New to Canada Mortgages

The first step to getting a mortgage in Canada is to build your credit rating. A strong credit rating will help you get a better mortgage rate, which could save you thousands of dollars in interest charges over the life of your mortgage. Here is a list of activities that will help you build your credit:

• Apply for, use and pay off a credit card each month
• Pay your bills in full and on time, including rent, utilities and telecommunication services
• Apply for small loans from your bank and make regular payments
• Prove that you have a consistent source of income, by staying with the same employer for an extended period of time

If you don’t have a strong Canadian credit rating, you can also use your credit rating from a Commonwealth country, such as the United States, the United Kingdom or Australia.

If you’re new to Canada and have a weak Canadian credit history, you’ll need to provide some specific supporting documents to show you have built up credit other ways. Some of the documents you may need to provide include:

• A valid work permit or landed immigrant status
• Proof of income through either an employment contract or pay stubs
• Proof of 12 months of rental payments and/or a confirmation letter from a landlord
• Regular payments towards utilities, telecommunications, insurance, etc. and/or confirmation letter from service provider(s)
• Letter of reference from a recognized financial institution
• Several months of bank statements
• Documented regular savings for 12 months
• An international credit report

Gathering this information beforehand will help streamline the mortgage application process.

As you’re building your credit, you can also start saving a down payment for your home purchase. If you are new to Canada and you have permanent resident status, you have to put down at least 5% of the purchase price. If you’re a non-permanent resident, you will need to put down at least 10% of the purchase price.

If you're buying a home with a purchase price of $500,000 or more, the minimum down payment is 5% of the first $500,000, and 10% of any amount over $500,000. This rule applies regardless of your residency status.

In Canada, if you put down less than 20% of the purchase price of your home, you would be taking on a high-ratio mortgage. High-ratio mortgages require mortgage default insurance, which protects the lender in case you can’t make your mortgage payments and default on your loan. If you put down 20% or more, you won’t need to purchase mortgage default insurance, so you can move onto the next step. But if you’re putting down between 5-19.99%, here’s how you can calculate your premium.

In Canada, there are three providers who offer mortgage default insurance through their own New to Canada Programs: CMHC, Genworth Financial and Canada Guaranty. CMHC is the most popular of the three, but all of them offer the same premium rates, as seen below.

To read more about each provider and its program, read our blog post: Mortgage Default Insurance Providers for Newcomers to Canada.

In Canada, you can either get a mortgage through a lender, like a bank or a credit union, or you can work with a mortgage broker. Mortgage brokers work for you, by shopping around for the best mortgage rates and products available in the market. Brokers don’t issue mortgage loans themselves, but instead negotiate on your behalf for better rates and products offered by lenders.

Your amortization period is the amount of time it will take to pay off your entire mortgage. As of July 9th, 2012, the maximum amortization period for mortgages that require mortgage default insurance is 25 years. If you can put down more than 20% of the purchase price, you may be able to get a longer amortization period – up to 30 years, from most lenders. A longer amortization period will reduce your monthly mortgage payments by spreading them out over a longer time frame, but will result in more interest being paid over the life of the mortgage.

Your mortgage term is the amount of time you commit to one mortgage rate and one set of conditions with your lender. Mortgage terms are between 6 months and 10 years, with 5 years being the most common. When your term is up, you will need to negotiate a new term on the remaining principal, with a new mortgage rate and new conditions. You will likely have many mortgage terms throughout your amortization period. Just remember to choose each mortgage term carefully; breaking your mortgage term early could result in a very expensive prepayment penalty.

The final decision you will need to make is which type of mortgage rate you want: a fixed rate or a variable rate. A fixed mortgage rate means your mortgage rate and payment will stay the same throughout your mortgage term, whereas a variable mortgage rate means your rate (and therefore your payment) is attached to Prime rate and may fluctuate throughout your term. The decision to go fixed vs. variable is personal, and is often based on your unique tolerance for risk and whether you think interest rates will go up or down in the future.