What is a Mortgage and How do I Qualify?
First and second mortgages are crucial concepts for first-time homebuyers in Canada. Understanding their differences, how to get pre-approved, and how to find the best rates will guide you toward a successful home purchase.
Key Takeaways
- First Mortgage: The primary loan on a property, which must be paid off first if the property is sold or the borrower defaults.
- Second Mortgage: A loan taken out after years of ownership, using the property’s equity, which carries higher risk and stricter lender requirements.
- Closing Costs: One-time fees that range from 1.4% to 4% of the property's price, covering legal fees, taxes, and inspections.
- Pre-Approval: Working with a mortgage agent helps you shop for the best rates and know how much you qualify for before purchasing a home.
- Best Rates: Research, consult a mortgage agent, and use mortgage comparison tools to secure the best rates in Toronto.
If you are a first time home buyer in Canada, you may have likely heard the terms first and second mortgage , but what do they really mean? What is the difference between first and second mortgages? By the end of this post, you will have all the answers to your first and second mortgage questions. We will also cover primary ownership and how to find the best rates mortgage in Canada .
What is a First Mortgage?
A first mortgage is the primary loan granted to a homebuyer allowing them to keep possession of a property until their debt is paid out. If a property is sold or the borrower is unable to continue making their monthly payments, the first mortgage is the primary debt that is paid out.
With every mortgage agreement, the borrower is required to sign a document ensuring the initial loan amount will be paid off. This agreement gives the lending company a sense of security because they possess the power of sale. If there is a surplus after the first mortgage is repaid and if there are no other mortgages then the remainder will be left in an account for the borrower.
First mortgage vs Second Mortgage
As mentioned above, a first mortgage is the initial lien against a property given to a homebuyer however it is possible to take out more than one mortgage. After several years of ownership, a homeowner can apply for a second mortgage on their property.
Here is an example meant to demonstrate how first and second mortgage work together and how to go about obtaining them…
If you purchase a house for $500,000 and put a down payment of $50,000, you are financing the rest of the $450,000 balance using a first mortgage. At any point after purchase, you can decide to apply for a second mortgage if there is enough available equity for you to borrow from. If you continue making your monthly payments, you will be able to retain your house and use the money from the second mortgage. However, if you are suddenly incapable of paying your mortgages, the initial lender will foreclose on your mortgage. The property will then be sold to cover the two mortgages, taking care of the first mortgage before the second. If the house sells for $460,000, the first mortgage will be paid off and $10,000 will go towards paying off the second mortgage.
The first mortgage is always the primary loan on a property and therefore, you do not need permission from the initial lender to obtain a second mortgage. However, a secondary mortgage lender will want extra reassurance that you can be financially responsible for two mortgage payments. These lenders will look at the amount of equity available in your home to ensure their investment will be safe.
What are Closing Costs? And how much are they?
Closing costs are the one-time fees following the sale of a home. The home buyer is required to make this payment approximately 3 days before finalization of the property purchase. There are many aspects covered in the closing cost such as legal fees, home inspection fees, land transfer tax and more. First time home buyers are advised to have anywhere from 1.4% – 4% of the selling price set aside for the closing cost.
At Clover Mortgage, we pride ourselves on developing customized solutions to fit each clients unique needs. Contact one of our experienced consultants today for an easy 30 second loan quote, where you can find out how much you can qualify for.
What is the difference between a first and second mortgage?
A first mortgage is the primary loan used to purchase a property, while a second mortgage is an additional loan taken out against the property’s equity after ownership. The first mortgage is prioritized in repayment if the property is sold.
How do I get pre-approved or qualify for a First Mortgage?
In order to start the approval process for a mortgage, a buyer should contact a mortgage agent who can shop the lenders and negotiate rates on their behalf. The mortgage agent will do an initial consultation where they will inquire some questions and let you roughly know what you can qualify for. They will then request some documents like income, debt, assets and credit score to submit to the lenders on the borrower's behalf. Your mortgage agent will act as a consultant, advising you on the best mortgage rates and options available to you.
How do I qualify for the best mortgage rates in Toronto?
The most important advice when looking for the best and cheapest mortgage rates is to shop around. Doing your research will ensure you have exhausted all the possible mortgage options and are receiving the best rates available to you.
There are three different approaches to price comparison shopping:
It is often preferred to start with rate comparison websites like Ratehub.ca because they allow you to search for the rates available in your province and modify the types of mortgage (variable vs fixed) and the length of term. These websites are a great start point to gather more information about your mortgage options.
Once you have gathered some information about the best mortgage rates offered to you, contacting a mortgage agent is the next viable step. Mortgage agents help you find the best and cheapest mortgage rates based on your personal financial situation by communicating with lenders on your behalf.
You also have the option to forgo speaking with a mortgage agent and go directly to your bank of choice but make sure you have done your own price comparison beforehand. Direct contact with a bank does not guarantee you will get the best and cheapest mortgage rates in Toronto because you have to negotiate the rates yourself. Unless you are an experienced homebuyer, using a mortgage agent is the easiest and most convenient way to ensure you are truly getting the cheapest and best mortgage rates in Toronto
Where do I start?
The most useful thing to do as a first time home owner is to do your research and consult with a real estate agent and suitable mortgage agent. We advise that everyone comes in for a pre-approval, which allows them to lock in a preferred interest rate. It also gives home buyers the advantage of knowing how much they can afford before deciding to purchase a home. Finally, ensure that you are using reputable sources to help you understand more about the different types of home purchase mortgage and the factors that contribute to mortgage approval. Websites like ours are a perfect place to start!
It is very useful to use online tools such as mortgage calculators when you starting thinking about buying a property. There are two main mortgage calculators that can help you understand where you stand financially. A mortgage affordability calculator shows you how much you can actually afford to spend on a mortgage. A mortgage payment calculator uses all of the characteristics of your mortgage to determine how much you will have to pay. Using these resources will give you a correct depiction of your financial standing in relation to the Canadian housing market. Remember to use mortgage calculators in Canada to ensure the rates are consistent with the Canadian market.
There are also certain government programs like the First Time Home Buyer Grant that allow first time buyers to get a financial return from their taxes a year after the first housing purchase.
However, the best advice we can give you is to contact our expert consultants who pride themselves on working tirelessly until you are making affordable payments on a home you love.
Call or text us today at 416-674-6222 or toll free at 1-800-673-2230 , or email us at info@clovermortgage.ca for your free no obligation mortgage consultation.
