In Ontario, most people need a mortgage loan to purchase a home. A mortgage is different from other types of loans in that it is secured by the property itself, meaning if payments are missed, the lender has the legal right to foreclose on the property. Before applying for a mortgage, it is important to understand the types of mortgages available, how much you can afford, and your legal rights and options.
Before You Apply for a Mortgage
Know Your Credit and Financial Situation
Before applying for a mortgage in Ontario, it is important to check your credit report and address any issues. A clean credit rating will improve your chances of getting a mortgage with a lower interest rate. Ontario residents are entitled to request a free credit report annually from major credit bureaus.
Debt-to-Income Ratio
Lenders will look at your debt-to-income ratio, which includes not just your mortgage payments, but also other debts such as car loans, student loans, and credit card balances. If possible, paying off existing debt before applying for a mortgage can help you qualify for a larger loan.
Down Payment
While the minimum down payment in Ontario is typically 5% for homes under $500,000, saving for a larger down payment of 20% or more will help you avoid mortgage default insurance (CMHC insurance) and reduce your monthly payments.
Escrow Payments
When you get a mortgage in Ontario, lenders typically require monthly escrow payments for property taxes and homeowners’ insurance. Be sure to budget for these additional costs.
Shopping Around for a Mortgage
Types of Mortgages
Ontario residents have a variety of mortgage options to choose from, including:
- Fixed Rate Mortgages
A fixed-rate mortgage has an interest rate that remains the same throughout the life of the loan, providing stability and predictability in your payments. You can choose a term ranging from 10 to 30 years. - Adjustable Rate Mortgages (ARM)
An adjustable-rate mortgage has an interest rate that can change over time, usually in response to market rates. These can be riskier because your payments may increase if interest rates rise. - Interest-Only Mortgages
With an interest-only mortgage, you only pay the interest for a period, after which you start paying down the principal. This can lead to larger payments later, so be cautious about this option. - Balloon Mortgages
Balloon mortgages have low monthly payments for a set period, but at the end of the term, a large balloon payment is due. You may need to refinance or sell the property to make this payment. - Mortgage Default Insurance
If your down payment is less than 20%, you will be required to purchase mortgage default insurance through the Canada Mortgage and Housing Corporation (CMHC) or other insurers.
Key Considerations for Ontario Mortgages
Mortgage Rate and Terms
Mortgage rates can vary between lenders, so it’s important to shop around and compare offers. Fixed-rate mortgages offer security, while adjustable-rate mortgages may provide lower initial rates but involve more risk.
Closing Costs
Closing costs in Ontario can include land transfer taxes, legal fees, title insurance, and home inspection costs. Make sure to factor in these costs when budgeting for your home purchase. Land transfer taxes are particularly significant in Ontario, and the amount varies depending on the property’s purchase price.
Mortgage Pre-Approval
Before house hunting, get pre-approved for a mortgage to determine how much you can borrow. This helps you set a realistic budget and demonstrates to sellers that you are a serious buyer.
Legal Considerations and Consumers’ Rights
Understanding the Agreement of Purchase and Sale
The Agreement of Purchase and Sale (APS) is the legal document that outlines the terms of the transaction. Make sure you understand all the clauses, including conditions related to financing, inspections, and closing dates.
Home Inspections and Disclosures
In Ontario, sellers are not required to disclose defects in the property, so it is important to have a professional home inspection done before finalizing the purchase. If significant issues are discovered, you may be able to negotiate repairs or a reduction in the purchase price.
Mortgage Default and Foreclosure
If you are unable to make your mortgage payments, the lender can initiate foreclosure proceedings. In Ontario, foreclosure is a legal process that allows the lender to sell the property to recover the debt. However, the borrower may be able to avoid foreclosure by negotiating a payment plan or refinancing.
Consumer Protection
Ontario residents are protected under the Ontario Consumer Protection Act, which provides safeguards for consumers entering into contracts, including mortgages. Lenders must provide clear information about the mortgage terms, interest rates, and fees.
Refinancing Your Mortgage
Why Refinance?
Refinancing your mortgage in Ontario may allow you to take advantage of lower interest rates, shorten the term of your loan, or access home equity for renovations or other expenses. Be sure to calculate whether refinancing will save you money, considering the closing costs involved.
Refinancing Process
To refinance your mortgage in Ontario, you will need to apply with your current lender or a new one. You will go through a similar process as when you first applied for a mortgage, including providing financial documentation and a property appraisal.
Paying Off Your Mortgage
When you pay off your mortgage, make sure you receive a release of mortgage from your lender, which proves that the loan has been fully paid. This release should be registered with the Ontario land registry.
Legal Options for Consumers
If you encounter issues with your mortgage, such as predatory lending or issues with your lender, you have legal options. In Ontario, you can contact the Financial Services Regulatory Authority of Ontario (FSRA) for assistance with mortgage-related complaints.
If you feel that you are being treated unfairly, you may also seek advice from a legal professional specializing in consumer protection or real estate law.