some lenders might only use one of these bureaus, so it’s a good idea to check your credit report from both of them.
Since mortgage lenders often have minimum credit score requirements, it is important to know where you stand before submitting any mortgage application. You can check your credit score from online providers such as Credit Karma or Borrowell. Once per month, you can also check your credit score with Equifax Canada for free.
You may also want to cut back on your existing debt, such as credit cards and personal loans. Lenders will have a certain limit for how much of your income can go towards making debt payments. If you already have too much debt, this may limit how much you can borrow with a mortgage.
For those looking to get a new purchase mortgage when they’re buying a home, the next step is to save up for a down payment. This doesn’t apply if you’re applying for a mortgage renewal or mortgage refinance, although you can always make a mortgage prepayment at such time to save on mortgage interest costs.
The general rule of thumb for down payments is that you should aim to put down at least 20% of the purchase price as a down payment. Generally speaking, the higher your down payment is, the lower your monthly mortgage payments will be. You’ll also be able to afford a more expensive home and a larger mortgage.
Depending on the price of the home, you may even be able to make a down payment as low as 5%. That would be for insured mortgages, often by the Canada Mortgage and Housing Corporation (CMHC), which allows a down payment of just 5% if the purchase price of the home is less than $500,000. Homes with a purchase price between $500,000 and $1 million can have a down payment as low as 5% on the portion under $500,000 and 10% on the portion above $500,000.
Saving for a down payment can be tough, but it's an important part of qualifying for a mortgage when buying a new home. Start by making a budget and cutting out any unnecessary expenses, such as entertainment or dining out. The 50/30/20 budget rule can be helpful when saving for your down payment. This rule involves breaking down your income into three categories: 50% for essentials, 30% for discretionary spending and 20% towards savings. The 20% in savings should go towards a high interest savings account, GICs, or similar safe investments, that you can easily withdraw from and use for your down payment.
At closing, you’ll need to pay some additional expenses and fees. These are called closing costs, and can include things like appraisal fees, title insurance, and land transfer taxes. Depending on your location, you may want to budget for 3% to 4% of the home’s price to cover closing costs on your mortgage and home.
You may also want to make sure you are taking advantage of all the available tax breaks when it comes to saving for a down payment. The new First Home Savings Account (FHSA) combines the best of a TFSA and RRSP to allow first-time home buyers to save towards their down payment.
Before you start shopping for a mortgage lender, it's important to make sure that you can actually afford the payments. Getting your finances in order and starting to save up for a down payment is a great foundation, but you’ll want to know how much you can borrow too. If you’re renewing or refinancing, current rates or a higher borrowing amount may also have changed your regular mortgage payment amount. You can use a mortgage affordability calculator to get an estimate of how much you can borrow. This calculator takes into account your annual income, debts, and other factors that will affect your ability to repay the loan, and then compares it against a series of ratios.
These debt service ratios, which are total debt service (TDS) and gross debt service (GDS), is a reason why it’s a good idea to reduce your existing debt before applying for a mortgage. The total debt service ratio compares your total monthly debts and housing costs to your gross monthly income. Generally, this ratio should be no more than 44%. The gross debt service ratio, which only considers your housing-related expenses, usually has a limit of 39%.
Something that is used when calculating your mortgage affordability is the mortgage interest rate. The lower the interest, the more money you’ll be able to afford to borrow. Mortgage rates depend on your financial situation, but it also varies based on what mortgage type and term that you choose. For example, fixed vs. variable rates, open vs. closed mortgages, insured or uninsured, and the term length will affect your rate. Have a mortgage type in mind and find the current mortgage rate available so that you can calculate a more accurate mortgage affordability amount.
A mortgage pre-qualification is a quick process in which a lender reviews your financial numbers and provides an estimate of how much you may be able to borrow. This can help you determine what kind of home and budget you should look for when shopping for a new house.
The pre-qualification process typically includes you providing your income, debt, and other general questions. You won’t have to provide any documents or proof of income, and there won’t be any credit checks. With this general information, the lender can provide an estimate of how much you may be able to borrow and what kind of interest rate they may offer.
Although it is not a guarantee that you will be approved for a mortgage, or even a mortgage pre-approval, pre-qualifying can give you a basic idea of how much you might be able to borrow.
Once you’ve determined how much you can afford, it’s time to start shopping for a mortgage lender! Mortgage lenders in Canada include banks, credit unions, and even specialized mortgage companies such as B Lenders and private mortgage lenders. Qualification and requirements vary between lenders. For example, it’s generally harder to qualify for a mortgage with a bank, as they’re required to conduct a mortgage stress test to see if you can afford your mortgage payment even when interest rates rise.
Mortgage rate comparison websites, like WOWA.ca, are an easy way to quickly see current mortgage rates from dozens of Canadian mortgage lenders, including rates from the big six banks. You can check rates for different term lengths and options, and choose the lender with the lowest rate.
You can also use a mortgage broker to help you in your search. Mortgage brokers are licensed professionals who can help you compare different lenders and find the best rate for your situation. They may also be able to negotiate better terms with lenders in their network. Compared to a bank, which can only offer their own mortgage products, a mortgage broker gives you access to a variety of mortgage lenders.
After deciding on a mortgage lender, or after your broker has secured one for you, it’s a good idea to get a mortgage pre-approval. Unlike a mortgage pre-qualification, which is just a rough estimate, a pre-approval is more thorough and will tell you how much you could borrow. Another big advantage is that you may also be able to lock-in your mortgage rate. This means that even if rates increase before you get approved for a mortgage, the rate you’ve been pre-approved for won’t change. Most lenders have this rate hold period for up to 120 days, but some lenders may even offer this for up to 150 days.
If you’re renewing a mortgage, your lender will send you a mortgage renewal notice up to several months prior to your current mortgage term expiring. You can choose to stay with the same lender or switch to another lender. While staying with the same lender will simplify the renewal process, switching to another lender will require the entire mortgage application process to be completed from start to finish, including conducting a mortgage stress test if applicable.
Now it’s time to apply for a mortgage! The process of applying for a mortgage can be complicated, so it’s important to read all of the paperwork carefully and understand what you are signing up for. You will need to provide the lender with a variety of financial documents such as proof of income, identity, employment, income tax returns (through your notice of assessment), and source of down payment. This is where a mortgage broker can come in handy - they’ll guide you throughout the mortgage application process.
Most lenders allow you to submit your mortgage application online, which makes it easier and more convenient. However, you will generally need to make an appointment to meet with the lender to sign documents. Some lenders and brokers are completely virtual, with signatures done digitally and a virtual closing process.
Once the lender has received all of the documents they need, they will review them and decide whether or not to approve your mortgage loan. They’ll check your credit, conduct a home appraisal, and may ask for more documents if you’re not a traditional borrower, such as if you’re self-employed or rely on rental income.
Mortgage applications can take anywhere from a day to a few weeks for a decision on mortgage approval to be made. The amount of time it takes to process and approve a mortgage application depends on several factors, such as the type of loan you have applied for, the complexity of your financial situation, and how long it takes for you to provide all the necessary documentation, if follow-up is required.
Once your loan is approved, it’s time for closing! There will be plenty of paperwork to sign before the mortgage is finalized. Your lender or mortgage broker should be able to provide guidance and answer any questions you have.
If you’re not approved for a mortgage, you might try to negotiate with the lender, such as increasing your down payment amount, getting a mortgage co-signer, or even extending the mortgage’s amortization period so that each monthly payment is smaller and more affordable. Alternative mortgage lenders, such as B lenders and private lenders, can also be easier to qualify for. However, private lenders will have much higher interest rates, and so they should only be used temporarily for short terms while you improve your finances.