Mortgage Blog

Debunking the Myths and Misconceptions of Getting a Mortgage: Understanding Your Mortgage Options in Canada

March 8, 2023 | Posted by: Dallas Martin

When it comes to mortgages, there are a lot of myths and misconceptions that can lead to confusion. Whether you're a first-time homebuyer or an experienced investor, understanding what is true and what isn't can make all the difference when it comes to making sound financial decisions about your mortgage. This article will look at Canada's most common mortgage myths and misconceptions to help readers make informed choices about their financial future. So without further ado, let's get started!

Myth 1 - First time home buyers are the only people who can put 5% down

When it comes to mortgages, one of the most common myths is that only first-time home buyers are allowed to put down a 5% deposit. However, contrary to popular belief, anyone seeking to buy a house - even if they previously owned one - can put down as little as 5% for their owner-occupied residence.

At this point, I've lost track of how many times someone has called me and been misled about the fact that they needed 20% down to purchase an owner-occupied house simply because they weren't first-time homebuyers.

It's important to remember that mortgage insurance must be obtained in all cases when putting down less than 20%, so it's important to factor this into your budget and understand the costs associated with taking out an insured mortgage. Don't hesitate to contact us if you have questions about your downpayment or any associated insurance premiums will cost.

Refer to our reliable and convenient mortgage calculators to accurately determine your mortgage payment based on the downpayment you provide. For those just starting in their home-buying journey or for the seasoned veterans who need a refresher, our Mortgage 101 video will explain all of the fundamentals of mortgages. 

Myth 2 - Refinancing a mortgage prior to its maturity does not make financial sense when prepayment penalties are involved.

Prepayment penalties are one of a mortgage's most misunderstood elements, and many believe that these fees make it impossible to refinance a loan before maturity. Contrary to popular belief, not all lenders impose heavy prepayment charges. There are plenty of loan providers who have less severe penalties than others.

It is essential to be aware of the potential pre-penalty costs when deciding on your mortgage, in addition to merely focusing on obtaining the lowest rate. From my observations, I have noticed that in recent years approximately 60% of homeowners have chosen to terminate their contracts prematurely. Undoubtedly, this was due to the rising home prices.

If borrowers have fixed mortgages, they can expect to face three months interest penalty or an IRD penalty. Certain lenders have huge IRD penalties; while I won't name names, it's possible that you currently have part of your savings in one of these institutions.

IRD

The Interest Reduction Deposit (IRD) is based on the amount of your prepayment and the interest rate difference between your original mortgage rate and what lenders can charge for loans with a similar remaining term. Each lender has its own way of calculating IRD penalties.

If you are looking for an effective way to consolidate debt, then refinancing your mortgage and only paying the three-month interest might be a wise choice. The benefits of this approach outweigh any other methods of debt repayment that you may consider. If you have been fortunate enough to secure a reasonable mortgage with beneficial terms, this could be an effective way of consolidating your debts quickly and efficiently. Even if you face an IRD penalty, some lenders calculate these much more forgivingly than others. It is important to note that variable-rate mortgages are subject to three-month interest penalties, which explains why many people who anticipate selling or refinancing their homes early opt for a variable-rate mortgage.

I can't stress this enough you must take the time to thoroughly review and comprehend the fine print in your mortgage agreement before signing, as this ensures you are familiar with any prepayment penalties lurking down the line.

Myth 3 - Private mortgages are only for people with bad credit

Private mortgages are a viable option that is often overlooked due to the misconception that they are only for people with bad credit. This could not be further from the truth! Private mortgages are an excellent choice for individuals with good credit who need a little help getting their mortgage approved.

One of the primary advantages of opting for a private mortgage is that you can receive financing quickly, sometimes within 48 hours! Banks are notorious for taking weeks – if not months – to approve mortgages. With a private mortgage, however, you can be approved and ready to purchase your dream home much faster.

When you take the private route, lenders may be more likely to overlook any home-related imperfections, such as a bad roof or unfinished construction.

Private mortgages can be a great option if you are self-employed or an entrepreneur without traditional income streams. Many of these types of loans don't require proof of income.

If your current liabilities have caused a high total debt service ratio, private mortgage lenders may be more willing to approve you for financing. Typically, private lenders don't focus as heavily on borrowers' debt when approving loans and instead are interested in the property's value and equity.

However, one of the drawbacks is that private mortgages usually carry higher interest rates than traditional ones. Therefore, you should research and compare the terms of different lenders before deciding.

Overall, private mortgages can be an effective way to finance a home, and they should not be overlooked due to the misconception that they are only for those with poor credit.

To ensure you get the best mortgage for your needs, you must arm yourself with facts and knowledge. Start by carefully researching the different private mortgage options available so you can choose the best one for you. Then, if you're ready to get started on getting a private mortgage, read our private mortgage page here. And if you need some help navigating this process, don't hesitate to reach out and chat with one of our helpful mortgage experts today!

Myth 4 – Self-employed individuals have a more challenging time qualifying for a mortgage 

Self-employed individuals may face unique challenges when qualifying for a mortgage, but that does not mean it's harder. The truth is self-employed people qualify for mortgages all the time, provided they can demonstrate their income and financial stability.

When applying for a mortgage with an A+ lender as self-employed, you must demonstrate that you can repay the loan. To do this, applicants must submit various documents such as two years of T1 generals, business statements displaying their net profit and Notice of assessments indicating taxes paid. These lenders consider your average net income from the past two years while also allowing us to gross up that income by an additional 15%, depending on your field.

By taking advantage of tax write-offs, some alternative lenders can allow you to use your six-month bank statement and gross it annually. We need to examine the expenses that you have incurred, but this route usually provides a higher net income which will enable you to qualify for larger loans.

When dealing with alternative lenders, interest rates may be 1% higher than A+ lenders and come with additional fees. But taking into account the entire picture, these increased costs could be offset by your tax write-offs at the end of the year if your income warrants it. Although there may be an additional cost on your mortgage loan, this could result in substantial savings in the long run.

Please remember that it is essential to speak with a mortgage professional and an accountant before making any decisions so that they can give you the best advice and help you make an informed decision.  

In conclusion, many myths and misconceptions about mortgages in Canada can lead to confusion for potential borrowers. Here, we have debunked four mortgage myths:

Only first-time home buyers can put 5% down - FALSE. 

Refinancing a mortgage before maturity does not make financial sense when prepayment penalties are involved. - FALSE.

Private mortgages are for only those with bad credit – again, FALSE.

And lastly, self-employed individuals have a more challenging time qualifying for a mortgage loan, absolutely not TRUE!

We hope this article increases your understanding of mortgages and encourages you to ask more questions as you embark on your home journey. Good luck, and as always, if you have any questions or require clarification about the mortgage process, don't hesitate to contact us.

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