A Beginner's Guide to Mortgages

Are you thinking of buying a home? Congratulations! Although the process can seem opaque, getting a mortgage can be simpler than you think. Here’s a run down of the basics and some info on the low interest rate mortgage products we offer at Mogo.

Let’s begin at the beginning. If you’re planning on buying a home, chances are you’ll need a bank loan to pay for it. This is where mortgages come in.

What is a Mortgage?

Mortgages are loan products available from a series of financial institutions or companies that are specifically designed to be high in principal amount and low in interest with maturity dates of up to 30 years away. These loans enable many people to purchase homes.

The principal amount is the total amount borrowed. The interest rate is what the lender will charge the borrower for borrowing their money over time. The maturity date is the date that the loan must be repaid in full.

Mortgage maturity dates can vary depending on the principal amount you borrow and the particular mortgage product, and will  be determined by you and your lender together during the approval process. The maturity date may be, for example, 15, 25, or 30 years away. They are commonly set for 25 years.

According to Ratehub, the best mortgage rates in Canada currently hover between ~1.5% and 2.5%.

Your loan is spread out, or “amortized”, into monthly payments until the loan’s maturity date. The loan is “secured” against your home until your mortgage is paid in full, which means that during the term of your mortgage your lender has the right to sell your home to get their money back if you don’t make your loan payments.

Why Would I Need a Mortgage?

Unless you’ve got a couple hundred thousand dollars to spare, you probably need a mortgage to help you buy a home.

Housing prices in Canada—in dense city centres and rural areas alike—have risen over the last decade to often untenable prices. For those of us earning around the average Canadian salary of just over $50,000 CAD annually, buying a home is a real challenge.

Why? It’s incredibly difficult to save, say, $500,000 for a home in the suburbs while paying for our regular living expenses and bills. It’s not impossible, but it would likely take a very long time.

Contracting with a lender to undertake a mortgage speeds up the timeline. Once you’ve procured approval for a mortgage of a specific amount, you can use that money to purchase a home. Then, instead of paying rent, you make mortgage payments.

Paying rent is just like paying a bill; that payment doesn’t earn you interest or contribute to your own wealth. Conversely, paying your mortgage off adds the total value of your home to your total owned assets—and that value will generally continue to appreciate over time.

How Do I Apply for a Mortgage?

Applying for a mortgage can be easy—it just requires a little preparation and some legwork.

Set a Budget and Pick a Mortgage

In Canada, it’s advisable to apply for a mortgage when you have saved a down payment of 10% to 15% of the purchase price of the home you want to buy. Your down payment can be thought of as  the deposit you use to commit to the loan with your lender, which is paid up front against the total value of the home.

If you wanted to buy a $500,000 home, you’d do well to save between $50,000 and $75,000. Your monthly mortgage payments will vary depending on the mortgage product and the lender, so decide beforehand what you think you can afford—and stick to it.

As a good rule of thumb, you should try not to spend more than 30% of your net monthly income on housing. So, if you earn $3,000 per month, your mortgage payments would ideally be no more than $900/month.

Getting a mortgage will require you to prove your ability to make payments under a series of circumstances, like if your interest rate went up. If you are unable to prove this ability, it’s possible the lender may choose not to offer you a mortgage, or to offer a higher interest rate to compensate for the risk.

Pick a Mortgage Product

Before you reach out to a lender or broker, decide what kind of mortgage product you’d like to procure. You can always change your mind after you receive specific advice from your lender or broker, but it’s always important to do your own research first.

In Canada, there are several different mortgage products available. These include:

•     Fixed interest rate mortgages, where your interest rate never changes (typically these have slightly higher interest rates)

•     Variable interest rate mortgages, where your interest rate may change in the future (typically these have lower interest rates to begin)

•     Open mortgages, where you can make as many payments as you like (typically these come with higher interest rates)

•     Closed mortgages, where you can only make monthly payments (typically these have lower interest rates)

Each lender or broker will offer you different products with different rates and loan terms. It’s important to think through each of these options very carefully and critically, with your goals and future plans in mind.

Choose a Bank or Mortgage Broker

Choosing a bank or mortgage broker to help you find a lender isn’t always a straightforward process. It’s important to contract with a lender that you trust, and that you believe will be a fair and empathetic partner in your loan.

It’s not a good idea to enter into a mortgage contract with a lender you don’t trust, or whose terms you don’t understand.

Many people procure mortgages through their own banks, like RBC or TD. If you have a history with a certain financial institution, they may be able to grant you better rates or terms because they know you and your financial circumstances better. Your long-standing  relationship as a member makes your loan less risky for the lender.

However, as banks shift their presence and services to become more online and people change banks more frequently, folks may opt to procure a loan using a mortgage broker.

This is where Mogo comes in. With MogoMortgage, we’re able to source very competitive mortgage rates to help you achieve your financial goals faster.

Apply for Mortgage with Mogo

Using MogoMortgage is easy. Just apply online through your Mogo Dashboard, review the offers our awesome MogoMortgage Team finds for you, and you’re one step closer to buying your home.¹ Our team is always on hand to answer your questions and to help you make an informed decision.

Mortgages are a normal, stress-free part of life for millions of Canadians, and they can be for you, too. We’re here to help. 💪

This blog post is provided for informational purposes only and is not intended to be mortgage or real estate investment advice. When it comes to investing money in real estate, you should always do your own research and consult a professional.

1 - To apply for any Mogo product, you must open a MogoAccount and pass identity verification. The MogoAccount is currently only available to individuals in BC, AB, SK, MB, ON, NB, NS, PE, NL, YT, NT and NU. who have reached the age of majority in their province of residence. The MogoMortgage application is currently only available to MogoMembers in BC, AB, MB, ON, NB, NS, PE and NL that have met our underwriting requirements. MogoMortgage is offered by Mogo Mortgage Technology Inc. o/a MogoMortgage, a mortgage brokerage (Ontario: FSCO License No. 12836).