Understanding the RisksGetting a mortgage is often the largest financial commitment you will make.
Being ready for a mortgage involves a lot more than just qualifying for a loan. Because of the amount of money you borrow, and the time it takes to pay it back, getting a mortgage comes with certain risks. It’s important to know what these risks are and to be financially prepared for them.
This is true whether you work with a mortgage broker/agent or deal with the lender directly. But, if you do use a mortgage broker/agent, he or she can help you better understand these risks and how they may relate to you personally.
Below are some of the possible risks and how to manage them.
1. Will you be able to afford the mortgage?
Before shopping for a mortgage, take a close look at your situation – your finances, future plans and lifestyle – and consider how much debt you can comfortably handle.
Consider not just how much money you have today, but your financial position for the length of the mortgage. Ask yourself if you will be able to continue to make the full payments on time. Even if you can, consider how the payments will affect your spending money and your ability to deal with sudden or unexpected financial needs. Will you have difficulties making sure you have enough left for other things you need?
2. When deciding how much money you can afford to borrow, consider:
Your current financial situation
Your future financial situation
How long you plan to own a home, have a mortgage or sell and buy a different home
Any extra expenses you plan to incur (e.g. buying a car, starting a family etc.)
The economic climate
The total cost of owning a home (e.g., property taxes, home repairs, condominium fees, etc.)
How much your home may increase or decrease in value over time
The potential for higher mortgage payments
The risks of a drop in your income
Your personal tolerance for debt and risk
3. How stable is your income and employment?
You may be able to afford a mortgage now, but your financial situation can change. Financial set-backs can happen at any time – not just when the economy is weak. Consider how you would manage if your income fell, your expenses rose and/or your mortgage payments increased. This is especially important for seasonal and contract workers. A decrease in pay or losing your job could seriously change what you can afford and your ability to pay back the mortgage.
4. Your income could fall and/or your expenses could rise if you:
Start a family
Change careers/return to school
Assume caregiver responsibilities
Have an income based on sale commissions, tips, bonuses or other incentives
Lose your job(s)
Get into debt
Become ill or disabled, or get injured
Run into business or legal problems
Get divorced or separated
Lose a spouse, partner or family member
Depending on the type of mortgage you have, your payments could also increase if your interest rate rises, or if you have to renew your mortgage at a significantly higher interest rate.
5. Have you planned ahead?
When faced with financial trouble, meeting your mortgage payments can be stressful – or even impossible – without prior planning.
Before shopping for a mortgage, you should find out what sources of income and alternative funding options are available to you, and develop a plan for making payments in hard times.
6. To make a plan for meeting your payments:
Create a detailed budget for your household (including housing, food, utilities etc.)
Build up emergency savings for mortgage payments, usually six months.
Clarify what payment options are available in your mortgage contract (e.g., some mortgage providers’ give you the option of applying pre-payments you have made to a current payment that is due.)
Investigate insurance products that may help you or your estate cover the mortgage if you become ill or disabled, get injured or die (e.g., disability insurance, critical illness insurance, term insurance etc.)
Find out what tax credits you are entitled to.
Ask your mortgage provider, broker or agent if a better interest can be offered when your current term ends.
Know what employment and government benefits you’re entitled to.
Know whether or not, and how, you can access any other funds or investments (e.g., money in your registered pension plan or RRSPs).
Consider consulting a team of professionals, which could include a real estate agent, mortgage provider, financial adviser, accountant and/or lawyer.
7. Do you have a good credit history?
Your credit history determines your credit worthiness and your ability to get a mortgage. Lenders will ask to check your credit history to decide if they want to offer you a mortgage. But be careful not to agree to too many credit checks over a prolonged period of time – that could have a negative effect on your credit score as it is an indication that you’ve actively applied for new credit.
You can always get a copy of your own credit history and make sure it is complete and accurate. There are two main credit-reporting agencies: Equifax Canada Inc. [[New Window]] and TransUnion of Canada [[New Window]] . You’ll pay a small fee for this service.
8. How much does owning a home cost?
Owning a home costs more than the amount of the mortgage. When you purchase a home, there are closing costs, including legal and other fees such as home inspection, along with appraisals and land transfer taxes to be paid. Once the home is yours, there are moving expenses, property taxes, insurance, condo fees, home repairs, and so on. Make sure to include all of these expenses as part of the total cost when you are considering if you can afford a mortgage.
9. Will owning a home affect your other financial and life decisions?
Mortgage payments could limit your ability to manage other expenses. After making your mortgage payments, would you have enough money to also pay for the things you might need in the years ahead? You might need a vehicle, wish to travel, have children or add to your family in the future. Consider if a mortgage could prevent you from being able to manage other commitments or goals.
10. Do you understand your mortgage contract?
Like most legal contracts, a mortgage can be very complicated. It is important to know and understand what you are committing to and if it’s right for you. Before signing a mortgage contract, you need to be sure that you understand all of the terms and conditions. Read all of the information and ask questions if you don’t understand something. You may also wish to seek legal advice before signing a mortgage agreement.
In Ontario, mortgage brokerages, brokers and agents are required to disclose to you the material risks of your mortgage in writing and in plain language. You are also entitled to have at least two business days to review a mortgage disclosure statement before you sign a mortgage agreement with a mortgage brokerage, or before you make a payment under a mortgage, whichever is earlier.
11. What happens if you can't pay for the mortgage?
Not being able to meet your mortgage payments in full and on time can have serious consequences including penalty fees, default and even foreclosure. It is important to be aware of these consequences before taking on a mortgage.
12. If you cannot make your mortgage payments:
You may have to pay late charges
You will damage your credit rating. Having a poor credit rating will make it difficult for you to obtain loans and make certain purchases in the future
Your mortgage may go into default and your mortgage lender may sell your home through Power of Sale to cover your debt, or become the owner through foreclosure.
If through Power of Sale the lender has the right to sell the property to recover the money still owed on the mortgage. Depending on the circumstances, you may never get the home back. If the lender sells the home for a price that is more than what is left on the mortgage, extra money is given back to the homeowner. In the case of a shortfall, the owner will have to pay the difference. Also, it will be harder in the future to find a lender that will offer you another mortgage.
If through foreclosure the lender gets a court order to take over the property. If this happens, all of the previous mortgage payments you have already made, all the money you have invested into the home and any equity (value beyond what is owed on the mortgage) in the home is lost.
13. Will your property value increase or decrease?
A home is often a good asset. But not always. The value of a home can go up or down. Decreases in value can result in losses of equity.