First-time home buyers often encounter new (and confusing) jargon when they are applying for a home loan. "Conforming loan," "fixed-rate," and "funding fee" are just a few to name. However, the most confusing term by far is "conventional mortgage."

What is a conventional mortgage? If there are conventional mortgages, what are unconventional mortgages? What is the difference between these two types of home loans? We will answer these questions and more in this blog post.

What Are Conventional Mortgages?

A conventional mortgage, also known as a conventional loan, is a home buyer's loan that funds 80% or less of the purchase price of the property. Since the loan limit is 80%, buyers need to have a 20% down payment saved up and available to them to qualify for a conventional loan.

For instance, a couple looking to buy a $450,000 house should have $90,000 saved for their down payment.

While saving this much may be possible for some people, many first-time homebuyers have a hard time saving up such a large down payment amount because they have debt (e.g., outstanding student loans).

Since the maximum loan amount is 80% of the mortgage, conventional mortgages tend to not have any form of high-ratio or mortgage insurance premiums. We'll touch more on that later.

What Are Unconventional Mortgages?

Unconventional, non-traditional, or high ratio mortgages are the exact opposite of conventional mortgages. Unconventional mortgages cover more than 80% of the total closing costs.

A home buyer may not qualify for a conventional loan for many possible reasons, including but not limited to:

• A poor debt to income ratio (how much money a person spends paying off debt in comparison to their monthly income)
• An unstable source of income
• Smaller down payment saved
• Lower credit scores

In these cases, a buyer's loan options become extremely limited because banks and mortgage companies are wary of lending their money to individuals with these types of financial portfolios. As a result, buyers must choose mortgages supported by the federal government.

Fun fact: Non-traditional mortgages must be backed by a government agency. These types of mortgages help protect the lender, not the borrower.

Are Conventional Mortgages The Standard?

It is important to note that conventional loans are not the standard; buyers are required to have a minimum down payment of 5% for a primary residence or 20% for an investment property. You can still purchase a home without having a 20% down payment saved up, but it may have additional loan limits and regulations you need to follow.

The Benefits of Conventional Loans

Conventional loans have many benefits that you can enjoy. We'll go into depth on some of the benefits you can enjoy if you save enough to receive a conventional loan.

1. A Larger Down Payment = More Equity

A conventional loan is more beneficial for homebuyers because they have more equity right at the beginning of their loan.

Since buyers with a conventional loan have paid a larger down payment for their property, they have more equity in their homes. More equity can be extremely beneficial because it provides owners with access to a larger home equity loan or home equity line of credit.

2. Don't Pay Mortgage Insurance

Mortgage insurance protects lenders in case the borrower defaults on their mortgage payments. Insurance typically costs 2.8% to 4.0% of the total mortgage amount. When you pay private mortgage insurance (PMI) on top of your mortgage loans, it puts a strain on your ability to make your monthly payments.

Thankfully, mortgage insurance is usually only required for any loan that is over 80% of the home's purchase price or market value. Therefore, homeowners with conventional loans don't have to buy mortgage insurance.

3. More Relaxed Lending Requirements

The mortgage industry has requirements that borrowers need to meet and follow. These requirements include proving your credit score, source of income, and more. While these terms are usually the same, they can differ depending on whether you are receiving a conventional or high ratio mortgage.

Unconventional mortgages are given to buyers who have a low down payment, poor credit score, etc. Since buyers do not have what lenders consider a 'stable financial portfolio,' they receive stricter lending requirements. As a result, they may have to go above and beyond to prove that they are responsible borrowers.

4. Lower Mortgage Rates

Often, borrowers can receive lower interest rates when they have a conventional mortgage rather than an unconventional one. The interest rate that you receive is an important determinant of your finances. Interest rate affects the amount of your monthly mortgage payment and, as a result, the cost of your total loan.

For example, if you secure a 25-year mortgage for $400,000 with a 3% interest rate, you can expect to pay $146,963.60 in interest in the 25 years. You will have to pay $253,187.39 in interest if you receive the same loan with a 5% interest rate.

Borrowers usually only receive lower rates when they have a good credit score and a low debt to income ratio. We recommend bringing your credit report to lenders to learn what interest rates they can offer you.

How Do You Get A Conventional Loan?

The first thing that you need to do is to gather all the materials required by lending services. You should have a copy of your credit report, proof of employment and any financial records to show to potential lenders.

Once you have that information collected, visit private lenders like banks, credit unions, and mortgage companies to inquire about a mortgage loan. We strongly recommend speaking to a mortgage broker because they will help you find the best rates.

 

Frequently Asked Questions (FAQs): Unconventional Mortgages

What are unconventional mortgages?

Unconventional mortgages are non-traditional home loans that differ from standard fixed-rate or adjustable-rate mortgages. They often have unique features, such as alternative qualification criteria or repayment structures.

How do unconventional mortgages differ from conventional mortgages?

Conventional mortgages follow standard lending guidelines, while unconventional mortgages deviate from these norms. Unconventional mortgages may have lower credit score requirements, interest-only payments, or balloon payments.

What types of unconventional mortgages are available?

Unconventional mortgages encompass various types, including interest-only mortgages, adjustable-rate mortgages (ARMs), subprime mortgages, jumbo loans, and more.

What is an interest-only mortgage?

An interest-only mortgage allows borrowers to pay only the interest portion of the loan for a specified period, typically 5-10 years. After this initial period, they must start repaying both principal and interest.

How do adjustable-rate mortgages (ARMs) fit into unconventional mortgages?

ARMs start with a fixed interest rate for a set period, after which the rate adjusts periodically based on market conditions. They can be considered unconventional due to the uncertainty of future interest rate changes.

What is a subprime mortgage?

Subprime mortgages are loans offered to borrowers with lower credit scores or less conventional credit histories. They often have higher interest rates to compensate for the increased risk to lenders.

Why do people choose unconventional mortgages?

Borrowers may opt for unconventional mortgages if they have unique financial situations, such as irregular income, limited credit history, or the need for short-term financing.

Is it advisable to consider an unconventional mortgage?

The suitability of an unconventional mortgage depends on your specific financial circumstances and goals. It's essential to carefully evaluate your ability to manage potential risks and consult with a mortgage professional to make an informed decision.

If you're looking to buy a home, you'll probably need a mortgage, since most people cannot afford to pay the full price of a home. The mortgage principal is the amount you'll need to borrow (purchase price minus your down payment and any required mortgage insurance).

To suit your personal finance needs, there are a variety of mortgage types.

Conventional Loans

Down payments on homes are required, but a large down payment is usually recommended anyway to qualify for a better rate and reduce the overall interest paid.

A minimum 20% down payment is required for a conventional loan. With this percentage, your mortgage is lower-risk and eligible for a conventional mortgage. Otherwise, your loan is considered higher risk and requires insurance. The premium is added directly to your mortgage amount. People who can't afford large down payments, or want to take advantage of good rates or prices can benefit, with a minimum 5% down.

The Canada Mortgage and Housing Corporation, similarly to the US Federal Housing Finance Agency, sets requirements like this; it's also involved in mortgage insurance rates and policy on housing affordability and accessibility.

Mortgage Terms and Amortization

The mortgage term is the period your mortgage contract is in effect. Payments are based on amortization. All details are outlined in the mortgage agreement. Terms range from a few months to 5 years or so. In the end, you'll probably have to renew for another term, until you're able to pay off the debt completely.

The amortization period is how long it takes to pay your mortgage fully. A shorter amortization means a higher monthly payment but less interest paid. In Canada, down payments of 20% or more let you amortize up to 30 years; otherwise, the maximum is 25 years.

Monthly Mortgage Payment Frequency

Monthly mortgage payments are common, but more frequent payments, like a bi-monthly payment, let you pay down mortgages faster and reduce interest. It may also be required that property taxes are automatically deducted through the financial institutions.

Interest Rate

A higher interest rate means higher mortgage loan payments. Rates change when you renegotiate and renew mortgage terms.

The interest rate is like a lender's fee for borrowing money. A minimum credit score is required. Mortgage loans are secured; if you fail to pay, your mortgage lender may take possession. On the other hand, you get lower interest rates compared to unsecured loans.

Mortgage rates are impacted by your term length, credit history, employment situation, whether it's for a home loan or investment property, as well as other factors.

Fixed rate mortgage

A fixed rate mortgage is likely to have a higher rate than a variable rate. With a fixed interest rate, though, your payments stay the same throughout and interest payments are consistent. Fixed rate mortgages are better if you are more conservative and want the security of consistent rates.

Variable rate mortgage

Also known in the US as adjustable rate mortgages, these have variable interest rate fluctuations during your term. Typically, variable rate mortgages have lower rates than fixed. You can choose fixed payments, which stay the same, despite the varying actual interest, or adjustable payments so your payments change with rates.

Hybrid or combination

Hybrid or combination mortgage rates have fixed and variable interest rates, sometimes with different terms for each. The fixed portion partially protects when interest rates rise, while the variable portion partially helps when rates fall.

Types of mortgages

Mortgages can be portable, where you keep your mortgage when buying another property, or assumable, when you pass your existing mortgage to someone buying your property. There are different types of mortgages available.

Open mortgages

An open rate is usually higher than on a closed mortgage with a comparable term length, but it allows more flexibility if you may make extra payments.

Closed mortgages

A closed mortgage interest rate is usually lower than a comparable open mortgage one. Closed term mortgages usually limit the amount of extra money, or pre-payments, you can put toward your mortgage.

Convertible Mortgages

These allow the type of mortgage to change, usually to allow you to start with an open mortgage and then lock into a closed mortgage. It offers lower rates than an open mortgage with the flexibility to switch to a closed term.

Hybrid Mortgages

A hybrid mortgage allows more than one type of mortgage to be covered in one contract.

Reverse mortgages

If you're 55 and own your home, you can convert home equity into lump sum or monthly payments by borrowing against your home equity.

Mortgage Lenders That Help

Buying a home is a huge investment. At Circle Mortgage Group, we protect your best interests, and understand your financial situation and goals are unique.

If you're self-employed, a first-time buyer, or looking for commercial mortgage or self-employed mortgages, finding your perfect solution is especially complex, but we'll guide you through the mortgage process for your home loans. We can also help you with a mortgage renewal, remortgage, or reverse mortgage.

Whether you need a traditional mortgage or something more complicated, we'll get you better rates so you pay off your mortgage balance faster.

If you are selling your house, you may be wondering which projects will add to the value of your home's sale price, and which aren't worth the expense and hassle. Alternately, you may be researching home improvement ideas for your forever home, choosing to spend money only on projects that add the most value.

Research shows not all improvement projects increase a home's value. If you aim to build or maintain the value of your home, be sure to balance the expense of the upgrade against the potential value increase.

Rewarding Renos

Although DIY projects save on labour costs, consider your own time investment as part of the overall cost.

Below are some cost-effective home improvements to add style, boost your home's curb appeal, and provide good return on investment (ROI) according to the Appraisal Institute of Canada (AIC).

Add Usable Space

An unfinished basement means potential space is being wasted. Finishing a basement is complicated but worth the effort as it increases the usable square footage of a home, effectively giving you a larger house. Converting an unfinished space costs around $50 - $90/ft2 with a 75% ROI.

Energy Efficient and Environmentally-Friendly Upgrades

Soaring energy costs and rising interest in eco-friendly houses mean energy-efficient upgrades are more desirable than ever to potential buyers.

Projects improving energy efficiency are worthwhile, especially switching old windows to more insulated ones and replacing the front door with steel. You can expect a 50 - 100% ROI on these.

Adding a smart thermostat or smart home technology to minimize energy usage will boost your home's efficiency. Additionally, with 'green' renos, you may qualify for government incentives, which help to give you a 60% ROI.

Clever Kitchen Renos

A major renovation to your entire kitchen is costly, but a minor remodel still boosts your home's appeal without lots of effort. Simply replacing cabinet fronts and pulls is cheap and easy, but makes a big difference. Facelifts like these recoup a higher percentage than full overhauls. Remodels cost $20,000 - $50,000; minor upgrades sit at the lower end of the scale and yield a ​75 - 100% ROI.

Bathroom Boosts

Simple bathroom upgrades are effective, too. Replacing old light fixtures, faucets and knobs can refresh dated or cheap-looking bathrooms. Most fixtures can be upgraded for under $100 each, with a 75% ROI. Also, save money by reglazing the tub instead of replacing.

Flooring Fixes

Replacing worn carpeting and flooring with wood or laminate planks is another DIY project that has a strong impact.

Laminate flooring costs start at about $3 per square foot. It is appealing, and cheaper and tougher than hardwood floors.

Great Outdoors

A more usable yard increases space and home value, so decks and patios are in demand. Decks from cheaper materials like wood or composite cost roughly $20,000 with a 70% ROI. Including a fire pit can cost about $6,000, but stretches use of your outdoor space into winter and yields a 67% ROI.

A new garage door, or a stone veneer facelift, can provide a 92% ROI.

For very little money, though, you can upgrade your house dramatically through basic landscaping. Simple yard care, such as cutting and fertilizing the grass, controlling weeds, and trimming bushes, costs about $340 with a 539% ROI.

Painting

A simple, low cost job is adding a fresh coat of paint. Even little touch-ups or targeted painting of doors and trims is effective. If selling, neutral, lighter colours are recommended.

DIY interior painting costs $2 - $3/ft2. Painting exterior surfaces is a little more at $2 - $4/ft2, but is especially important to protect against mold and other damage. Painting has an excellent ROI of 50% to 100%.

Keep it Clean

An easy fix is deep cleaning to improve the overall look of your home's exterior and interior, breathing new life into your home's appearance.

Power wash exterior surfaces to remove dirt and mold and spruce them up. For just $300, power washing may add $4,000 to resale value.

Assess for Biggest Impact

When deciding on what projects to start with, assess your house for what would make the most impact; a real estate agent can help you with this. Focus on your most dated or worn areas first. If an upgrade adds convenience or refreshes a shabby space, it is likely a safe bet.

Upgrades matching your neighbourhood's profile are most impactful. Big expenditures on fancier items that are significantly more luxurious than commonly found in the area will not add as much value as upgrades to catch up with neighbourhood standards.

Financing Home Improvements

Real estate agents can help you choose which upgrades significantly add to house value.

Consider taking out a home equity loan to complete needed projects, whether you are selling or staying in your home. Circle Mortgage Group has the best home equity loans; they can help you get a great rate so you can tackle these projects. Improve your home today and get an excellent return on your investment.

So, you're looking at buying your first home and have set up a mortgage appointment. The steps in the home buying process can sometimes seem intimidating and confusing – especially for first-time home buyers. But they don't have to be! Your dream home is just a few steps away!

Seeking professional mortgage advice is a foundational step that will help push your plans to purchase a home forward. Knowing what kind of documents and identification you need to bring, as well as knowing what questions to ask can make your mortgage appointment informative and the mortgage process beneficial.

The following information will be extremely handy when starting your journey as a first-time home buyer. It’s always helpful to prepare all of these documents before your mortgage approval meeting so that it can go as smoothly as possible.

4 Things To Bring To Your Appointment

Here are some suggested and mandatory documents you should bring and know before walking into your mortgage broker's office for your appointment.

1. Personal Identification and Credit Score

One of the most basic but essential things you'd need to bring to your mortgage appointment is proof of identification and current address. This will likely mean bringing your driving licence or passport.
It's recommended that you bring two pieces of ID in case the mortgage broker requires more than one piece. Other pieces of identification might include permanent resident cards, health cards, or a valid certificate of Indian status. For proof of address, you might bring your lease agreement, credit card statement, bill, driver's license, etc. As well, you will need to have your current credit score available. This can be found through your bank account.

2. Financial Statements

Like any loan, the party who will be providing the money will want to know about your financial habits and whether you will be able to pay back the loan with interest within a set time period.

Proof of Income

Mortgage professionals will require some financial information including a proof of income through pay stubs, employment letter, or tax documents. If you're self-employed, these documents will be a bit different. As well, they will likely need a proof of available funds for the down payment and monthly payments. This can be provided through bank statements from savings accounts like an RRSP, TFSA, or a high interest savings account. If applicable, you can also provide a list of assets with estimated value with depreciation included.
These documents will be extremely helpful when it comes to leveraging your home buyers plan to use for your down payment.

Any Outstanding Debts

Along with your income, you will have to provide any debt documentation. Your mortgage lender will not only need to know where you are getting your income, but also where your debts are. Are the bills on your credit cards piling up? Do you have another property that you are paying a mortgage on? Do you have student or car loans that are still outstanding? These are all details that are taken into consideration when it comes to your mortgage approval. These records can be seen on your credit report, as well as credit card statements, tuition receipts, etc.

3. Property Examples

When you are hoping to finance a house as a first-time buyer, you're encouraged to bring some property examples in with your meeting so that you can give your mortgage broker an idea of the size and price of the house you're looking for. This can also determine the size of the mortgage you will need before you get pre-approved. Having a couple of properties and price ranges in mind will be extremely beneficial for the entire mortgage process.

4. List of Questions

The mortgage process can be confusing – but it doesn't have to be. Whether you're hoping to get your mortgage pre-approval, completing the finishing touches, or just getting started, there are always questions that arise. Your mortgage broker is well equipped to provide professional mortgage advice and can confirm whether you are able to get your pre-approval. Seeking mortgage advice about what you can afford from a broker will prepare you for the rest of the purchasing process.
After the initial appointment, there will be more documents to fill out, more meetings to be had, and more steps to take in order to prepare your mortgage. Asking questions when you have them will help you understand the various steps in the process.

Contact Circle Mortgage Today

Here at Circle Mortgage, we help clients in the Burlington and surrounding area with all of their mortgage questions. Our team of professional and licensed mortgage brokers is here to provide answers, details, and resources to assist in your buying journey. We focus on providing the right services for whatever you may need! Contact us today to set up an appointment with one of our many professionals.

It costs a lot of money to buy a house. Qualifying home buyers need a minimum 5% down payment to purchase a home, and with rising real estate prices, buyers need to have more money saved to afford a down payment.

Thankfully, the Canadian government understands the pressure and financial strain that many Canadians are under. As a result, they have created the RRSP Home Buyers' Plan to help make affording a down payment a bit easier.

This blog will explain what the Home Buyers' Plan is, how it can help first-time buyers, and its benefits and downsides to help you understand and take advantage of this program.

What Is The Home Buyers' Plan?

The Home Buyers' Plan (HBP) is a program that allows first-time homebuyers to withdraw from their registered retirement savings plans (RRSPs) to either buy or build a qualifying house for themselves or a related individual with a disability. The maximum withdrawal amount is $35,000 per person. If two spouses are purchasing or building a house together, both can take advantage of the program and have $70,000 at their disposal.

The Benefits of Using Your Registered Retirement Savings Plan

Utilizing your RRSP account to pay for your first home is a smart decision. Many advantages come with using your RRSP funds to pay for your down payment. We will touch on these benefits below.

1. Tax Benefits

If you’re 18 years of age or older, you can contribute 18% of your annual income (up to $29,210) to your RRSP, tax-free. The contribution room carries over every year, allowing you to save more money for retirement. Every RRSP contribution is tax-deductible, meaning that you will receive a tax refund for the amount you contribute to your retirement fund.

You will be taxed on each RRSP withdrawal if you take money out of your registered retirement savings fund before retirement. Thankfully, RRSP withdrawals under the First-Time Home Buyers' Plan do not have to be claimed on your income tax return. In other words, you will not have to pay tax on the withdrawal. You can receive a tax refund by saving for retirement and you can use that money tax-free to pay for your first home. It’s a win-win situation.

2. Save Less Money

It can be challenging to save for a home and retirement when paying your bills. But, with the HBP, you don’t have to stretch yourself thin trying to save money for your retirement and your first home purchase. You can focus all your additional earnings on your RRSP contribution and use your RRSP for your first house.

3. Pay For Your Down Payment

The obvious benefit of the Home Buyer's Plan is a down payment! You will have the funds to purchase a home. Additionally, the HBP will allow you to have a substantial down payment. The larger the initial payment, the smaller your mortgage loan will be. This is beneficial because you won’t have to worry about compound interest building up on an additional $35,000 to $70,000 of your mortgage loan. However, you may have to worry about being taxed if you do not repay your RRSP withdrawal when your repayment schedule is complete.

Repay Your RRSP Contributions

It’s important to note that the funds that you withdraw from your RRSP have to be repaid; the Canada Revenue Agency requires every first-time home buyer to repay their withdrawal. Otherwise, it will be considered RRSP income and you will be charged tax.

Thankfully, you do not have to start paying it back within the same calendar year or anytime soon after that. The following year after your purchase, you must make your first repayment installment. You then have 15 years to complete repayment, paying back the remaining balance you had withdrawn from your RRSP.

Determine Your Eligibility

To take advantage of the HBP, you need to meet their eligibility requirements:

• You must be a first-time homebuyer
• You have a written agreement to buy or build a qualifying home for yourself or a related person with a disability
• You must be a Canadian resident
• You must intend to use the home as your principal residence within one calendar year of buying or building it. If you buy or build a home for a related person with a disability, they must use the home as their primary residence within one year.

Get A Mortgage Loan

Circle Mortgage Group is an award-winning mortgage brokerage located in Burlington, Ontario. We have access to a wide range of loans with fantastic mortgage rates. Rather than go to your financial institution, shop for a loan with our help. We can help you get the financing you need with the mortgage rate you want. Call us today!

Many homeowners are not aware that they can take out a second mortgage on their properties.

A second mortgage, also called a home equity loan, is a second loan taken out on a property that is already mortgaged. In simpler terms, it’s when homeowners have two mortgages for one property.

What Is A Second Mortgage?

Second mortgages are secondary loans that homeowners can take out on a property with a primary mortgage. However, this money is not to pay off the cost of the property. Instead, the funds cover other expenses like credit card debt, auto loans, and home renovations.

Homeowners receive a lump sum payment of their second mortgage upfront. They then need to make payments on both their first and second mortgages at the same time. However, second mortgages are typically interest-only payments. Interest payments help pay off the interest earned on the loan which depends on the loan interest rate. Interest rates on a second mortgage will generally be higher than the first loan secured. Seconds mortgages are available at either a variable or fixed interest rate.

Primary Mortgage vs. Second Mortgage Loans

A primary mortgage is an original mortgage used to buy a house. It’s the home loan that covers the cost of the property beyond the down payment and some closing costs. Typically, primary mortgages will make up anywhere from 95% or less of homes' purchase price. A second mortgage is much different.

A second mortgage loan is not equal to the cost of your home. Instead, the amount of money that you can borrow will depend on the amount of equity in your home. The total of a first and second mortgage can be as much as 80% of your home's value, minus the balance of your primary mortgage.

What Is Equity?

Equity is the market value of your unencumbered interest in your home. In simpler terms, it is the amount of money that you have paid for your home, outstanding mortgage balance not included.

For example, you paid a $20,000 down payment on a $400,000 house. Your first mortgage covered the remaining $380,000. You have paid $25,000 in monthly mortgage payments since you first purchased the property. When you first bought the home, your home's equity was $20,000. After paying off a portion of your existing mortgage, the value of your home equity is $45,000.

How Is A Second Mortgage Different Than A Line of Credit?

A second mortgage is much different than a home equity line of credit (HELOC) despite its reliance on equity.

First, a HELOC is a line of credit secured against your home. It works like just any other credit line; you take out money during the draw period and spend it. Then, you pay it back before you can borrow again. HELOCs are like high-interest credit cards. In contrast, second mortgages are loans with mortgage rates. They are used to consolidate debt into a single loan that can be paid off monthly payments alongside a monthly mortgage payment.

The main similarity between second mortgages and HELOCs is the collateral: your home. You risk losing your home if you do not pay back the money you borrow.

How To Get A Second Mortgage

A home equity loans are ideal for debt consolidation. Rather than pay off personal loans and your mortgage separately, you can combine them into first and second mortgages. This will help fix your bad credit, transfer high-interest debts to a lower interest rate, and boost your low credit score.

Here is how you can apply for a second mortgage:

1. Pay down your first mortgage. Mortgage lenders require homebuyers to have over 20% equity in their homes before borrowing money. They also need to be able to pay their monthly payments without exceeding their Total Debt Service Ratio.
2. Find a second mortgage lender. A second mortgage must be with a different lender than the primary lender. Many mortgage lenders and credit unions are willing to help.
   Apply. Visit your financial institution to apply for a second mortgage. You will need to provide personal finance information.
3. Pay and spend. Borrowers will need to pay several fees to get a second mortgage. They will need to pay origination fees, homeowners insurance (rates vary), title search fees, legal fees, and appraisal fees. After, you have your home equity loan to spend.

Find A Second Mortgage Lender With Circle Mortgage

At Circle Mortgage, we make getting a second mortgage simple. Call us today to speak with our mortgage broker. We can answer second mortgage FAQs and help you decide whether an additional loan is right for you.