Every year, thousands of new people immigrate to Canada and these New Canadians play a vital role in supporting the Canadian economy. As a Canadian one of our greatest achievements is to own our own home.
Many Newcomers to Canada also dream of owning a home or property, however are sometimes put off by perceptions of how difficult and confusing qualifying for a mortgage might be. As a Mortgage Broker, located in Newmarket, Ontario I work with Newcomers across York Region and the GTA and I make the process as simple and straightforward as possible.
What You Need To Know As A New To Canada Applicant
What is Credit and why is it so important?
A Credit score or otherwise known as beacon score, is a three- digit number that portrays the strength of your finances. Scores can range from 300 – 900. The higher the score the better you are able to qualify for a mortgage. Conversely, a lower score tells the lender that you are a credit risk and cannot be trusted with a mortgage.
There are two credit -tracking agencies in Canada. Equifax and Transunion and both track your credit differently, however for the most part we look at Equifax to track credit.
Where does your score need to be? A score of over 620 is considered good and also the minimum to qualify for a mortgage with less than 20% downpayment. Does that mean that if your score is lower than 620 you won’t qualify for a mortgage? NO , however scores below 620 mean there are less lenders to select from and also the interest rate can be higher and you may require 20% down payment or more. Credit scores are built on active accounts, which can be major credit cards, car loans, lines of credit, cell phones, student loans etc.
So how do you start to build Credit as a Newcomer to Canada?
- Open up a bank account – there 6 big banks (RBC, TD, Scotia,CIBC, National Bank and BMO) that charge fees for bankaccounts and then there is PC Financial – which you can openup free checking and savings accounts for no fees; the benefit isthat you start saving money each month by earning points,which can then buy groceries.
- Depending on your work or credit history in the country you resided in prior to immigrating to Canada, you may be able toget an unsecured credit card and if not you can either get a secured credit card (see below) or establish credit by renting a place and putting utilities as well as cell phone bills under your name. The utilities will not be tracked on credit, however the cell phone bill is. Furthermore, by establishing a utility bill under your name, you can transfer that account when you get a mortgage and thus will be able to waive the set-up fees. This also helps you with credit as the bank can verify good financial habits when you go in for a credit card.
- Apply for a secured card - These cards are offered to those with no credit or with bad credit to help them establish a credit history. It's the same as a regular credit card except that the credit limit is set by how much money you can put down. Limits on these cards range from $500 to $2,500 but be careful as not all secured credit card providers track your credit. Make sure you get a secured credit card through one of the six big banks named above. Any activity on a secured card is reported the same as it would be with an unsecured card, so it will affect your credit. If you handle a secured card responsibly, you can eventually become eligible for an unsecured card.
- Once you get a credit card (either secured or unsecured), the secret is to spend what you can afford each month and pay it off in full – a common mistake is to get credit, spend and then have it get out of control, which will also derail credit.
- Open up a TFSA (Tax Free Savings Account) - this will not only help you to save money but show the lender that you have good financial habits – again goes a long way to establishing credit.
- In addition to a credit card you can also open up a store credit
- card – HBC, Home Depot, just to name a few! You can establish
- credit the same way as the credit card – spend only what you
- can afford and pay it off each month.
Finally, here is the secret sauce to building and keeping your credit score above 620.
- Don’t seek too much credit all at once. Credit can be fun at the
- beginning - like a new toy! However, lenders can perceive you
- to be a risk if you get too many types of credit and if you then
- use it irresponsibly, which tends to happen when people have
- too many credit cards to pay back all at once, the lender will not
- look so favorably on you.
- Credit is a privilege not to be misused. Make sure you are not jumping from one creditor to the next – you will be looked upon as a “credit seeker” and many lenders will not look positively upon your application.
- Each month, use your credit wisely and do your best to pay more than the minimum payment and try not to put more on credit than what you can pay off in one or two payments.
Newcomers to Canada must be able to provide evidence of either a valid work visa or permanent Canadian residence.
To make things simple, Newcomers to Canada will need to put down at least 5% of the value of the property, which they are looking to purchase as a downpayment. Moreover, lenders currently insist that any downpayment below 20% of a property's value must be covered by a default insurance company such as Genworth, CMHC or Canada Guaranty. Default insurance protects the lender if you fail to pay on the mortgage, as there is insufficient equity in the home, with less than a 20% downpayment. This default insurance is added to the mortgage and paid over the amortized term of 25 years.
Alternatively, if you are able to put down 20% or more of a property's value as a downpayment, you will qualify for a conventional Canadian mortgage and not require mortgage default insurance.
Downpayment Changes – What you need to know!
As of February 15, 2016 the Federal government mandates that any purchase higher than $500,000 - $1,000,000, will require a further 5% down-payment. For example, if you are purchasing a property that is $650,000 it would look like this:
Purchase Price $650,000
$500,000 @ 5% $25,000
$150,000 @ 10% $15,000
Total Downpayment required would be $40,000
Purchases under $500,000 will still be eligible for 5% down.
On top of this you will still require to also have your closing costs, which are usually between 1.5% - 2.5% of the purchase price.
Need help saving for your downpayment? Here are some tips to help you save:
- Create a budget and prioritize the downpayment over any other expense, including a new car, vacation or major expense;
- Pay off your high-interest credit cards and loans first; not only will this allow you to reduce your debts but it will also help you qualify the mortgage as you will have a higher beacon score and better debt ratios;
- Start saving 10-20% of your income. If you have trouble saving, ask your employer to put this amount aside in a self-directed savings account or RRSP so you can take it out when needed;
- Start living a more frugal lifestyle. Do you go out to dinner every week or buy your lunch everyday? Reduce your unnecessary expenses and you will see that your savings will quickly increase without giving it a second thought.
- Finally having a savings account does not work if you are not taking advantage of a higher interest account. We all know we won't get that at the banks so think of doing the following:
- Open up a self-directed RRSP account. As a Newcomer to Canada and essentially a First Time Homebuyer, you can use up to $25,000 towards the HBP (Home Buyers Plan). This allows you to use the money towards a purchase and pay the money back over 15 years tax free. Click here for more info!
- Open up a self-directed TFSA and invest in safe stocks and funds with low fees or in syndicated mortgages with no fees. Not only will your money grow, but if you take it out to use for a home, you can regrow that amount again in your TFSA. Click here for more info!
The amortization period is the expected length of time that it will take you to pay off your mortgage in full. Moreover, longer amortization periods are often seen as beneficial, as these lower people's overall monthly payments. That being said, if you are a Newcomer to Canada and can only put less than 20% downpayment on your property, the maximum amortization period, which a Canadian lender will offer, will be 25 years. Alternatively, if you are able to put a downpayment of 20% or more, lenders will offer amortization periods up to 35 years.
With a longer amortization period for example, you may have lower monthly payments, but you will also unfortunately accrue more interest over the lifetime of the mortgage.
The mortgage term is the length of time, which you commit to your mortgage lender. Typically terms of 5 years are average, however, terms can range from anywhere between 6 months to 10 years.
Banks and other lenders always make more when you choose the longer term, however is this in your best interest? NO!
As your licensed Mortgage Broker, who is putting your interests above the lenders, I ensure that the term you choose fits your goals and your future plans. For instance if you take 5 year term mortgage and you plan to move in 3 years, you would potentially owe penalties for early cancellation of your mortgage. I take the time to qualify what you need so that we get the right mortgage for you the first time around!
Fixed Or Variable Interest Rate
Of course, the most important thing to think about when considering the mortgage options available to you is what kind of interest rate you choose. Typically most Canadians have chosen fixed because that's what they were told by their parents or what the bank offered as the bank makes more money on a fixed mortgage than a variable.
The most important things to consider when choosing fixed or variable are the following:
- How long will you be in this specific home?
- If less than 3 years, choose a variable as you only incur 3 months interest if you break it early or if you choose a fixed term, make sure it is for the time you plan to be in this specific home and no longer as you will incur a penalty to break the mortgage;
- Choose variable if you are comfortable with the amount of interest being paid changing each month. While your regular payments will remain constant, your interest rate may change based on market conditions. This impacts the amount of principal you pay off each month. When rates on variable interest rate mortgages decrease, more of your regular payment is applied to your principal. Additionally if rates increase, more of your payment will go toward the interest. Furthermore, by choosing variable you can lock into the current 5 year fixed rate at any time the rates start to rise, but you cannot go from a fixed to a variable, without breaking the mortgage and incurring penalties;
- Choose fixed if you need to sleep at night and know that your rate is "fixed" for the term. Each month the same amount goes towards your interest and your principal.
IRD or Interest Rate Differential is a penalty that lenders charge if you break the mortgage on a fixed term, earlier than you were committed to. Each lender calculates the IRD differently, however the most important thing to know is that the IRD is calculated on the difference between the posted rate and the discounted rate multiplied by the time left on the mortgage.
So which should you choose? Unfortunately it might not be up to you if your GDS (Gross Debt Service Ratio) and TDS (Total Debt Service Ratios) are not in line for qualifying for the Variable rate.
To qualify for the variable rate or any fixed rate less than 5 years, we base our analysis on the current BOC qualifying rate. For a 5 year fixed rate, we qualify you on the current 5 year fixed rate being offered.
Most “A” lenders look for a ratio of GDS – 32% & TDS-40%. “B” Lenders are more flexible but you will incur higher rates.
When I do a purchase analysis for my clients, I look at both options and present the pros and cons of both fixed and variable. I take into account my clients current monthly obligations, their current lifestyle and what they can afford. Fixed or variable, it comes down to affordability and qualification.
Why The Right Mortgage Broker Is Always The Right Choice
Newcomers to Canada particularly are deterred from employing the services of professional mortgage brokers like myself, due to the perceived fees involved. However, the truth is that when you use services such as mine you don't pay a single cent. I get paid my fee from the mortgage lenders, who I obtain the commitment from. My services are therefore completely free.
Moreover, I don't just specialize in finding the best mortgage deals suited for your individual situation. If you are New to Canada I can help you with everything from establishing credit in Canada in the first place with products such as starter credit cards to helping you qualify for a mortgage via less conventional means such as landlords' letters showing proof of a twelve months or more on time rent payments and even paid utility bill records.
With the right guidance and advice, you can get on the Canadian property ladder and all you need is a dedicated and professional Mortgage Broker on your side. With contacts to over 40 different Canadian lenders, I will guide you through the mortgage landscape to ensure you are getting the mortgage that suits your family, your budget and your new life in Canada.
It is worth keeping in mind though, that Newcomers to Canada are only considered 'new' for 36 months. After this time any extra flexibility for newcomers tends to diminish.
Are you New to Canada?
I'm Amina and I guarantee not only to get you the best mortgage deal possible, but to make the entire process about you and your future. Therefore contact me today and let's start talking about where you are now and where you want to go from here.