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Resources and Forms

Here are a variety of common resources required by lenders that can help with you be pro-active in your purchase journey. Locating them will make the mortgage process more efficient.

Income

For self-employed individuals operating through a corporation, providing corporate tax returns can be an important part of the mortgage application process. Lenders will use corporate tax returns to verify the income from the business, especially if the borrower is a shareholder or draws dividends from the corporation. Here’s how corporate tax returns fit into the mortgage qualification process:

1. Corporate Tax Return (T2)

T2 Tax Return: If the self-employed borrower operates their business through a corporation, lenders may request the corporation’s T2 tax returns for the past 2-3 years. This allows lenders to understand the profitability and stability of the corporation.

Corporate tax returns show:

  • Revenue and expenses of the corporation.
  • Net profit or loss.
  • Dividends paid to shareholders (including the borrower).
  • Information about the company’s financial health, assets, and liabilities.

2. Dividends and/or Salary from Corporation

If the borrower draws a salary from the corporation, lenders will want to verify this income through personal tax returns (T1), along with the Notice of Assessment (NOA) to confirm that the income matches what is reported on personal tax filings.

If the borrower is paid dividends instead of (or in addition to) a salary, lenders will also look at:

  • T5 slips (if dividends are issued) to verify dividend income.
  • Any dividend income reported in the personal T1 returns.

3. Business Financial Statements

In addition to the corporate tax returns (T2), lenders may ask for business financial statements, which could include:

  • Income statement (profit and loss) showing the business’s revenue and expenses.
  • Balance sheet showing assets, liabilities, and shareholder equity.
  • These are important to show the lender the financial standing of the corporation, especially if the borrower’s income is dependent on the corporation’s overall health.

4. Using Retained Earnings

Retained earnings in a corporation (profits that are kept in the business and not paid out as salary or dividends) can sometimes be used by lenders to help qualify for a mortgage. Some lenders consider retained earnings as an additional source of financial strength, especially for business owners who keep significant profits within the company.

5. Debt Service Ratios

Lenders will calculate the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios, including the borrower’s personal debts and any debts of the corporation that they are personally responsible for (such as if they have personally guaranteed corporate loans).

6. Additional Considerations

Self-employed individuals with corporations may also face more stringent down payment requirements, with lenders sometimes requiring a higher down payment (20% or more) if they view the income as less stable or harder to verify.

Stated income mortgages may be an option for some corporate borrowers, where the income is not fully verified but a larger down payment is required.

Conclusion

When applying for a mortgage as a self-employed borrower with a corporation, providing clear, well-organized corporate tax returns (T2) along with business financial statements and your personal tax returns will help the lender assess your eligibility. The key is to show consistent and reliable income over the past few years, either through salary, dividends, or a combination of both.

Here is an example of a T2 Slip (Corporation Income Tax Return):

An employer letter is often required for a mortgage as part of the process to verify your income and employment stability. Lenders want to ensure that you have a steady and reliable source of income to make regular mortgage payments. Here’s why an employer letter is typically needed:

Income Verification: The letter confirms your current employment status, position, and salary, which helps the lender assess your ability to repay the loan.

Job Stability: Lenders prefer borrowers who have stable employment. The employer letter serves as proof that you are employed and likely to maintain your income level in the near future.

Documentation Requirement: Along with other financial documents (pay stubs, tax returns), an employer letter strengthens your application by providing a formal, signed statement from your employer.

Mitigating Risk: From the lender’s perspective, confirming your employment reduces the risk that you’ll default on the loan due to loss of income.

Different lenders may have different requirements, but this document is often a key part of the approval process for salaried or employed borrowers. If you’re self-employed, you may need to provide other documents, like business financials or tax returns.

An employer letter typically includes specific details about your employment and income to satisfy the lender’s requirements. Here’s a basic template and key elements that should be included:

[Company Letterhead]

Date: [Insert Date]

To Whom It May Concern,

This letter is to confirm that [Employee’s Full Name] is currently employed with [Company Name] as a [Job Title]. [He/She/They] has been employed with us since [Start Date].

[Employee’s Full Name] is employed on a [Full-time/Part-time/Contract] basis and earns an annual salary of $[Amount] (or an hourly rate of $[Amount] if applicable). Additionally, [he/she/they] receives bonuses or other compensation amounting to approximately $[Amount], if applicable.

We confirm that [Employee’s Full Name] is in good standing with the company, and there are no plans to terminate or reduce [his/her/their] employment in the foreseeable future.

Should you require any further information, please feel free to contact me at [Employer’s Contact Information].

Sincerely,

[Signature]
[Employer’s Full Name]
[Employer’s Job Title]
[Company Name]
[Company Address]
[Phone Number]
[Email Address]

A CRA Notice of Assessment (NOA) is a vital document when applying for a mortgage. It provides a summary of an individual’s annual income and taxes, issued by the Canada Revenue Agency (CRA) after filing a tax return. Lenders request NOAs as part of mortgage applications to verify income and assess a borrower’s financial situation.

How a CRA NOA is used in Mortgage Applications:

Income Verification:

  • The NOA reflects total income from all sources (employment, investments, self-employment, etc.).
  • Lenders use it to verify the income claimed by the borrower in the mortgage application.
  • Self-employed borrowers especially rely on NOAs, as they may not have regular pay stubs.

Debt and Tax Assessment:

If there are any taxes owing, this will be shown on the NOA. Lenders may view outstanding tax liabilities as additional debt, which can affect the borrower’s debt-to-income ratio and mortgage approval.

Consistency Over Time:

Lenders often ask for the last 2-3 years of NOAs to ensure that the borrower’s income is stable and consistent over time.

For self-employed borrowers or those with variable income (e.g., commissions, bonuses), this is critical to demonstrate steady earnings.

Proof of Payment:

If the borrower has tax arrears or any unpaid balances, lenders may want to see that taxes have been paid in full. The NOA helps confirm this.

How Many NOAs Are Required for Mortgages?

  • Salaried Employees: Typically, 2 years of NOAs.
  • Self-Employed or Commission-Based Employees: Lenders usually ask for 2-3 years of NOAs, along with additional documentation like T1 Generals or financial statements.

Key Role in Different Types of Mortgages:

Traditional Mortgages: Salaried or hourly employees may only need to provide recent NOAs if additional proof of income is required.

Self-Employed Mortgages: Lenders will typically place much more emphasis on NOAs to assess income stability since self-employed individuals might not have regular pay stubs.

Tips for Mortgage Applicants:

  • Make sure all taxes are paid, as unpaid balances may affect your mortgage approval.
  • Gather NOAs for the past 2-3 years in case the lender requests them.
  • Working with a mortgage broker to better prepare your financial documents, as the application process might require additional proofs of income.

If you have any questions regarding this assessment, please contact the CRA at 1-800-959-8281.

Here is an example of a CRA Notice of Assessment (NOA):

  • Total income for the year (line 15000)
  • Taxable income (line 26000)
  • Total tax assessed
  • Total federal and provincial taxes paid
  • Any balance owing or refund due
  • The Total Income (Line 15000) and Taxable Income (Line 26000) are two critical figures that lenders look at to determine your ability to afford a mortgage.
  • Any balance owing or refund also indicates whether taxes were correctly paid, which is important for financial health assessment during mortgage approval.

 

For self-employed individuals seeking a mortgage, lenders typically require more documentation than for salaried employees. Since self-employed income can be more variable and harder to verify, lenders want to see a solid financial track record to assess the borrower’s ability to repay the loan. Here’s a list of the typical business financials and documents that self-employed borrowers need to provide:

1. Personal Income Tax Returns (2-3 Years)

Notice of Assessments (NOA): Lenders generally ask for 2-3 years of personal tax returns and Notices of Assessment from the Canada Revenue Agency (CRA) to verify the borrower’s income and ensure there are no outstanding tax liabilities.

T1 Generals: The complete tax return (T1 General) that includes details of the borrower’s personal income and deductions.

2. Business Financial Statements (2-3 Years)

If the self-employed individual operates a corporation or partnership, lenders may ask for full business financial statements prepared by a professional accountant.

These should include:

Income statement (profit and loss): Shows the business’s income and expenses.
Balance sheet: Lists the business’s assets, liabilities, and equity.

3. Proof of Business Ownership

This may include:
Articles of incorporation (if incorporated).
Business registration documents (for sole proprietorships or partnerships).

4. Bank Statements

Lenders may request 3-6 months of business and personal bank statements to assess the cash flow of the business and verify consistency in income deposits.

5. Contracts or Invoices (Optional)

Some lenders may ask for contracts, invoices, or agreements with clients to prove ongoing work and future income.

6. Account Letter (Optional)

In some cases, lenders may ask for a letter from a certified accounts verifying the borrower’s income and business structure. 

Mortgage lenders often require detailed financial documents like the T1 General and the Statement of Business Activities (T2125), especially for self-employed individuals. These documents help lenders assess a borrower’s income and financial stability. Below is an explanation of both forms and their role in the mortgage application process.

T1 General (Personal Income Tax Return Form)

The T1 General is a comprehensive tax return form that summarizes an individual’s income, deductions, and taxes owed or refunded. It’s an essential document for both salaried and self-employed individuals applying for mortgages.

Key Sections of the T1 General:

  • Personal Information: Name, SIN, address, and filing status.
  • Total Income (Line 15000): Includes income from all sources (employment, business income, capital gains, etc.).
  • Net Income (Line 23600): Gross income minus deductions like RRSP contributions and union dues.
  • Taxable Income (Line 26000): The amount of income on which taxes are calculated.
  • Federal and Provincial Tax Deductions: Taxes paid or payable, and any refundable credits.
  • Refund or Balance Owing: Whether you owe taxes or are due a refund.

Why Lenders Request T1 General for Mortgages:

Income Verification: Lenders use the T1 General to verify all sources of income, including self-employment and investments.

Deductions & Tax Obligations: It shows any deductions, outstanding taxes, or other liabilities, which may affect the mortgage qualification process.

Consistency Over Time: Lenders typically ask for 2-3 years of T1 Generals to assess whether your income is stable, particularly if you’re self-employed or have fluctuating income.

Here is an example of a T1 General (Personal Income Tax Return Form):

Statement of Business or Professional Activities (T2125)

The T2125 Statement of Business or Professional Activities is a key part of the tax filing process for self-employed individuals, freelancers, or those earning income through a small business. This form details the revenue and expenses related to running a business.

Key Sections of the T2125:

Business Information:

  • Business Name and Address
  • Business Code (industry-specific classification)
  • Fiscal Period (the time period for which you are reporting income)

Income:

Gross Income: The total income generated from business or professional services.

Expenses: Categories like advertising, office supplies, rent, salaries, utilities, vehicle expenses, and capital cost allowance (depreciation of business assets).

Net Business Income: The gross income minus all allowable business expenses.

Net Profit/Loss: After deducting expenses from income, this line shows your business’s net income, which is reported on the T1 General as part of your total income.

Why Lenders Request T2125 for Mortgages:

Net Business Income: Lenders use the net business income to calculate your overall income and determine how much mortgage you can afford.

Expense Patterns: The form helps lenders understand your business’s financial stability and whether your income is sustainable, particularly for self-employed borrowers.

Consistency: Lenders typically want 2-3 years of T2125 forms to ensure your business income is stable or growing, which helps them assess the long-term viability of your earnings.

Here is an example of a Statement of Business Activities (T2125):

Mortgage Application Process for Self-Employed or Business Owners

If you’re self-employed, lenders often look at both the T1 General and the T2125 (Statement of Business Activities) to evaluate:

  • Total Income: The lender will add up all sources of income (from employment, business, and other investments) shown on your T1 General.
  • Business Viability: The T2125 provides insight into how well your business is doing and whether your business income can sustain a mortgage.
  • Consistency: Having steady or increasing income over 2-3 years will improve your chances of mortgage approval.

Additional Documents for Self-Employed Mortgage Applicants:

  • CRA Notice of Assessments (NOAs) for the last 2-3 years to verify that taxes have been paid.
  • Business Financial Statements (if applicable) to provide more detailed insights into the financial health of the business.
  • Bank Statements to show cash flow.

Tips for Self-Employed Borrowers:

  • Maintain thorough and organized records of your business income and expenses.
  • Be prepared to provide at least 2-3 years of both T1 General and T2125 documents, along with NOAs.
  • Work with a mortgage broker, as they can help present your financials in the best light to lenders.

The T4 and T4A slips are common tax documents used to report different types of income to the Canada Revenue Agency (CRA). These forms are often requested by lenders during the mortgage application process to verify an applicant’s income and ensure they have a stable and reliable source of earnings. Here’s an overview of both forms and how they are used in mortgage applications:

T4 Slip (Statement of Remuneration Paid)

The T4 slip is issued by employers to employees and reports employment income, along with deductions made during the tax year. It’s the most common slip for salaried or hourly employees.

Key Sections on the T4 Slip:

  • Employment Income (Box 14): Total income earned from the employer during the year.
  • Income Tax Deducted (Box 22): The amount of federal and provincial tax withheld by the employer.
  • Canada Pension Plan (CPP) Contributions (Box 16): The contributions deducted for CPP.
  • Employment Insurance (EI) Premiums (Box 18): The amount deducted for EI premiums.
  • Other Boxes: Deductions for union dues, RRSP contributions, taxable benefits, etc.

Why Lenders Request T4 Slips:

Income Verification: The T4 slip shows a summary of an applicant’s total employment income for the year, which is crucial for lenders to assess how much mortgage the applicant can afford.

Tax Deduction Verification: It verifies that income taxes and other mandatory contributions (like CPP and EI) have been properly deducted.

Employment Stability: A history of steady employment income from multiple T4 slips over 2-3 years can improve the likelihood of mortgage approval.

T4A Slip (Statement of Pension, Retirement, Annuity, and Other Income)

The T4A slip reports various types of income that are not considered regular employment income. It’s issued for pensions, self-employment income, commissions, scholarships, or other sources of income that aren’t covered by a traditional T4.

Key Sections on the T4A Slip:

  • Box 020: Self-employed commissions.
  • Box 028: Other income, including fees for services or freelance work.
  • Box 016: Pension or retirement income.
  • Box 105: Scholarships or bursaries.
  • Box 048: Fees for services paid to self-employed individuals (e.g., contractors or consultants).

Why Lenders Request T4A Slips:

Verification of Non-Employment Income: If you receive income from freelance work, commissions, pensions, or other non-salary sources, the T4A shows the total amounts and helps lenders calculate your overall income.

Self-Employed Income: For self-employed borrowers or those who receive commissions, the T4A is crucial in providing evidence of their earnings. Lenders often request multiple years of T4A slips to ensure income stability.

Pension or Retirement Income: If the applicant is retired or nearing retirement, the T4A shows pension income, which is factored into mortgage affordability calculations.

Mortgage Application Process for T4 and T4A Holders

Salaried Employees (T4 Holders):

  • Most lenders will request T4 slips from the past 1-2 years to verify income and job stability.
  • CRA Notice of Assessment (NOA) is also commonly requested to confirm that the taxes on that income have been paid.
  • If the applicant has consistent income and stable employment history, the T4 provides a solid basis for calculating mortgage affordability.

Self-Employed or Commission-Based Borrowers (T4A Holders):

  • Lenders often require 2-3 years of T4A slips to confirm that the borrower has consistent income from their business, commissions, or contract work.
  • Additional documents like T1 Generals, Statement of Business Activities (T2125), and NOAs may be required to provide a fuller picture of the borrower’s financial situation.
  • Some lenders may also request bank statements or business financials to validate the cash flow and health of the business for self-employed applicants.

Tips for Applicants Using T4 and T4A Slips:

  • Keep multiple years of both T4 and T4A slips handy, as lenders often request 2-3 years of documents.
  • Ensure that all income reported on your mortgage application matches the income on your T4 and T4A slips.
  • Be prepared to explain any fluctuations in income, particularly for commission or self-employed work, which can affect how lenders view your financial stability.

Here are examples a T4 Slip (Statement of Remuneration Paid) and T4A Slip (Statement of Pension, Retirement, Annuity, and Other Income):

When using corporate dividend income to boost your personal income for a mortgage, there are a few key considerations lenders will take into account. Here’s how the process typically works:

1. Inclusion of Dividend Income as Personal Income

Corporate dividend income can be added to your personal income when applying for a mortgage, but lenders usually evaluate it differently from traditional salaried income. The dividend income must appear on your personal tax returns (T1 General), and lenders may review a two-year history of this income to ensure it’s consistent and sustainable.

2. Two-Year Average of Dividend Income

To add corporate dividend income to your personal income, most lenders require a two-year history of dividends being paid to you. They will average this income over the two years to provide a more reliable estimate of your annual income. This is done to smooth out any fluctuations in dividend amounts.

3. Grossing Up Dividend Income

Since dividends are taxed more favourably than salaried income, some lenders will “gross up” the dividend income by a percentage (often between 15% to 25%). This grossing up reflects the pre-tax equivalent of the dividend, thus increasing the amount of income lenders consider when determining your mortgage affordability. For example, if you receive $50,000 in dividends, and the lender uses a 20% gross-up, they will consider it as $60,000 for qualifying purposes.

4. Corporate Financial Health

Lenders may want to see corporate financial statements to verify that the corporation is generating sufficient profit to sustain the dividends. This is especially true for smaller businesses where your personal income is closely tied to the company’s performance.

5. Personal and Corporate Tax Returns

You’ll need to provide your personal tax returns (T1 Generals),Notices of Assessment (NOAs), and Statement of Investment Income (T5) from the Canada Revenue Agency (CRA) to show that you’ve declared the dividend income. Some lenders may also require corporate tax returns (T2) to review the company’s overall financial health.

6. Debt-Service Ratios (GDS and TDS)

Lenders will use the dividend income in the same way they use other income to calculate your Gross Debt Service (GDS) and Total Debt Service (TDS) ratios. The GDS ratio measures the percentage of your income that goes towards housing costs (like mortgage payments, property taxes, heating), and TDS measures the percentage of your income that goes towards all debt payments.

Example of How it Works:

  • Dividend Income: Suppose you receive $50,000 annually from your corporation in dividends.
  • Gross-Up: If the lender applies a 20% gross-up, they will treat it as $60,000.
  • Mortgage Qualification: This increased income could help you qualify for a larger mortgage than if you only used your base income or salary.

7. Types of Lenders

A-Lenders (Major Banks): These lenders typically have more stringent rules when it comes to self-employed or dividend income. They’ll require consistent documentation and may scrutinize your corporate financials more closely.

B-Lenders (Alternative Lenders): B-lenders may be more flexible with dividend income, especially if your overall credit and financial profile are strong. They might accept a shorter income history or use a higher gross-up percentage.

8. Impact on Down Payment

If your corporate dividend income is substantial and stable, it can help you qualify for a higher mortgage and potentially reduce the size of your required down payment, though some lenders may still prefer a larger down payment for self-employed or dividend-based applicants.

Considerations:

  • Dividend Fluctuation: Dividends can be more volatile than salaried income, which may raise concerns for the lender.
  • Company Structure: If your business has retained earnings or is generating substantial profits, it will be easier to justify the continuation of dividend payments. 

By combining corporate dividend income with any other personal income sources, you may be able to increase your purchasing power. However, each lender will have its own criteria, so it’s crucial to work with a mortgage broker who understands the requirements for self-employed individuals and those receiving dividend income.

Here is an example of a Statement of Investment Income (T5):

Rental Property

Rental income can be used to help qualify for a mortgage, but lenders have specific guidelines for how it is confirmed and calculated. Here’s a summary of how rental income is typically handled when applying for a mortgage:

1. Types of Rental Income

Existing Rental Income: This refers to income generated from properties already rented out, such as investment properties or units within your primary residence (like a duplex).

Prospective Rental Income: If you are buying a property that you plan to rent out, lenders may consider future rental income, but they typically apply more conservative estimates.

2. Documents Required to Confirm Rental Income

To confirm rental income, lenders usually require:

  • Lease Agreements: For properties currently rented, a copy of the signed lease agreement is required.
  • T1 General (Tax Returns): For rental income declared on your tax returns, lenders will usually ask for the last 2-3 years of tax returns to confirm consistency in the income.
  • Notice of Assessment (NOA): This confirms your total income declared and accepted by the Canada Revenue Agency (CRA).
  • Rental Statements: For larger rental portfolios, some lenders may ask for detailed rental statements outlining income, expenses, and net profits.
  • Bank Statements: To verify rental payments are being deposited regularly into your account.

3. Calculating Rental Income for Mortgage Qualification

Lenders typically use one of the following methods to account for rental income:

Inclusion Method: The lender adds a percentage (often 50% to 80%) of the rental income to the borrower’s total income. The percentage varies by lender and whether the rental property is owner-occupied or strictly an investment property.

Offset Method: A percentage (usually 50% to 80%) of the rental income is used to offset the expenses (like mortgage payments, property taxes, insurance, etc.) associated with the rental property.

4. Rental Income for Investment Properties

Down Payment: Most lenders require a higher down payment for investment properties (typically 20% or more) compared to owner-occupied properties.

Debt Service Ratios: Lenders will use rental income to calculate debt service ratios (Gross Debt Service (GDS) and Total Debt Service (TDS)) to determine if you can afford the mortgage.

5. Vacancy and Maintenance Factor

Some lenders may apply a “vacancy and maintenance” factor to account for potential periods where the property is not rented. This could be 5% to 10% of the gross rental income, reducing the amount of rental income considered for mortgage qualification.

6. Rental Income from Short-Term Rentals

Rental income from short-term rentals (e.g., Airbnb) may be harder to use for mortgage qualification. Some lenders may not consider this type of income unless it’s well-documented over several years and shown on tax returns.

7. Rental Income and CMHC (Canada Mortgage and Housing Corporation)

CMHC, which insures high-ratio mortgages, has specific rules for using rental income. They allow rental income to be included in the borrower’s total income if it’s from a legal rental suite in their primary residence or a property purchased with the intention of renting it out. CMHC may also allow up to 100% of rental income if certain conditions are met, such as proven rental history and documentation.

Each lender may have slight variations in their approach to confirming and calculating rental income, so it’s essential to discuss this with your mortgage broker, so they can confirm the guidelines of the specific lender you’re working with.

Down Payment

When applying for a mortgage, lenders require bank statements as part of the verification process for your down payment. This helps them ensure that the funds you’re using for the down payment are legitimate and meet regulatory requirements. Here’s a breakdown of how bank statements are used for mortgage down payment verification:

Why Lenders Request Bank Statements:

  • Proof of Down Payment: Lenders need to verify that you have sufficient funds available for the down payment. A bank statement provides clear documentation of where the money is coming from and how long it has been in your account.
  • Anti-Money Laundering (AML) Compliance: Under Canadian law, lenders must comply with anti-money laundering regulations, which require them to verify the source of your down payment. Large or sudden deposits may raise red flags, and the lender may ask for explanations or additional documentation for those funds.
  • Debt-to-Income Ratio: Bank statements allow lenders to see your financial health, including your current debts, regular income, and spending patterns, helping them assess whether you can afford the mortgage payments.

What Lenders Look for in Bank Statements:

Consistency of Funds: Most lenders want to see at least 90 days (3 months) of bank statements to verify that the down payment funds have been in your account for a significant period. Large, recent deposits may need to be explained (e.g., gift from family, sale of an asset, etc.). These can be downloaded from your online banking portal.

Source of Funds: The bank statements should show the accumulation of savings from income or other legitimate sources. For a gifted down payment, lenders will often require both a gift letter and the bank statement showing the transfer. Each lender has their own gift letter and will provide a copy. If the funds come from selling an asset (e.g., a car or investment), proof of the sale may also be needed.

Sufficient Funds for Closing Costs:

In addition to the down payment, lenders may check if you have enough funds to cover closing costs (typically around 1.5% to 4% of the property price, depending on the province).

Liabilities and Spending Patterns:

Lenders may also review your regular account activity to see any recurring payments, liabilities (like car loans or credit cards), and whether you maintain a healthy balance in your account.

Details Required on the Bank Statement:

  • Your Name and Account Number: The statement must clearly show that the account belongs to you.
  • Dates: The statement should cover a period of at least 90 days.
  • Deposits: The amount and source of all deposits during this period, particularly large ones, must be clear.
  • Account Balance: The statement must show the current balance to confirm sufficient funds for the down payment.

Acceptable Sources of Down Payment:

Personal Savings: This is the most straightforward source of funds.

RRSP Withdrawal: First-time homebuyers can withdraw up to $60,000 from their RRSP under the Home Buyers’ Plan. 

FHSA Withdrawal: First-time homebuyers can withdrawal, tax-free, on qualifying home purchases under the FHSA program.

TFSA Withdrawal: Withdrawals are made tax-free and without repayment obligations.

Gift from Immediate Family: Lenders only accept gifted down payments from direct family members (parents, siblings, grandparents, etc.).

Sale of Assets: If you’re using the proceeds from the sale of a car, investments, or other assets, documentation of the sale (e.g., bill of sale, investment liquidation statement) will be required.

Borrowed Down Payment: In some cases, you can borrow the down payment, but the lender must be aware, and the loan payments will be factored into your debt-to-income ratio.

Tips for Providing Bank Statements:

  • Avoid Large Unexplained Deposits: If you do have a large deposit, provide a clear explanation (e.g., a bonus, gift, or sale of an asset) along with supporting documents.
  • Ensure your Name, Account Number, and Financial Institution’s details are visible.
  • Be Transparent: If there are any irregularities in your account history, be upfront and provide an explanation. Lenders may request further documentation if anything seems unclear.

What Happens if Funds Are Recently Transferred?

If you receive a large deposit into your account within 90 days of your application, you’ll need to show the source of the funds. This could be:

  • A sale of assets (you’ll need the sale documentation).
  • Gifted funds (you’ll need not only the gift letter but possibly documentation of the transfer).
  • Savings from another account (you may need to provide statements from the other account as well).

Additional Documents for Down Payment Verification:

Investment Account Statements: If you are using funds from an investment account (stocks, mutual funds, etc.), you’ll need to provide statements from that account.

RRSP, FHSA, or TFSA Withdrawals: If you’re using funds from an RRSP (under the Home Buyers’ Plan), FHSA, and/or a TFSA you’ll need documentation showing the withdrawal(s).

By providing accurate and thorough documentation, you’ll help streamline the mortgage approval process. A mortgage broker can guide you on exactly what the lender requires and how to best present your financial situation.

A gift letter for a mortgage down payment is a document that confirms that the funds being used for a down payment are a gift and not a loan. This is important because lenders need to ensure that the borrower is not incurring additional debt that would impact their ability to repay the mortgage. The gift letter must confirm that the funds are a gift and not expected to be repaid.

Key Elements of a Gift Letter:

Donor and Recipient Information:

  • Full name of the person giving the gift (the donor).
  • Full name of the person receiving the gift (the borrower).

Relationship to Borrower:

  • The letter must specify the relationship between the donor and the borrower.
  • Lenders only accept gifts from immediate family members (parents, siblings, grandparents, etc.).

Gift Amount: The exact amount of money being gifted for the down payment.

Confirmation of Gift: A clear statement confirming that the money is a gift and does not need to be repaid. This assures the lender that the borrower is not taking on additional financial obligations.

Date of Transfer: The date when the gifted funds will be or have been transferred to the borrower’s account.

Signature: The gift letter must be signed by both the donor and the borrower.

Sample Gift Letter Format:

Here’s a basic example of what a gift letter might look like, but most lenders will provide you with a set copy:

Date: [Insert Date]

To Whom It May Concern,

I, [Donor’s Full Name], confirm that I am gifting the sum of [Insert Dollar Amount] to [Borrower’s Full Name] for the purpose of a down payment on the purchase of a home at [Property Address, if known]. I am [relationship to borrower (e.g., parent, grandparent, sibling)] of the recipient.

This gift is non-repayable, and there is no expectation or requirement of repayment. These funds are being provided to assist with the down payment for their mortgage.

The gifted funds will be transferred to [Borrower’s Name] on [Date of Transfer].

Sincerely,

[Donor’s Signature]
[Borrower’s Signature]

Additional Considerations:

Proof of Gifted Funds: In addition to the gift letter, lenders may ask for proof of the transfer of funds. This can include bank statements from both the donor and the borrower showing the transfer of money.

Immediate Family Requirement: Lenders only accept down payment gifts from immediate family members (parents, siblings, grandparents). Some lenders may have specific rules, so it’s important to confirm with your mortgage broker.

Non-Repayable Requirement: The lender must be certain that the gifted funds are not a loan that would add to the borrower’s debt load. This is why the non-repayable statement in the letter is crucial.

Timing of Funds: Lenders generally prefer that the funds be in the borrower’s account well in advance of the closing date. Make sure the transfer happens early enough to avoid delays.

Mortgage Gift Letter Has An Expiry: Gift letters come with an expiration date. Since financial institutions typically require down payment funds to be in your account for at least 90 days, this is the standard time during which you must close on the home. 

Why Lenders Require a Gift Letter: Confirm No Additional Debt: A gift letter assures the lender that the down payment is coming from a legitimate source and will not add to the borrower’s debt load, which could affect their ability to pay the mortgage.

Comply with Mortgage Regulations: Lenders are required to comply with anti-money laundering laws and other financial regulations, so they need clear documentation of the source of funds for the down payment.

Verify Stability of Funds: The gift letter helps lenders confirm that the borrower has access to stable funds for the down payment without financial strings attached.

When is a Gift Letter Needed?

When part or all of the down payment is being gifted by a family member, rather than coming from the borrower’s own savings.

In situations where the borrower is using funds from a First Home Savings Account (FHSA)or government programs, a gift letter may still be required to show that the additional down payment funds are being gifted.

Down Payment Requirements:

In Canada, the minimum down payment required depends on the purchase price of the home:

  • 5% for homes priced up to $500,000.
  • 10% for the portion of the price between $500,000 and $1,499,000.
  • 20% for homes priced $1,500,000 or more.

Gifted down payments are commonly used to help meet these requirements, especially for first-time homebuyers.

Conclusion:

A gift letter is a straightforward document, but it’s an important part of the mortgage application process if you’re using gifted funds for a down payment. It ensures the lender that the gift is not a loan and does not need to be repaid, which can affect mortgage qualification. Speak with your mortgage broker early so that they can obtain the lender’s required letter. Make sure to follow the lender’s requirements and provide all necessary documentation to avoid any delays.

When purchasing a home, mortgage closing costs are the final set of expenses that need to be settled before the transaction can be completed. They are in addition to your down payment and are essential for securing the property and mortgage. Closing costs typically range from 1.5% to 4% of the purchase price of the home, depending on the province and specific circumstances. Here’s a comprehensive guide on what to expect:

Key Mortgage Closing Costs:

Land Transfer Tax (LTT):

What it is: A tax paid to the provincial or municipal government upon transferring ownership of the property.

How much: The amount depends on the property’s purchase price and the province or municipality. Some cities have an additional municipal land transfer tax.

First-Time Homebuyer Rebates: Some provinces offer rebates for first-time homebuyers to reduce this cost.

Legal Fees and Disbursements:

What it is: You’ll need to hire a real estate lawyer, or notary, to handle the legal aspects of the purchase, including title search, preparing documents, and registration of the property transfer.

How much: Legal fees typically range from $1,000 to $2,500.

Disbursements: These are additional out-of-pocket expenses your lawyer incurs on your behalf (e.g., title searches, registration fees).

Title Insurance:

What it is: Title insurance protects the homeowner and lender against issues related to the property’s ownership, such as title defects, unpaid taxes, or zoning violations.

Is it mandatory: No, unless mandated by the lender.

How much: Usually costs between $200 and $400, depending on the property and lender requirements.

Property Insurance:

What it is: Home insurance is required by lenders to protect your home against fire, theft, and other damages. You’ll need to provide proof of insurance before closing.

How much: The cost varies based on the value of the home, location, and coverage, typically ranging from $500 to $2,500 annually.

Property Tax Adjustments:

What it is: If the seller has prepaid property taxes for the year, you will need to reimburse them for the portion covering the time after you take possession.

How much: The amount depends on when you purchase the home and the amount of taxes already paid.

Mortgage Default Insurance (CMHC/Genworth/Sagen Insurance):

What it is: If your down payment is less than 20%, you’ll be required to purchase mortgage default insurance to protect the lender in case you default on the loan. This can be added to your mortgage payments or paid as a lump sum at closing.

How much: Premiums range from 2.8% to 4% of the mortgage amount, depending on the size of the down payment.

Appraisal Fee:

What it is: Some lenders may require an appraisal of the property to determine its market value before issuing a mortgage.

How much: Typically between $400 and $600, though some lenders cover this cost.

Home Inspection Fee:

What it is: It’s highly recommended to get a home inspection to identify any potential issues with the property before purchase.

How much: Generally costs between $300 and $600, depending on the size and location of the home.

Interest Adjustment:

What it is: You may need to pay an interest adjustment if your first mortgage payment does not coincide with the closing date. This covers interest from the date of closing to the date of your first mortgage payment.

How much: The amount depends on the size of the mortgage and the timing of your payment schedule.

Prepaid Utilities or Condo Fees:

What it is: If the seller has prepaid utilities, condo fees, or other costs, you may need to reimburse them for the portion that covers your ownership period.

How much: Varies depending on the utility bills, condo fees, or other prepayments made by the seller.

Moving Costs:

What it is: While not a formal closing cost, don’t forget to budget for moving expenses, such as hiring a moving company or renting a truck.

How much: Typically ranges from $500 to $2,000, depending on the distance and services required.

First-Time Home Buyer Incentives:

If you’re a first-time homebuyer, there are several programs and incentives available that may help reduce your closing costs:

– RRSP Home Buyers’ Plan (HBP): Allows you to withdraw up to $60,000 from your RRSP (Registered Retirement Savings Plan) tax-free to use as a down payment.

– First Home Savings Account (FHSA): If you meet qualifying withdrawal conditions, monies may be used towards the purchase of my home and be tax-free (conditions apply).

– First-Time Home Buyers’ Tax Credit (HBTC): A tax credit worth up to $1,500 that can help offset some of the closing costs associated with buying your first home.

– Land Transfer Tax Rebate: Some provinces and cities offer a rebate on the land transfer tax for first-time homebuyers

Tips for Managing Closing Costs:

  1. Budget Ahead: Since closing costs typically range from 1.5% to 4% of the home’s purchase price, it’s crucial to budget for them in advance to avoid surprises.
  2. Use a Mortgage Broker: A mortgage broker can guide you through the process and help you understand how much you need to set aside for closing costs.
  3. Get Accurate Estimates: Ask your lawyer or notary for an estimate of the legal fees, title insurance, and other costs specific to your situation.
  4. Check for First-Time Buyer Programs: If you’re a first-time buyer, make sure to explore all available rebates and credits to reduce your overall closing costs.

Conclusion:

Closing costs are an essential part of the home-buying process. By understanding what’s involved and planning for these expenses in advance, you can avoid last-minute surprises and ensure a smoother home purchase. It’s important to save enough to cover these costs in addition to your down payment, and working with professionals like real estate lawyers and mortgage brokers can help you navigate the process efficiently.

When applying for a mortgage, lenders or mortgage providers may request a void cheque for various reasons, primarily for setting up automatic mortgage payments. A void cheque contains your bank account information, which allows the lender to automatically withdraw mortgage payments from your account.

Here’s a breakdown of why void cheques are used and how they fit into the mortgage process:

What is a Void Cheque?

A void cheque is a regular cheque that has the word “VOID” written across it. This disables the cheque from being cashed but keeps the key information visible. The void cheque provides important details like:

  • Bank Name and Branch
  • Transit Number
  • Institution Number
  • Account Number

Why Do Lenders Request a Void Cheque for Mortgages?

Setting Up Automatic Payments: Lenders require a void cheque to set up Pre-Authorized Debit (PAD) payments, where mortgage payments are automatically withdrawn from your bank account on a specified date each month. This is the most common way to ensure timely payments.

Direct Deposit or Withdrawal Information: The cheque provides the necessary bank account information (account number, transit number, and financial institution number) required to link your mortgage account with your bank.

Account Verification: Some lenders may ask for a void cheque to ensure that the account you’re providing is active and belongs to you. It’s a simple way to verify your account information and avoid any mistakes in setting up the withdrawals.

When Will You Need to Provide a Void Cheque?

At Closing: Once your mortgage is approved and the closing date is approaching, the lender will likely ask for a void cheque to ensure that your mortgage payments can be automatically withdrawn.

Changing Bank Accounts: If you switch bank accounts during the mortgage term, you may need to provide a new void cheque to update the withdrawal information.

How to Obtain and Provide a Void Cheque:

From Your Chequebook: Simply take a blank cheque from your chequebook and write “VOID” in large letters across the front. Do not sign the cheque. Scanned and uploaded/emailed copies of physical Void cheques are acceptable by most lenders.

Online Banking (Digital Void Cheque): Most banks offer the option to generate a digital void cheque online. Log into your online banking account, navigate to your chequing account, and look for an option like “Direct Deposit Information” or “Download Void Cheque.” You can download or print a PDF version of the void cheque.

Other Alternatives to Void Cheques:

If you don’t have access to a void cheque or chequebook, most lenders will accept the following alternatives:

Direct Deposit Form: This can be obtained from your bank and includes the same banking details required for withdrawals.

Pre-Authorized Debit (PAD) Form: Some lenders provide a form that allows you to input your banking details directly for setting up payments.

Online Banking Printout: A printout from your online banking showing your account details may sometimes be accepted, but you should verify this with your lender.

Speak with your mortgage broker to confirm your lender’s preferred alternative.

Common Issues to Avoid:

Incorrect Bank Account Information: Ensure that all account numbers (transit number, financial institution number, and account number) are correct to avoid payment delays or misapplied payments.

Outdated Information: If your account information changes during your mortgage term, provide an updated void cheque as soon as possible to prevent missed payments.

Conclusion:

Providing a void cheque is a simple but important step in the mortgage process. It ensures that your lender has the correct banking information to set up automatic withdrawals for your mortgage payments, helping to avoid missed payments or complications. Whether you provide a physical void cheque or a digital version through online banking, this document ensures smooth and timely mortgage payments.

Here is an example of a VOID Cheque:

Other

When applying for a mortgage, lenders require 2 forms of ID to prove identity and confirm the applicant’s information. Here is a list of acceptable forms of identification commonly used in mortgage applications:

Primary Identification (must include photo, signature, be government-issued, and have an expiry date):

Canadian Passport
Driver’s License (issued by a Canadian province or territory)
Provincial ID card (in BC only, and must be a separate card from their driver’s licence)
Permanent Resident Card
Diplomatic identification issued by Foreign Affairs Canada
Firearms Licence (must be issued in Canada and include a photo)
Secure Certificate of Indian Status
Canadian Armed Forces Identification Card
NEXUS Card (for cross-border travel)

Secondary Identification (required in combination with a primary ID):

Social Insurance Number (SIN) card
Birth Certificate
Health Card (depending on the province, as some provinces restrict its use as ID)
Old Age Security Card
Credit Card or Bank Card (with name and signature)
Citizenship Certificate or Citizenship Card
Driver’s License from the County they reside in
Foreign Passport (if applying as a non-resident or new immigrant)

Lenders may have specific requirements, so it’s always a good idea to speak with your mortgage broker to confirm the acceptable documentation.

Obtaining a mortgage with bad credit can be more challenging, but it is still possible. Here’s what you need to know if you have poor credit and are considering buying a home or refinancing a mortgage:

1. Impact of Credit Score

Credit Scores: In Canada, credit scores range from 300 to 900. A score below 600 is generally considered poor by most lenders. With a lower score, you may face higher interest rates, stricter terms, or fewer lender options.

Prime vs. Subprime Lenders:

Prime Lenders (big banks, credit unions) typically require good-to-excellent credit for the best rates.

Subprime Lenders or alternative lenders (private lenders, etc) cater to those with less than ideal credit. However, their rates tend to be higher, and the terms may be more restrictive.

2. Down Payment Requirements

Higher Down Payments: You may be required to put down a larger down payment. For those with good credit, a down payment of 5% is typical for homes under $500,000. Whereas, lenders might ask for a 20-35% down payment to mitigate their risk for those with poor credit

Loan-to-Value (LTV) Ratio: Lenders may approve a lower LTV, meaning you can only borrow a smaller portion of the home’s value.

3. Mortgage Default Insurance

Mortgage Insurance (CMHC): If your down payment is less than 20%, you’ll need to pay for mortgage default insurance through the Canada Mortgage and Housing Corporation (CMHC), Sagen (formerly Genworth), or Canada Guaranty. However, these insurers may reject applications with bad credit, limiting your options.

No Mortgage Insurance: If you have a 20% or greater down payment, you can avoid mortgage insurance. Some alternative lenders may allow this but will charge higher interest rates to offset the risk.

4. Interest Rates

Higher Interest Rates: Lenders see those with lower credit scores as higher-risk borrowers, which often translates into higher mortgage interest rates. The difference in rates can be significant, leading to higher monthly payments and greater overall interest paid over the mortgage’s lifetime.

Fixed vs. Variable Rates: Most subprime lenders offer fixed-rate mortgages to ensure they mitigate risk with predictable payments.

5. Types of Lenders

A Lenders: These are traditional lenders like big banks and credit unions. They prefer borrowers with strong credit scores, stable incomes, and low debt levels.

B Lenders: These are alternative lenders who offer mortgages to individuals with lower credit scores or non-traditional income sources. While their rates are higher, they are more flexible with credit issues.

Private Lenders: Private lenders often have the least stringent requirements but charge the highest rates. They may also require more collateral or offer shorter mortgage terms.

6. Mortgage Brokers

Specialized Brokers: Mortgage brokers can be valuable when you have bad credit because they have access to a wide range of lenders, including those that specialize in subprime mortgages. They can help you find the best terms available for your situation.

Be Cautious: Some brokers may charge higher fees or push unfavourable products. Ensure the broker is reputable and transparent about all fees and conditions.

7. Debt-to-Income Ratio (DTI)

Income Matters More: When you have bad credit, lenders place more emphasis on your income and ability to repay the loan. Your debt-to-income ratio (DTI)—the percentage of your income that goes toward paying debts—will be scrutinized. A lower DTI (typically under 40%) improves your chances of approval.

Stable Employment: Having a stable source of income can help offset a low credit score in the eyes of lenders. Lenders want to see consistent, verifiable income, especially if you have a poor credit history.

8. Improving Your Credit Score

Boosting Your Score: Working to improve your credit score will save you money. Ways to improve your score include:

Paying down credit card balances.

Making all payments on time.

Avoiding new credit inquiries.

Reducing overall debt.

Credit Repair: Sometimes, you can fix errors on your credit report. Get a copy of your credit report from TransUnion or Equifax and check for inaccuracies.

9. Co-Signers

Using a Co-Signer: If you have bad credit, using a co-signer with good credit can improve your chances of getting a mortgage with more favourable terms. The co-signer becomes responsible for the mortgage if you default, so this is a big commitment for them.

Requirements: The co-signer must meet the lender’s credit and income requirements. Co-signing can be risky for the co-signer, as it affects their credit and borrowing capacity.

10. Mortgage Options for Bad Credit

Bad Credit Mortgage: Some lenders specifically offer “bad credit mortgages.” These mortgages have stricter terms, such as higher interest rates and fees, but can help you secure financing.

Second Mortgage: If you already own a home, taking out a second mortgage may be an option to consolidate debt or access home equity. These loans also come with higher rates.

Rent-to-Own: For those unable to qualify for a mortgage right away, a rent-to-own arrangement allows you to rent a home with an option to buy it later. This can give you time to improve your credit while building equity in the property.

11. Alternative Mortgage Solutions

Shorter Mortgage Terms: Some subprime lenders may offer shorter terms (e.g., 1-2 years) with higher interest rates, allowing you to refinance once your credit improves.

Home Equity Line of Credit (HELOC): If you already own a home and have equity, you might be able to use a HELOC to consolidate debt, which can help improve your credit over time.

12. Mortgage Stress Test

Qualifying with Bad Credit: You must pass the mortgage stress test, even with bad credit. The stress test ensures that you can afford the mortgage if interest rates rise. Lenders will evaluate your ability to pay at the higher of either the Bank of Canada’s qualifying rate or 2% above the rate offered.

13. Beware of Predatory Lending

High Fees and Penalties: Some lenders that target those with bad credit may impose high fees, hidden charges, or severe penalties for missed payments. Always read the fine print carefully.

Watch for Scams: Be cautious of lenders or brokers who ask for upfront fees or guarantee approval without verifying your financial situation. Legitimate lenders don’t guarantee mortgages without proper checks.

14. Refinancing Options for Bad Credit

Equity-Based Refinancing: If you already have a mortgage but have bad credit, refinancing can be difficult unless you have significant equity in your home. Lenders may focus more on the property’s value than your credit score in such cases.

Higher Rates for Refinancing: You may face higher interest rates when refinancing with bad credit, but this option can still help if you need to consolidate high-interest debt.

15. Long-Term Financial Planning

Consider the Long-Term Costs: Higher interest rates mean paying more in interest over the life of the mortgage. Make sure you can afford the higher payments and factor in how long it will take you to pay off the mortgage.

Plan to Refinance: If you do obtain a mortgage with bad credit, plan to refinance once your credit improves. Refinancing to a lower rate in the future can save you significant amounts of money.

Final Thoughts:

While getting a mortgage with bad credit is possible, it often comes with higher costs and risks. It’s important to carefully weigh your options, improve your credit where possible, and work with a reputable mortgage broker. Patience and preparation can help you secure better terms over time.

Proof of condo insurance is often required by mortgage lenders before approving or finalizing a mortgage for a condo/townhouse purchase. Condo insurance ensures that both the lender’s investment and the borrower’s property are protected in case of damage or loss. Here’s how this works:

1. Types of Insurance Required for Condos

Personal Condo Insurance (Unit Insurance): This covers the interior of your unit (walls, flooring, appliances, fixtures) and personal belongings, as well as liability coverage for injuries inside your unit.

Condo Corporation Insurance: The condo corporation has a separate insurance policy that covers the building’s structure, common areas (like elevators, hallways, and lobbies), and exterior. However, this does not cover the individual units or personal property within them.

2. Why Lenders Require Proof of Condo Insurance

Mortgage lenders require proof of personal condo insurance to ensure that the borrower’s investment is protected in case of unforeseen damage (like fire or water damage) that could affect the condo unit.

Lenders want to make sure that in the event of a loss, the borrower is not financially devastated, which could lead to default on the mortgage.

The insurance provides coverage for the lender’s collateral (the unit itself) if it’s damaged.

3. Proof of Condo Insurance Requirements

Before finalizing a mortgage, lenders typically ask for a certificate of insurance or policy declaration page from your insurance provider that shows the following:

The insurance policy number.

The name of the insurance provider.

The coverage amount (should be sufficient to cover the contents and improvements within your condo).

The effective and expiry dates of the insurance policy.

Confirmation that liability coverage is included.

In some cases, lenders may ask to be listed as the “loss payee” on your policy. This means that in the event of significant damage to the unit, the insurance company would notify the lender or pay them directly to cover any losses tied to the mortgage.

4. Condo Corporation’s Insurance

While your personal condo insurance covers your unit, lenders will also want to confirm that the condo corporation’s master insurance policy is in place for the building and common areas. This ensures that the overall property (building) is adequately insured.

When buying a condor townhouse, you should request a status certificate from the condo corporation, which includes details about the building’s insurance coverage, among other important information about the condo’s financial health and rules.

Lenders may ask for confirmation from the condo corporation that they have an up-to-date insurance policy for the building. This is critical for both the lender and the buyer, as uninsured damage to the building could impact the value of your unit.

5. When is Proof of Condo Insurance Required?

Lenders will typically ask for proof of insurance before closing on the mortgage, but it may also be a condition of final mortgage approval. Without proof of adequate insurance, lenders may refuse to advance the funds.

In some cases, the lender may ask for proof of insurance shortly after closing, but it’s generally best to have the insurance in place well before the mortgage funds are disbursed.

6. What Happens if You Don’t Provide Proof of Condo Insurance?

If you fail to provide proof of condo insurance, lenders may delay the release of mortgage funds or make it a condition of your mortgage approval.

In extreme cases, if insurance isn’t maintained during the term of the mortgage, the lender may purchase force-placed insurance on your behalf, which tends to be more expensive and only covers the lender’s interests, not the borrower’s personal property or liability.

Having the right insurance in place is not only a lender requirement but also crucial for your own financial security.

When a corporation applies for a mortgage, lenders typically require more documentation compared to an individual mortgage application. This is because corporate mortgages involve assessing both the corporation’s financial health and the personal guarantees of the business owners or directors, if applicable. Here’s a list of the typical documentation required when a corporation applies for a mortgage:

1. Corporate Documents

Lenders need to verify the legal status and structure of the corporation:

Certificate of Incorporation: A copy of the document that proves the company is legally registered in Canada.

Articles of Incorporation: Outlines the structure and purpose of the corporation.

Corporate Bylaws: These are the rules governing how the corporation operates.

Corporate Resolution to Borrow: A formal resolution by the board of directors authorizing the mortgage application and specifying which individuals have the authority to sign documents on behalf of the corporation.

2. Financial Documents

Lenders will closely examine the financial health of the corporation:

Financial Statements (last 2-3 years): Audited or reviewed statements, including income statements, balance sheets, and cash flow statements, showing the company’s profitability and stability.

Business Bank Statements (last 6-12 months): These help verify the corporation’s cash flow and liquidity.

Corporate Tax Returns (last 2-3 years): This helps lenders assess the corporation’s tax history and profitability.

Notice of Assessments (NOAs): These may be required to verify that the company has filed its taxes appropriately.

3. Personal Guarantees and Personal Financials

Even though the mortgage is under the corporation’s name, lenders often require personal guarantees from the directors or key shareholders, especially for smaller or privately held companies:

Personal Net Worth Statements: These outline the personal assets and liabilities of the business owners or guarantors.

Personal Tax Returns (last 2-3 years): Lenders may ask for the personal tax returns of the primary shareholders or directors, especially if they are providing personal guarantees.

Personal Credit Reports: Credit checks are usually performed on the directors or guarantors to assess their creditworthiness.

4. Corporate Ownership and Structure

Lenders need clarity on the ownership and control of the corporation:

Shareholder Register: A list of shareholders and their percentage of ownership in the company.

Director Information: Names, addresses, and positions of the directors and officers of the corporation.

Organizational Chart: For larger corporations, a chart showing the corporate structure, including subsidiaries or affiliated companies, may be required.

5. Business Plan or Purpose of Loan

Lenders may ask for a business plan or a detailed explanation of how the mortgage will be used. For example:

Business Plan: If the mortgage is being used for expansion or acquisition of new property, a business plan may be required to outline future projections and the purpose of the mortgage.

Property Details: Information about the property being purchased, including an appraisal or purchase agreement, zoning details, and any environmental reports if applicable.

6. Property-Related Documents

When a corporation is applying for a mortgage for a specific property, these additional documents are often required:

Purchase Agreement: If the property is being purchased, the agreement between the buyer (corporation) and the seller.

Property Appraisal: A professional appraisal of the property’s value, often required by the lender.

Environmental Assessment: For commercial properties or land, lenders may require environmental assessments to ensure the property is free from environmental liabilities (e.g., contamination).

Property Survey: A legal land survey to confirm property boundaries and identify any issues like easements or encroachments.

7. Lease Agreements (if applicable)

If the corporation is purchasing an income-producing property (e.g., commercial or multi-unit residential), copies of existing lease agreements and rent rolls may be required to assess potential rental income.

8. Insurance Documentation

Lenders will require proof of insurance to ensure the property is protected:

Proof of Property Insurance: Ensuring that the property is insured for its replacement value.

Liability Insurance: Depending on the type of property, the corporation may also need liability insurance.

9. Proof of Deposit or Down Payment

Lenders will require proof of the source of the down payment:

Corporate Bank Statements: Showing that the company has the required funds for the down payment.

Source of Funds: If the funds for the down payment come from a loan or a different source, the lender may ask for documentation on this source.

10. Additional Documents (as requested by lender)

Legal Opinion Letter: Some lenders may require a legal opinion from the corporation’s lawyer confirming the company’s ability to enter into the mortgage contract.

Corporate Tax Account Status: Proof that the corporation has no outstanding tax liabilities or is up to date on tax filings (sometimes referred to as a clearance certificate from the CRA).

Summary:

Corporate Legal Documents: Certificate of Incorporation, articles of incorporation, corporate resolution to borrow.

Financial Documents: Financial statements, corporate tax returns, business bank statements.

Personal Guarantees: Personal tax returns, credit checks, net worth statements for key shareholders or directors.

Property-Related Documents: Purchase agreements, property appraisal, environmental assessments, insurance proof.

Business Plan: If required, for explaining the loan purpose and projections.

Lenders want to ensure that both the corporation and the individuals involved are financially stable and capable of repaying the loan. Therefore, expect a comprehensive review of corporate and personal financials during the mortgage application process.

When your mortgage is up for renewal, deciding whether to stay with your current lender or switch can have financial implications. Here are some factors to consider before making a decision:

1. Interest Rates

Current Lender: Your current lender will offer you a renewal rate, but it might not always be their best rate. Often, the initial offer can be negotiated.

Other Lenders: Other lenders might offer more competitive rates, especially if they are trying to attract new customers. Shopping around could save you money in the long run.

2. Mortgage Terms and Flexibility

Review the terms and conditions your current lender offers. Other lenders might provide more flexible prepayment options, better penalties for early payment, or different amortization periods that could suit your needs better.

3. Mortgage Type

If you are considering switching from a variable to a fixed-rate mortgage (or vice versa), this might be a good time to explore new options.

4. Fees for Switching

Switching lenders can involve fees like appraisal fees, discharge fees, or legal fees. Some lenders may offer to cover these costs if you move to them, but it’s important to calculate whether these costs outweigh the potential savings from a lower interest rate.

5. Relationship with Current Lender

If you’ve had a positive experience with your current lender, they may be willing to negotiate better terms to retain you as a customer. Loyalty and a good track record could give you leverage in negotiating a better deal.

6. Convenience

Staying with your current lender can be more convenient, as switching involves paperwork and time. However, if the savings from switching are significant, this effort could be worthwhile.

7. Credit Score

Your credit score might impact the offers you receive from other lenders. A higher credit score can often lead to better mortgage terms, so be sure to check your score before shopping around.

Next Steps:

Negotiate with your current lender to see if they can offer you a better rate or more favourable terms.

Shop around for rates from other lenders or consult a mortgage broker to explore your options.

Would you like help comparing some offers or going through your options in more detail? A mortgage broker can help provide a full picture of your options, so that you can secure the right product with the right lender.

The debt-to-income (DTI) ratio is a critical tool that lenders use to evaluate mortgage applicants. The DTI ratio helps lenders determine whether a borrower has the financial capacity to manage a mortgage on top of existing debts. There are two main ratios that Canadian lenders analyze:

Gross Debt Service (GDS) Ratio: This ratio focuses specifically on housing-related expenses and is calculated as the percentage of a borrower’s gross monthly income that goes toward housing costs. These costs include:

Principal and interest on the mortgage

Property taxes

Heating costs

50% of condo fees (if applicable)

Lenders typically require the GDS ratio to be 39% or less. If it exceeds this limit, the borrower might be seen as financially overstretched, increasing the risk of default.

Total Debt Service (TDS) Ratio: This ratio includes all monthly debt obligations, not just housing-related expenses. It considers:

Mortgage payments (principal and interest)

Property taxes, heating, and condo fees (like the GDS ratio)

Monthly debt payments, such as credit cards, car loans, student loans, and any other debt

The TDS ratio must generally not exceed 44% of the borrower’s gross monthly income. This ratio gives lenders a broader perspective on the borrower’s total debt load.

How These Ratios Affect Mortgage Approval

Qualification Limits: Canadian lenders use GDS and TDS as hard limits for mortgage qualification. If either ratio is too high, the borrower may need to consider a smaller mortgage amount, a larger down payment, or pay down other debts to reduce monthly obligations.

Impact of the Mortgage Stress Test: In addition to meeting GDS and TDS requirements, applicants must pass a “mortgage stress test.” Lenders calculate the ratios based on either the current mortgage rate + 2% or the Bank of Canada’s qualifying rate, whichever is higher. This test ensures that borrowers can afford payments even if interest rates rise.

By managing DTI, lenders aim to protect both the borrower and the financial system, preventing borrowers from taking on mortgages they may not be able to sustain, especially in an economy where interest rates and housing costs can fluctuate.

When you default on your mortgage it means you’ve failed to meet the terms of your mortgage agreement, typically by missing one or more mortgage payments. The consequences of defaulting can escalate over time, leading to serious financial and legal repercussions, including foreclosure. Here’s a breakdown of what happens when you default on your mortgage:

1. What Constitutes a Default?

Mortgage default can occur for several reasons, including:

Missing mortgage payments (this is the most common form of default).

Failing to maintain property insurance.

Failure to pay property taxes.

Breaching other terms of the mortgage contract, such as not maintaining the home in good condition or committing fraud.

2. Consequences of Default

Late Payment Fees: Initially, you’ll incur late fees if you miss a payment. These vary depending on the lender and how many days late the payment is.

Negative Impact on Credit Score: Missed or late payments will be reported to credit bureaus, which can significantly lower your credit score, making it more difficult to qualify for loans in the future.

Increased Debt: If you continue to miss payments, interest and penalties will accumulate, adding to your overall debt and making it harder to catch up.

3. Grace Period and Options for Arrears

Many lenders offer a grace period before taking serious action, giving borrowers the chance to bring their mortgage payments up to date (also known as “curing” the default). During this time:

Communication with the lender is key. If you experience financial difficulties, contact your lender as soon as possible to discuss options, which could include:

Payment deferral (temporarily postponing payments).

Loan modification (adjusting the loan terms to make payments more affordable).

Special payment arrangements to help you catch up on missed payments.

4. Legal Action After Default

If you fail to bring your payments up to date after the grace period, your lender may take legal action. This can vary depending on the province you live in, as mortgage laws differ across Canada. Generally, the lender will pursue one of the following legal processes:

A. Power of Sale (Most Common in Ontario and Other Provinces)

Power of Sale is the most common legal remedy used by lenders in Ontario and several other provinces (such as New Brunswick, Prince Edward Island, and Newfoundland and Labrador). Under a Power of Sale, the lender has the legal right to sell the property to recover the mortgage balance owed without going through a lengthy court process.

Process of Power of Sale:

The lender must give you notice (typically 15-35 days depending on the province) to allow you time to pay the arrears or the full balance of the mortgage.

If you do not pay, the lender can list the property for sale.

The sale proceeds are used to pay off the outstanding mortgage debt, legal fees, and other associated costs. Any remaining funds are returned to the borrower (homeowner).

Key Point: In a Power of Sale, the lender doesn’t take ownership of the property—they simply sell it on the open market to recover what’s owed.

B. Foreclosure (Most Common in Western Canada)

Foreclosure is a more severe legal process where the lender takes ownership of the property, rather than selling it on your behalf. This is more common in provinces like British Columbia, Alberta, and Manitoba.

Process of Foreclosure:

The lender must first file a foreclosure lawsuit in court.

A redemption period may be granted by the court (usually between 30 to 180 days), giving you the chance to catch up on missed payments.

If you are unable to bring the mortgage up to date, the court may issue a foreclosure order, allowing the lender to take ownership of the property.

In most cases, once the property is sold (either through a court-ordered sale or auction), any shortfall between the sale price and the mortgage balance can still be pursued by the lender as a deficiency judgment.

Key Point: In foreclosure, you lose ownership of the property, and the lender may not be required to give you any remaining funds after the sale, especially if the sale price does not cover the outstanding debt.

C. Judicial Sale (Used in Some Provinces)

In some provinces, a judicial sale is used as an alternative to foreclosure. This process involves the lender applying to the court for permission to sell the property, under court supervision.

The court oversees the sale to ensure the property is sold for fair market value, and the proceeds are distributed accordingly.

5. Deficiency Judgment

In some cases, if the proceeds from the sale of the home (whether through Power of Sale or foreclosure) are not enough to cover the outstanding mortgage balance, the lender may seek a deficiency judgment. This means the borrower will be held liable for the difference between the sale price and the mortgage debt.

However, in certain provinces, such as Alberta, anti-deficiency laws protect homeowners from being sued for the shortfall in some circumstances, particularly for mortgages on principal residences.

6. Mortgage Default Insurance

If your mortgage is insured by CMHC, Sagen, or Canada Guaranty, and you default, the lender will file a claim with the mortgage insurer. If the insurer pays the lender, the insurer will then pursue you (the borrower) for the repayment of the outstanding amount, including legal fees and interest.

The insurer may also attempt to recover the shortfall through wage garnishment, property liens, or other legal methods.

7. Loss of Equity

When you default and the property is sold through foreclosure or Power of Sale, you may lose all the equity you’ve built up in the home. If the property sells for less than what you owe, you could even end up owing additional money to the lender.

8. Impact on Future Borrowing

A mortgage default will severely impact your credit score and may stay on your credit report for 6-7 years. This can make it difficult to qualify for future loans, credit cards, or even rental housing.

If you want to get a mortgage again in the future, you may need to work with alternative lenders who offer mortgages to individuals with poor credit, often at higher interest rates and with stricter terms.

9. Bankruptcy or Consumer Proposal

If the financial strain of the mortgage default is part of a larger debt problem, you may need to consider filing for bankruptcy or a consumer proposal. These options can help eliminate or reduce other debts, but they also come with significant long-term impacts on your credit and financial situation.

Conclusion

Defaulting on a mortgage can lead to severe financial consequences, including loss of the home, damage to your credit score, and potential legal action. It’s crucial to communicate with your lender if you are facing financial difficulties to explore potential solutions before the situation escalates to legal action. Speak with your mortgage broker about lending options to see if a better product is available for your current need. Early intervention can often prevent the worst outcomes, such as foreclosure or Power of Sale.

The Gross Debt Service (GDS) ratio and Total Debt Service (TDS) ratio are two important financial metrics used by mortgage lenders to determine a borrower’s ability to afford a mortgage. These ratios help lenders assess the risk of lending money to the borrower.

1. Gross Debt Service (GDS) Ratio

The GDS ratio is the percentage of a borrower’s gross monthly income that goes towards housing-related costs. These costs typically include:

Mortgage payments (principal and interest)

Property taxes

Heating costs

(In some cases) 50% of condo fees (if applicable)

GDS Ratio Limit:

Generally accepted limit: 35%-39% (depending on strength of credit score)

2. Total Debt Service (TDS) Ratio

The TDS ratio measures the percentage of a borrower’s gross monthly income that goes towards all debt obligations, including housing costs and other debts such as:

Mortgage payments

Property taxes

Heating costs

(In some cases) 50% of condo fees (if applicable)

Other debts (e.g., car loans, credit card payments, personal loans, etc.)

TDS Ratio Limit:

Generally accepted limit: 42–44% (depending on strength of credit score)

Key Differences:

GDS only considers housing-related costs, while TDS includes all debt obligations.

Both ratios are used by lenders to determine affordability and mitigate the risk of default.

To qualify for a mortgage, borrowers generally need to meet both GDS and TDS ratio limits. If a borrower’s ratios are too high, they may need to lower their debt load, increase their income, or make a larger down payment.

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Proof of house insurance is a crucial requirement for obtaining and maintaining a mortgage. Lenders want to ensure that the home, which serves as collateral for the loan, is protected against potential risks like fire, theft, and damage. Here’s how house insurance ties into mortgages and what’s typically required:

1. Why Lenders Require House Insurance

Protection of the Lender’s Investment: Your home is the lender’s security for the mortgage. If the home is damaged or destroyed, the insurance helps ensure that the lender is compensated for the outstanding mortgage amount.

Risk Mitigation: In case of a natural disaster, fire, or other damaging event, insurance ensures that the home can be repaired or rebuilt without a financial burden falling solely on the homeowner, reducing the risk of defaulting on the mortgage.

2. Types of Insurance Coverage Required

Homeowners Insurance: This policy covers the structure of the home, its contents, and personal liability. It typically includes:

Dwelling Coverage: Covers damage to the structure of the home.

Contents Coverage: Covers personal belongings (furniture, electronics, etc.).

Liability Coverage: Protects the homeowner in case someone is injured on the property.

Additional Living Expenses: Provides coverage for living costs if the home becomes uninhabitable due to a covered loss.

Replacement Cost vs. Actual Cash Value: Lenders usually require that the insurance provides replacement cost coverage, which pays to repair or replace the home at today’s prices, not the depreciated value.

3. Proof of House Insurance Requirements

Before a mortgage can be finalized and funds disbursed, lenders will typically request proof of insurance from the borrower. Here’s what they usually require:

Insurance Policy Document or a Certificate of Insurance: This is typically provided by the insurance company and must include:

The policy number.

The coverage amounts for the home and contents.

Effective and expiry dates of the policy.

A detailed description of what is covered (including replacement cost).

Loss Payee Clause: Lenders often require that they are listed as a loss payee on the policy. This means that in the event of significant damage to the property, the insurance company will notify the lender or pay them directly to cover any outstanding mortgage balance.

Sufficient Coverage: The insurance policy must cover at least the mortgage amount, but many lenders require coverage for the full replacement cost of the home to ensure the property can be rebuilt if necessary.

4. When Proof of Insurance is Required

Before Mortgage Funding: Most lenders will not release mortgage funds until they receive proof that adequate house insurance is in place. The borrower usually has to arrange insurance coverage before the closing date.

After Closing: The lender may request updates or confirmation that the insurance remains active throughout the life of the mortgage. It’s crucial to maintain continuous insurance coverage, as failing to do so could result in penalties or the lender obtaining force-placed insurance.

5. What Happens If You Don’t Provide Proof of Insurance?

Delayed Closing: Without proof of insurance, the lender may delay or cancel the mortgage closing, as the home will be uninsured.

Force-Placed Insurance: If you fail to maintain insurance on your home after the mortgage is in place, the lender may purchase insurance on your behalf (known as force-placed insurance). This is often much more expensive and usually only protects the lender’s interest, not your personal belongings or liability.

Risk of Default: A lack of insurance puts both the homeowner and the lender at risk in case of damage or destruction, which can lead to financial strain and potential mortgage default.

6. Other Important Considerations

Flood and Earthquake Coverage: Basic home insurance policies may not cover floods or earthquakes, which are more relevant in certain regions of Canada. Some lenders may require additional coverage depending on the home’s location.

Mortgage Default Insurance: This is separate from homeowners insurance and is required for high-ratio mortgages (where the down payment is less than 20%). This protects the lender if the borrower defaults, but does not replace the need for standard home insurance.

7. Annual Proof of Insurance

Some lenders may require periodic proof that the home remains insured throughout the mortgage term. You can request an updated certificate of insurance from your provider when necessary.

In summary, providing proof of house insurance is an essential step in securing a mortgage. Lenders require it to ensure that the property is adequately protected, and failure to provide or maintain insurance can lead to complications with your mortgage.

You should inform your lender as soon as possible if you anticipate missing a mortgage payment. Proactively communicating with your lender can help you avoid the more serious consequences of default and might provide opportunities to work out a solution before things escalate. Here’s why it’s important:

1. Prevention of Default

If you miss a mortgage payment without notifying your lender, the payment is officially in arrears and could lead to late fees, damage to your credit score, and eventually more severe consequences like foreclosure or a Power of Sale.

Informing your lender early gives them the opportunity to work with you to avoid default.

2. Available Solutions

When you communicate with your lender about financial difficulties, they may offer various options to help you manage your payments, such as:

Payment deferral: Temporarily pausing payments for a set period while you get back on your feet.

Loan modification: Adjusting the terms of the mortgage, such as extending the amortization period to lower monthly payments.

Special payment arrangement: Setting up a repayment plan to catch up on missed payments over time.

Interest-only payments: In some cases, lenders may allow you to make interest-only payments for a short period, temporarily reducing your monthly financial burden.

Skip-a-payment options: Some lenders offer programs that allow you to skip a payment once per year without penalty.

3. Maintaining Your Credit Score

Missing a mortgage payment can damage your credit score, making it more difficult to qualify for loans or mortgages in the future.

By communicating with your lender, you may be able to set up a plan that avoids a missed payment being reported to the credit bureau.

4. Building Trust with the Lender

Lenders appreciate when borrowers are upfront about their financial challenges. Being proactive can build trust, and they are more likely to work with you when they see you’re taking responsibility for the situation.

If you don’t communicate, the lender may assume that you are avoiding the problem, and they could move forward with legal action more quickly.

5. Avoiding Late Fees and Penalties

Missed payments often come with late fees or additional penalties. By reaching out to your lender in advance, you may be able to negotiate terms that could help you avoid these extra charges.

6. Preventing Foreclosure or Power of Sale

If missed payments continue without communication, the lender may begin foreclosure proceedings or initiate a Power of Sale. By informing the lender early, you can often prevent the situation from escalating to this level.

Some provinces have redemption periods or grace periods where borrowers can catch up on missed payments, but it’s better to avoid this situation altogether by keeping the lines of communication open.

7. Eligibility for Assistance Programs

Depending on the reason for missing payments, you might be eligible for assistance programs. For instance, if you’re dealing with a temporary job loss or a health emergency, some lenders or insurers may offer support programs to help you get through the rough patch.

Conclusion

It’s always best to inform your lender immediately if you are going to miss a mortgage payment. Lenders are more likely to work with you on a solution if they know your situation in advance. Ignoring the issue can lead to missed opportunities for help and more severe financial consequences. Speaking with a mortgage broker to review your current situation and find an appropriate product can relieve the strain on your finances long-term.

Loan-to-Value (LTV) is a key ratio that measures the relationship between the amount of the mortgage loan and the appraised value (or purchase price) of the property. LTV is a crucial metric for lenders because it helps them assess the risk of the loan. Here’s an in-depth look at how LTV works:

1. What is LTV?

Loan-to-Value (LTV) is the percentage of a property’s value that is being financed through a mortgage. It is calculated by dividing the mortgage amount by the appraised value (or purchase price, whichever is lower) of the home.

For example, if you are purchasing a home worth $500,000 and you put down $100,000 as a down payment, the loan amount will be $400,000, and the LTV will be 80%

LTV=(500,000/400,000 )×100=80%

2. LTV Requirements

Lenders use LTV ratios to manage their risk. The higher the LTV, the greater the risk to the lender because the borrower has less equity in the home. The maximum LTV depends on the type of mortgage:

For Insured Mortgages (High-Ratio Mortgages):

If your down payment is less than 20%, the mortgage is considered high-ratio, and you are required to purchase mortgage default insurance (e.g., CMHC, Sagen, or Canada Guaranty).

The maximum LTV for insured mortgages is 95% (meaning a minimum down payment of 5%).

Down payment requirements:

5% down payment for homes up to $500,000.

10% down payment on the portion of the purchase price between $500,000 and $1,499,000.

Homes priced at $1.5 million or more require a minimum 20% down payment, and mortgage insurance is not available.

For Conventional Mortgages (Uninsured Mortgages):

If your down payment is 20% or more, the mortgage is considered conventional, and mortgage default insurance is not required.

The maximum LTV for uninsured mortgages is 80%, meaning a minimum of a 20% down payment is required.

3. Impact of LTV on Mortgage Terms

Higher LTV (High-Ratio Mortgages):

With a higher LTV (e.g., 90%-95%), lenders view the loan as riskier. As a result:

You’ll be required to pay for mortgage default insurance.

The interest rates may be higher (although insured mortgages often have competitive rates because the lender’s risk is covered by insurance).

You have less equity in your home, meaning it will take longer to build up significant equity unless the property value rises or you make additional payments.

Lower LTV (Conventional Mortgages):

With a lower LTV (e.g., 80% or lower), the lender’s risk is reduced. As a result:

You are not required to pay mortgage insurance.

You may qualify for better interest rates because you have a larger equity stake in the property.

You have more equity, giving you greater flexibility for future refinancing or borrowing against the home.

4. LTV and Mortgage Insurance

If your LTV is above 80%, you’ll need mortgage default insurance (commonly through CMHC, Sagen, or Canada Guaranty). This insurance protects the lender if you default on the mortgage, but the cost is passed on to you.

Mortgage insurance premiums are typically added to the mortgage balance and are based on a percentage of the loan amount, ranging from 2.8% to 4.0% depending on your down payment size and loan amount.

Premium rates for insured mortgages:

5% down payment (95% LTV) → 4.0% of the mortgage amount.

10% down payment (90% LTV) → 3.1% of the mortgage amount.

15% down payment (85% LTV) → 2.8% of the mortgage amount.

5. LTV in Refinancing

When you refinance your mortgage in Canada, the maximum allowable LTV is 80% of the current value of your home. This means you can borrow up to 80% of your home’s appraised value, less any outstanding mortgage balance.

For example, if your home is appraised at $600,000 and you still owe $300,000 on your mortgage, you could potentially refinance up to $180,000 (80% of $600,000 = $480,000, minus the $300,000 still owed).

6. LTV in Home Equity Lines of Credit (HELOCs)

In Canada, the maximum LTV for a Home Equity Line of Credit (HELOC) is 65%. However, if you have a traditional mortgage combined with a HELOC, the total LTV (mortgage + HELOC) cannot exceed 80%.

For example, if your home is valued at $500,000 and you have a mortgage of $250,000, you could access up to $75,000 through a HELOC (65% of $500,000 = $325,000, minus the $250,000 mortgage).

7. LTV and Property Types

LTV limits can also vary depending on the property type:

Owner-occupied properties typically have higher LTV limits than rental or investment properties.

For rental properties, lenders might limit the LTV to 65%-80%, and may have stricter lending criteria.

8. How LTV Impacts Risk and Borrowing Power

High LTV (Above 80%): Considered riskier by lenders because the borrower has less equity in the property. Lenders may charge higher interest rates or require mortgage insurance.

Low LTV (Below 80%): Indicates a safer loan for the lender. Borrowers with low LTV are less likely to default and tend to receive better terms, such as lower interest rates.

Conclusion

LTV is an important ratio in mortgage financing, as it directly affects the size of your down payment, whether you need mortgage insurance, and the terms of your loan. A lower LTV is generally more favourable because it reduces the lender’s risk, leading to better mortgage terms. Whether you’re purchasing, refinancing, or taking out a HELOC, understanding your LTV can help you make more informed financial decisions.

Mortgage pre-approvals are a preliminary step in the home-buying process, offering borrowers an idea of how much they can afford and the interest rate they might qualify for. While it doesn’t guarantee final mortgage approval, a pre-approval gives buyers more confidence when shopping for a home and can provide some protection against rising interest rates during the pre-approval period.

Here’s a detailed breakdown of how mortgage pre-approvals work:

1. What is a Mortgage Pre-Approval?

A mortgage pre-approval is an estimate from a lender of how much they would be willing to lend you for a home purchase, based on your financial situation.

It includes the maximum loan amount you can borrow, an interest rate hold (typically for 60 to 120 days), and an estimate of your monthly payments.

The lender evaluates your income, assets, debts, and credit score to determine this amount.

2. Benefits of a Pre-Approval

Helps Set a Budget: A pre-approval lets you know the maximum amount you can borrow, helping you narrow your home search to properties within your price range.

Rate Hold: Most lenders will lock in an interest rate for 60-120 days, protecting you from potential interest rate increases while you shop for a home.

Shows Sellers You’re Serious: Having a pre-approval can make you a more attractive buyer to sellers, as it shows that you’re serious and capable of securing financing.

Faster Closing Process: Since much of the financial verification is done during the pre-approval stage, it can speed up the final mortgage approval process once you’ve made an offer on a home.

3. What Lenders Consider for a Pre-Approval

Lenders will review several aspects of your financial profile when issuing a pre-approval:

Income: You’ll need to provide proof of your income, such as pay stubs, a letter of employment, or tax returns (especially if you’re self-employed).

Credit Score: Lenders will check your credit score to assess your creditworthiness. A higher credit score (typically 680 or above) improves your chances of approval and getting a lower interest rate.

Debts and Liabilities: Lenders will review your current debts (e.g., car loans, student loans, credit card debt) to calculate your debt service ratios:

Gross Debt Service Ratio (GDS): The percentage of your gross monthly income that will go toward housing expenses (mortgage payments, property taxes, heating costs, etc.). Ideally, this should be no more than 32%.

Total Debt Service Ratio (TDS): The percentage of your gross monthly income that goes toward all debts, including your housing costs and other debts like loans or credit card payments. Ideally, this should not exceed 40-44%.

Down Payment: Lenders will ask how much you plan to put down as a down payment. In Canada, the minimum down payment is:
– 5% for homes under $500,000.
– 10% for the portion of the home price between $500,000 and $1,499,000.
– 20% for homes priced at $1.5 million or more.

4. Documents Needed for Pre-Approval

Proof of income: Pay stubs, tax returns (T1 for self-employed), Notice of Assessments (NOA), employment letters.

Proof of assets: Statements showing savings, investments, or other assets you own that will be used for the down payment or closing costs.

Credit report: The lender will pull your credit report directly, or you can provide one from a credit bureau.

Identification: Government-issued ID to verify your identity.

5. How Long Does a Pre-Approval Take?

Mortgage pre-approvals can take anywhere from a few hours to a few days, depending on the lender and the complexity of your financial situation.

Online mortgage brokers or lenders may offer faster pre-approvals, sometimes in as little as a few minutes if everything checks out.

6. Rate Hold

Most pre-approvals come with an interest rate lock (rate hold) for 60 to 120 days. If interest rates rise during this period, you’ll still get the lower rate that was locked in. If rates drop, many lenders will offer you the new lower rate at the time of final approval.

7. Not a Guarantee

It’s important to note that a pre-approval is not a guarantee of final mortgage approval. When you make an offer on a property, the lender will do a more thorough review of your financial situation, as well as the property itself (e.g., an appraisal).

If your financial circumstances change (e.g., job loss, new debts) or the property doesn’t meet the lender’s criteria, the final approval may be denied or adjusted.

8. Pre-Approval vs. Pre-Qualification

Pre-Qualification: This is a quick estimate of how much you might qualify for based on basic information (usually self-reported) but doesn’t involve a detailed review of your financials or a credit check.

Pre-Approval: A more formal process that involves a deeper review of your finances and credit score, giving you a more accurate estimate and a rate lock.

9. Shopping Around

Mortgage Brokers compare interest rates and terms from different lenders to. Each lender may have slightly different requirements or offer different rates.

Too many credit inquiries in a short time frame can temporarily impact your credit score. A mortgage Broker can minimize that impact by utilizing one inquire with multiple lenders.

Conclusion

A mortgage pre-approval is a crucial step in the home-buying process in Canada, providing you with a clear understanding of how much you can borrow and helping you secure a good interest rate for a certain period. While it’s not a final approval, it gives you an advantage when house hunting and can expedite the mortgage process once you find the right property.

Prepayment penalties are fees charged by lenders if you pay off all or a portion of your mortgage before the end of your term. Lenders use these penalties to offset the loss of interest they’d earn if you continued making payments as scheduled. Here’s a breakdown of how they work:

Types of Prepayment Penalties

Fixed-Rate Mortgages: The penalty is typically the higher of either:

Three months’ interest on your remaining mortgage balance.

Interest Rate Differential (IRD): This is calculated based on the difference between your current mortgage rate and the rate the lender could offer today for the time left in your term, multiplied by your outstanding balance. The IRD often results in a higher penalty than the three months’ interest, especially if rates have fallen since you took out the mortgage.

Variable-Rate Mortgages: Prepayment penalties are generally simpler for variable-rate mortgages and are typically just three months’ interest.

Factors Affecting Prepayment Penalties

Mortgage Term and Amount: Longer terms and higher balances generally lead to higher penalties.

Current Interest Rates: When rates have dropped since you locked in your fixed rate, the IRD penalty becomes more expensive.

Remaining Balance and Time Left: The penalty will also depend on how much time is left in your term and the size of your outstanding balance.

Options to Avoid or Reduce Penalties

Annual Prepayment Privileges: Most lenders allow prepayments of up to 10-20% of the original mortgage balance each year without penalty. Making use of this can reduce your balance and potentially lower any future penalty.

Porting Your Mortgage: Some lenders allow you to transfer (or “port”) your existing mortgage to a new property, helping you avoid the penalty.

Refinancing at Renewal: If you’re near the end of your term, it may make sense to wait and refinance once your term expires, avoiding penalties altogether.

When to Consider Paying a Penalty

If the cost of the prepayment penalty is lower than the potential interest savings from refinancing or switching lenders, it may be worth paying.

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Deciding whether to rent or buy a home depends on various factors, including your financial situation, lifestyle, long-term goals, and the current housing market. Here are some key points to consider when making the decision between renting and buying:

1. Financial Considerations

Renting:

Lower upfront costs: When renting, you typically only need a deposit (one month’s rent) and potentially an additional damage deposit (pets), which is much lower than the down payment required for a home purchase.

No property taxes or maintenance costs: As a renter, you’re not responsible for property taxes, home maintenance, or repairs. These costs are the responsibility of the landlord.

Fixed monthly costs: Rent payments are predictable (except for potential annual increases), and you don’t have to worry about fluctuating interest rates or unexpected repair bills.

Opportunity to save: Renting can give you more financial flexibility to save for other goals, such as investing or building a larger down payment for a future home purchase.

No appreciation: While renting can offer flexibility, you miss out on potential appreciation in property value, meaning your monthly payments don’t contribute to equity.

Buying:

Significant upfront costs: To buy a home, you typically need a down payment of at least 5% of the home’s value for properties under $500,000 (more for homes over that amount). There are also closing costs, which typically range from 1.5% to 4% of the purchase price.

Building equity: When you own a home, your mortgage payments build equity (the portion of the property you own outright). Over time, as the mortgage is paid down and the property appreciates, your wealth grows.

Property value appreciation: In many Canadian markets, home values increase over time, contributing to your net worth. However, this is not guaranteed, and the market can fluctuate.

Ongoing costs: Owning a home comes with ongoing expenses such as mortgage payments, property taxes, home insurance, maintenance, and potential repairs. These can add up, and you’ll need to budget for them.

Mortgage interest: In the early years of a mortgage, a significant portion of your monthly payments goes towards interest, meaning less goes towards building equity. If interest rates rise (for those with variable-rate mortgages), your monthly payments may increase.

2. Market Conditions and Timing

Housing Market Trends: Canada’s housing market can be volatile, with significant differences between regions. For instance, major cities like Vancouver and Toronto often have higher prices, while smaller towns or less populated provinces may offer more affordable housing options. In a seller’s market, home prices rise quickly due to demand, making it harder to find affordable homes, whereas in a buyer’s market, there’s more housing inventory, and prices may soften.

Interest Rates: Mortgage rates can have a big impact on your monthly payments. Low interest rates make buying more affordable, while higher rates may make renting more appealing in the short term. Keeping an eye on the Bank of Canada’s interest rate trends can help guide your decision.

Housing Affordability: In some Canadian cities, such as Vancouver and Toronto, buying a home can be extremely expensive. Renting may be more practical if home prices are far beyond your budget, even if you qualify for a mortgage.

3. Lifestyle Considerations

Renting:

Flexibility: Renting offers more flexibility, making it ideal for those who may want or need to move frequently for work, school, or personal reasons. If you’re unsure about where you want to live long-term, renting can be a good option.

Less commitment: Renting allows you to try different neighbourhoods or cities without the long-term financial commitment of owning a home.

No maintenance responsibility: As a renter, you don’t have to worry about repairs or upkeep. If something breaks, it’s the landlord’s responsibility to fix it.

Buying:

Stability: Owning a home provides long-term stability, especially if you plan to stay in one place for several years. It also allows you to customize your space to your liking.

Forced savings: Mortgage payments act as a form of forced savings, as part of each payment goes toward building your equity.

Pride of ownership: Many people value the sense of pride and security that comes with owning a home. It’s a place you can truly make your own.

Less flexibility: Buying a home is a long-term commitment. Selling a property can take time, and if you need to move for work or personal reasons, you might not be able to sell quickly or at a profit.

4. Long-Term Goals

Short-Term Stay: If you’re planning to live in a city for only a few years, renting might be the better option. The costs associated with buying and selling a home (real estate commissions, closing costs, etc.) can outweigh any financial benefits of short-term homeownership.

Long-Term Investment: If you plan to stay in a home for 5 years or more, buying could be a good investment, as you’ll build equity over time and benefit from potential property appreciation.

Retirement Planning: Many Canadians view homeownership as part of their long-term financial security. If your goal is to have a mortgage-free home by retirement, buying sooner rather than later may align with that plan.

5. Rent vs. Buy Calculators

There are several online calculators that can help you compare the costs of renting versus buying based on factors like home prices, interest rates, rental costs, and expected appreciation. These tools can provide a more personalized answer to whether renting or buying makes more sense for your specific situation. Check out my Calculator Toolbox to compare all your scenarios.

Summary: Key Questions to Ask Yourself

How stable is my income and job situation? If your job is stable and your income is sufficient to cover a mortgage, buying might make sense. If there’s uncertainty, renting offers more flexibility.

How long do I plan to live in the area? If you plan to stay in one location for the long term, buying may be better. Renting is ideal for those with shorter-term plans or who want flexibility.

Can I afford the upfront and ongoing costs of owning a home? If you have enough for a down payment and can comfortably cover mortgage payments, property taxes, and maintenance, buying could be a sound financial move. If not, renting might allow you to save more for the future.

What’s my risk tolerance? Owning a home comes with risks, including fluctuating market values, maintenance costs, and interest rate changes. Renting provides more financial predictability in the short term.

Ultimately, the decision to rent or buy depends on your financial readiness, lifestyle preferences, and housing market conditions in your area. Speaking with a mortgage broker can assist you in making the right decision for your current situation.

The mortgage stress test is a set of rules implemented to ensure that borrowers can still afford their mortgage payments if interest rates increase. Introduced by the Office of the Superintendent of Financial Institutions (OSFI) and the federal government, the stress test applies to both insured and uninsured mortgages.

How It Works

When lenders assess a mortgage application, they use the stress test rate to calculate the borrower’s debt service ratios. This ensures that even if interest rates rise, borrowers are less likely to default on their loans.

1. Who Does It Apply To?

The mortgage stress test applies to:

All homebuyers applying for a mortgage through a federally regulated lender, whether they make a down payment of less than 20% (requiring mortgage insurance) or more than 20% (uninsured).

Existing homeowners looking to refinance their mortgage or switch lenders at the end of their term. If you are renewing with your current lender, you may not have to undergo the stress test, but this depends on the lender’s policies.

Uninsured mortgages switching to a new lender may no longer require the stress test to be applied, although insured mortgages will still be required to qualify under stress test regulations. (OSFI)

2. Calculating the Stress Test Rate

The rate used in the stress test is the higher of:

The mortgage contract rate plus 2%. This means that if your mortgage rate is 4%, you would be tested at 6%.

The Bank of Canada’s benchmark qualifying rate, which is a guideline rate set by the central bank. As of now, this rate is 5.25%, but it is subject to change depending on market conditions and economic policy.

3. Debt Service Ratios Assessed

The stress test ensures that your debt service ratios remain within acceptable limits:

Gross Debt Service (GDS) Ratio: The percentage of your gross annual income that is used for housing-related costs, including mortgage payments, property taxes, heating, and 50% of condo fees (if applicable). Generally, lenders prefer this ratio to be no higher than 35%.

Total Debt Service (TDS) Ratio: The percentage of your gross annual income that is used to cover all debts, including housing costs, car loans, credit card payments, and other financial obligations. The maximum for this ratio is typically 42%.

4. Impact on Borrowing Power

The stress test often reduces the maximum mortgage amount that a homebuyer qualifies for. For example:

If a borrower could afford a $500,000 mortgage without the stress test, they might only qualify for $400,000 under the stress test guidelines. This means that borrowers must either increase their down payment, choose a less expensive home, or consider a longer amortization period (if available).

5. Example Calculation

Suppose you are applying for a mortgage with the following details:

Mortgage amount: $400,000

Amortization: 25 years

Contract interest rate: 4.00%

Bank of Canada benchmark rate: 5.25%

In this case, the lender will test your affordability at:

The greater of:

Contract rate + 2% = 4.00% + 2.00% = 6.00%

Bank of Canada’s benchmark rate = 5.25%

Since 6.00% is higher than 5.25%, the lender would use 6.00% as the qualifying rate to calculate your payments. Your ability to service the mortgage is tested based on this higher rate.

6. Why Was the Stress Test Introduced?

The mortgage stress test was introduced in response to concerns about rising household debt and the potential impact of higher interest rates on Canadians’ ability to service their debt. It aims to:

Promote financial stability by preventing borrowers from becoming over-leveraged.

Cool down housing market demand, especially in areas where prices are soaring.

Protect banks and the broader financial system from widespread defaults if economic conditions change, such as during a recession or a sharp increase in interest rates.

7. Criticism and Challenges

While the stress test adds a layer of protection, it has also received criticism:

Affordability Concerns: Many prospective homebuyers, especially in high-cost markets like Vancouver and Toronto, find it difficult to qualify for the amount they need, pushing them to the rental market.

Impact on First-Time Buyers: The test is particularly challenging for first-time buyers who may not have significant savings for a large down payment.

Refinancing Challenges: Homeowners who want to refinance their mortgage may find it harder to qualify for a new loan, limiting their financial flexibility.

8. Alternatives and Workarounds

Some borrowers look for ways to adapt:

Private Lenders: Some homebuyers consider borrowing from private lenders who are not federally regulated and may not impose the stress test.

Credit Unions: Many credit unions are provincially regulated and may have different qualification standards.

Shorter Amortization: Opting for a shorter amortization period could lead to higher payments but might help in securing better rates.

Understanding these details can help you make informed decisions when planning to buy or refinance a home.

Timing your home purchase and applying for a mortgage is an important step that can significantly impact your financial stability and success in obtaining a mortgage. Several factors—such as market conditions, interest rates, and personal financial readiness—play a role in deciding when to buy and apply for a mortgage. Here’s an outline to guide you through the timing aspect of both:

1. Assess Your Financial Readiness

Before applying for a mortgage, it’s essential to ensure that you’re financially prepared:

Down Payment: The minimum down payment in Canada is typically 5% of the home’s purchase price (for homes under $500,000). For homes between $500,000 and $1,499,000, the down payment increases to 5% on the first $500,000 and 10% on the portion above $500,000. For homes over $1.5 million, a 20% down payment is required.

Credit Score: A good credit score (typically above 680) will help you qualify for better mortgage rates.

Debt Load: Ensure your income vs debts are within acceptable limits. Reduce your debt before applying if necessary.

Employment Stability: Lenders prefer borrowers with stable employment and consistent income over time.

Debt Load: Ensure your income vs debts are within acceptable limits. Reduce your debt before applying if necessary.

Employment Stability: Lenders prefer borrowers with stable employment and consistent income over time.

Savings Aside from the down payment, you’ll need funds for closing costs (typically 1.5% to 4% of the home’s purchase price), home inspections, moving expenses, and potentially future repairs or upgrades.

2. Understanding Market Conditions

When considering the timing of your home purchase:

Housing Market Trends: The Canadian housing market experiences fluctuations in prices and demand. A buyer’s market (when there are more homes for sale than buyers) can offer more negotiating power, while a seller’s market (when there are more buyers than homes for sale) can lead to bidding wars and higher prices.

Seasonality: Spring and early summer tend to be the busiest times for real estate, with more homes available but potentially more competition. Winter months may have fewer listings, but buyers may find better deals as sellers may be more motivated.

Regional Variations: Real estate markets in major cities like Vancouver, Toronto, and Montreal may behave differently from smaller towns or rural areas. It’s crucial to research the specific region where you plan to buy.

3. Monitoring Interest Rates

Mortgage rates in Canada fluctuate based on economic conditions and the Bank of Canada’s key interest rate. Timing your mortgage application when interest rates are low can significantly reduce your monthly payments over the life of your loan.

Fixed vs. Variable Rates: If interest rates are low and expected to rise, you might consider locking in a fixed-rate mortgage. If rates are higher or expected to decrease, a variable-rate mortgage could be more advantageous.

Pre-Approval Lock-In: Many lenders offer mortgage rate holds for pre-approved buyers, allowing you to lock in a rate for 60 to 120 days. This protects you from rate increases while giving you time to shop for a home.

4. Getting Mortgage Pre-Approval

Before house hunting, it’s recommended to get pre-approved for a mortgage. This helps you:

Know exactly how much you can afford.

Show sellers that you are a serious buyer.

Lock in a mortgage rate (for a certain period) while you search for a home.

Get a clearer picture of the monthly payments and other financial obligations.

When to get pre-approved:

Ideally, once you are ready to start looking for a home. Pre-approvals are typically valid for 60 to 120 days, depending on the lender.

Getting pre-approved too early can result in needing to repeat the process if your house hunt takes longer than expected.

5. Economic and Regulatory Considerations

Stress Test: Canada’s mortgage stress test requires borrowers to prove they can afford mortgage payments at either the Bank of Canada’s five-year benchmark rate or their contracted mortgage rate plus 2%—whichever is higher. This rule applies to all insured and uninsured mortgages. Stay informed about changes in the stress test rules.

Government Incentives: Federal programs such as the Home Buyers’ Plan (HBP) may help you access additional funds for your down payment or reduce your borrowing costs. Timing your purchase around these programs can help optimize your financing. 

6. Consider Housing Supply and Demand

Timing based on supply: If you’re looking for a specific type of property (e.g., detached homes, condos), consider how much inventory is available. If there’s limited supply, you may need to wait for the right home to come on the market.

New Construction: If you’re purchasing a new build, be aware that the process takes longer (sometimes several months or even years). Factor in the development timeline when planning your mortgage application.

7. Economic Outlook and Employment

Evaluate your personal economic situation and job stability. If you’re expecting changes in your job or income, consider whether it’s the right time to commit to a mortgage. The economy at large can also affect home prices and interest rates, so keeping an eye on broader trends is important.

8. Local Market Conditions

Check real estate trends in the area where you want to buy. A hot market may make timing crucial, while a slower market could give you more time to explore your options and wait for better mortgage rates.

In Summary

Financial Readiness: Ensure you have the required down payment, stable income, and manageable debt before applying for a mortgage.

Market Conditions: Understand local market trends and seasonality. Timing your purchase in a buyer’s market or slower season could save money.

Interest Rates: Monitor interest rates and get pre-approved for a mortgage to lock in a favorables rate.

Pre-Approval: It’s generally a good idea to get pre-approved for a mortgage before seriously shopping for a home.

Programs and Incentives: Look into available government programs that may help reduce costs, especially if you’re a first-time homebuyer.

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Janeen Brodie
Mortgage Broker – MB607721

604-530-0103
janeen@dreamrealitymortgages.com

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