To confuse things even further the rules and regulations in the mortgage market are starting to change more often with the introduction of new, more innovative products. A few years back, two of these innovations were the 0% deposit and the 40 year mortgage. These were supposed to help first time buyers get on the property ladder by making that first purchase more affordable, however, the Canadian Government got spooked by the US housing crisis and has decided to try and remove these products from the market by stopping to insure these ‘riskier’ products through the Canadian Housing and Development Corporation (CMHC) effective October 15, 2008.

With all these changes how can Canadians choose the right mortgage? We’ve outlined a few key steps below to help with this process.

Net worth calculation

The first step to getting a mortgage is establishing one’s net worth, which is the amount left after over liabilities are deducted from assets. Prudent home buyers would ensure that their monthly housing costs are lower than half the gross monthly income of the household. These costs include the principal, interest, taxes and heating expenses, collectively known as ‘PITH’.

You should also consider the entire monthly debt, such as housing cost, credit card payments and other debts like car loans.

Documentation

The next step is to get all your documentation ready such as personal identification, job and salary details from employers, sources of income, information on bank accounts, loans and debts, proof of financial assets, sources and amount of down payment and proof of strong credit rating.

Choosing your lender

Now that you are armed with all your documentation you can start looking for mortgage lenders. Many people start by comparing mortgage rates using your local newspaper (or even more conveniently!) a website such as RatetSupermarket.ca. That will give you a good idea of the market and then you can make decisions on the best way to proceed.

2 good places to start are:

1. Speak to a mortgage broker – they are experts in the field, have access to all the major lenders (even your own bank) and if you have a difficult credit situation, many have access to private lenders who specialize in funding these types of cases. Best of all their services are free! They are paid a commission by the lender if they arrange a mortgage.

2. Your current lender or your bank – if you’re a first time buyer, it’s always a good idea to speak to your own bank, just make sure to get a few quotes as well.

If you’re refinancing then your current lender is obviously a good place to start as well.

Choose a mortgage & mortgage rate

Next, its time to decide on a mortgage and mortgage rate that’s best for your situation and its best to sit down with a broker or financial advisor to help you with this decision.

Mortgage rates

There are two main types of rates – fixed and variable mortgage rates. With fixed interest rate mortgages, the rate of interest stays the same throughout the tenure while in variable interest rate mortgages the rate fluctuates according to the prime lending rate. This choice really comes down to the economic landscape and whether interest rates are expected to increase or decrease in the short and long term.

The two most popular types of rates in Canada are the variable rate and the five-year closed fixed rate. These appeal to very different risk profiles as the former is willing to adjust their mortgage payments more regularly while the latter is more comfortable knowing their payments are fixed for the next 60 months.

Open or closed mortgage

Another option is choosing an open or closed mortgage. Open mortgages are flexible, with the borrower able to repay the loan early without any penalty. Closed mortgages have fixed interest rates for specified periods, and penalties are charged for pre-payment.

Some lenders allow for 20% of the mortgage to be repaid annually without additional fees. Convertible mortgages are short-term closed mortgages with options to switch to long-term closed mortgages.

Conventional vs high-ratio mortgages

In Canada, a conventional mortgage is one where the down payment is 25% or more of the total cost of the asset. A down payment of less than 25% is termed as a high ratio mortgage. As a lower down payment and higher loan amount imply high risk, lenders obtain protection by adding a mortgage default insurance policy. The Canadian Mortgage and Housing Corporation, Genworth Financial and AIG United Guaranty all provide mortgage default insurance.

Looking for a mortgage is like shopping for any other product – make sure to shop around, compare rates from various lenders and brokers, and then make an informed decision that suits your own situation. There is plenty of help and information available and if you follow these steps you’ll be in great shape to ensure you’ve chosen the right mortgage for you.