What Is A Residential Mortgage?
A residential mortgage is a loan, typically for a fixed amount of time, given to finance the purchase of a residential property. Residential property, is property that is zoned for single family homes, townhomes, apartments, or any other place where people live. Rental properties with up to 4 units are considered residential. Rental properties with five or more units are considered commercial property.
A mortgage has three basic parts, a down payment, monthly payments, and interest fees.
The down payment is the amount that you will need to pay to secure your mortgage. You will be expected to come up with a minimum of 5% of the cost of the home if the price of your home is below $500,000. For homes that are priced between $500,000 and $999,999, the down payment is 5% of $500,000, plus 10% of the remaining amount. Homes over a million dollars, require a 20% down payment.
These are the minimum down payments to qualify for a mortgage, and anything below 20% requires you to have mortgage default insurance. This insurance protects the lender in case you default on payments. Your mortgage loan insurance can be paid for upfront or added to your monthly mortgage payments.
You can choose to make monthly or bi-weekly payments. Paying bi-weekly will accelerate your mortgage payoff. By the end of each year, you will have paid the equivalent of 13 monthly payments instead of 12. This can cut years off your mortgage repayment and save you thousands of dollars in interest.
With a residential mortgage agreement, your property is put up as collateral in exchange for the loan. If you cannot maintain the monthly payments, the lender has the power to seize your home and sell it to repay the debt.
Should you ever find yourself in a situation where you are having difficulty making monthly payments, contact us to discuss options to access additional funding such as a second mortgage or home equity line of credit (HELOC).
An interest rate is a percentage of how much you’ll pay your lender each month as a fee for borrowing money. There are two types of mortgage interest rates, fixed-rate and variable.
If you want to rely on consistent mortgage payments and not have to worry about an increase to your monthly payments should interest rates rise, then this is the best option for you. Your payments and interest rate will remain the same for the full term of your loan.
Variable rates are lower than a fixed-rate mortgage, which makes it a good option if national interest rates remain low. However, should interest rates increase, your monthly payment amount will increase and could end up costing you more than if you had a fixed-rate mortgage.
A variable-rate mortgage does not have a set repayment amount and will fluctuate based on the national and posted interest rates. The initial interest rate offered by these mortgages is lower than fixed rates because of their potential to be unpredictable.
The mortgage term is the length of time your mortgage contract is in effect. This consists of everything your mortgage contract outlines, including the interest rate. For example, you might get a 5-year fixed mortgage at an interest rate of 2.84%, which means your interest rate will remain the same for 5 years.
At the end of the 5 years (term), unless you have the funds to cover the entire remaining balance, you will have to renew your mortgage. You also have the option to refinance or switch lenders.
When it’s time to renew your mortgage, it’s best to compare interest rates and renew it ahead of time. If you don’t complete the paperwork to renew your mortgage before the due date, it will renew automatically as a 6-month open mortgage. Open mortgages can be paid in full at any time, however, it will end up costing you a lot more.
The amortization period is the length of time that your mortgage payments are broken up over the life of the loan. A typical mortgage in Canada has a 5-year term with a 25-year amortization period. Longer amortization periods will reduce your monthly payments however, you will pay more interest over the life of the mortgage.
Pre-payment privileges are the additional payments your mortgage will allow you to make on top of your monthly payment requirements. With a closed mortgage, you won’t be able to pay your balance in full before the end of your term without incurring penalties. Most mortgages allow you to make some additional payments throughout the term. The sooner you pay down the balance on your mortgage, the less interest you will pay overall.
Contact us if you have any questions about mortgages.
Mortgages for Rental Properties
Most buildings with 1-4 units are zoned residential. Buildings with 5 or more units are zoned commercial, so you will need to take out a commercial mortgage.
How much of a down payment will you need for your residential rental property?
If you are purchasing a multi-unit property, whether you live in one of the units or not, will impact how much down payment you will need to make. If you do live in one of the units, your property is considered owner-occupied, if you don’t, your property is considered non-owner occupied.
The following chart shows the minimum down payment that is required for both owner and non-owner occupied investment properties.
|1 - 22||No||20%|
|3 - 4||Yes||10%|
|3 - 4||No||20%|
Owning rental property can be a great way to generate extra monthly income or pay down your own mortgage more quickly. Financing an investment property is more complex than a mortgage on your principal residence. Contact a Benson Mortgage specialist to help you through the process.
Second Home or Vacation Property Mortgage
What is a Second Home?
A second home is a residence that you, or a family member, intends to occupy for part of the year, in addition to having a primary residence. A second home could be a vacation home, a condo in the city, or a home for your child away at school.
Not to be confused with a second mortgage, a second home mortgage is a home loan that is used for the purpose of purchasing a second property.
If You Plan to Rent Your Second Property
If you plan to rent your second home or vacation property when you are not using it, it is considered an investment property and will require a minimum 20% down payment. If you or a family member plans to live in the home, on a rent-free basis, you can get a mortgage for less that 20% down payment.
Financing Vacation Homes/Cottages
Rental pool or timeshare properties are not eligible for mortgage financing. Cottages fall into two categories, Type A (all-season cottages), and Type B (seasonal cottages). Most lenders do not finance Type B cottages.
These are the requirements for each category:
Type A Cottages:
- Must be intended for occupancy at some point during the year by the borrower or relative on a rent-free basis (otherwise it is considered a rental).
- Winterized home with year-round access.
- The property is accessible by municipally plowed road/ year-round access.
- Potable running water, central heating, plumbing and electricity.
- Permanent foundation below frost line.
- The property is located in an area with demonstrated, reasonable resale demand.
Type B Cottages:
- Seasonal access is okay.
- Permanent heat source is not required.
- Has running water.
- Sits on temporary foundation (concrete blocks or pilings).
Ready to apply for your residential mortgage?