First Mortgages in Ontario

Buying your first home in Ontario is one of the biggest things you’ll do in your financial world. It’s essential to walk through various steps, including getting your finances in order and choosing a good broker to help you get the best terms and rates on that first mortgage.  

Many people who purchase a property have a single mortgage with a bank that they pay off over time. However, many different debts may be placed on a property simultaneously.

In this article, we’ve detailed exactly what is meant by a “First Mortgage” and how it differs from other mortgages and debts that may be placed on a property.

What Is a First Mortgage?

Mortgages are defined as house loans that utilize real estate as collateral. They have several characteristics, including interest rates, repayment schedules and loan amount details. A mortgage is a legal agreement between a financial institution, often a bank, and the borrower.  

Utilizing the debt-free portion of your home, commonly referred to as “home equity,” will allow you to secure additional mortgages. Mortgages are ordered chronologically. The initial mortgage placed on the property is termed the first mortgage, followed by subsequent mortgages labeled as second mortgage, third mortgage, and so forth.

As homeowners pay down their mortgages, the portion of the home’s debt-free value increases. Utilizing the debt-free portion of your home, commonly referred to as “home equity,” will allow you to secure additional mortgages.

The Significance of Mortgage Positioning

There’s a precise payment priority with the mortgages. First mortgage priority ensures that the lender who issued the mortgage receives payment first in the event of the property’s sale. If there’s any money left after that, it goes towards additional mortgages, like a second one.
The debts are paid off on a property in the same order they were placed, regardless of the lender or amounts owed. Borrowers should understand this framework based on the Land Titles Act and the Registry Act in Ontario.

Typical Uses for First Mortgages

Most first mortgages are used to finance the cost of buying a house. These mortgages generally come with a lower interest rate compared to most other types of loans. The length of time it takes to pay off a mortgage fully is referred to as the “Amortization.” The average amortization length for a Canadian first mortgage is 25 years.

Sometimes, a homeowner may choose to get a new first mortgage after fully paying off the mortgage they used to purchase the property. Commonly, these are placed to satisfy some urgent need for financing. Common reasons people get this type of financing include:

• Finance a renovation
• Fund business ventures
• Pay retirement expenses
• Assist family with purchasing another home

There exist numerous reasons why an individual might opt for a new first mortgage subsequent to the sale of a property. Usually, homeowners prefer taking mortgages instead of other kinds of debt since the rates are lower, the amounts are higher, and the approval process is more straightforward if there is enough home equity.

First Mortgages vs Second and Third Mortgages 

The first mortgage has priority over other financial claims. Being aware of the primary debt against the real estate is crucial when it’s your first time buying a house. The second mortgage is usually short-term and quite often interest-only. It ranks behind the first mortgage in order of repayment. 

If you’ve missed payments on a first mortgage, it’s essential to understand that second mortgages can serve as a viable solution to halt a power of sale. A third mortgage is in the last position and has a lower priority in case of default. Private lenders often provide these loans for higher interest rates. Due to a shortage of home equity, third mortgages rarely make it to the market.

First-time homebuyers can greatly increase their chances of securing a house loan by teaming up with the right professionals.

Working with Mortgage Brokers

A mortgage broker is an excellent middleman between a buyer and a lender. Their job is to find competitive rates and terms. They have access to a wide range of products and lenders so that they can shop for a first mortgage. 

Private lenders work with mortgage brokers and offer a streamlined process. They also have different requirements than conventional banks.

Approval Process and Requirements

The Financial Services Regulatory Authority of Ontario (FSRA) regulates mortgage brokers in the province. They suggest that getting pre-approval is a good starting point so you know your budget.  Mortgage loans for first-time buyers also need to include data about your employment, including pay stubs and financial information like bank statements. 

Traditional lenders will also want proof that you have a minimum of 5% of the purchase price and can cover closing costs. They will also need to see evidence of where your down payment comes from.  

Private lenders can be viable if the banks have rejected your application. However, they tend to charge much higher rates and fees than traditional lenders.

Making the right decision also means understanding other ingredients in a first mortgage.

Factors Influencing Mortgage Terms

Mortgage terms in Ontario can be slightly different depending on whether you’re dealing with a private lender or a traditional bank.

More conventional institutions place a high emphasis on your credit score and financial stability. Getting a favourable rate can mean having a good score with one of these institutions. Your payment history, the amount of credit you used, and what you have available help formulate this number. 

One of the financial factors that conventional banks and credit unions examine is the debt-to-income ratio, which measures a person’s income against their debt payments.

Private lenders take a more streamlined approach, focusing more on the equity you’ve built up in a property rather than your credit score. They use a formula called the Loan-to-Value ratio. This percentage represents the proportion of the loan you seek in relation to the appraised market value of the property.

There are also a few Insider tips to help you get the best interest rates on a first mortgage.

Securing the Best Interest Rates

It’s important to remember that a mortgage contract is binding and legal. You want to get the best interest rates because that’s a significant factor in affordability.

• Improving your credit score is one of the best ways to impress a lender and get lower rates. Maintain low outstanding balances on credit cards and ensure you make payments exceeding the minimum amount owed on time.
• Settling other debts, like car and school loans, is an excellent way to lower your debt-to-income ratio. It’s also helpful to build up a steady employment record.

Understanding the importance of your credit score is always a good move.

Credit Score and Its Role 

These scores are an essential part of a first mortgage from a conventional institution. Some of the best mortgage lenders for first-time buyers will consider your credit score.

Although there’s generally no standard, rating agencies like Equifax suggest that a credit score between 580 and 669 is considered fair. When dealing with a bank or credit union, your credit score can affect the conditions and terms of your first mortgage.

Generally, the higher your credit score, the better the interest rate on mortgage loans for first-time buyers. There are some other factors to consider.

Other Considerations  

If you’re applying for a first mortgage loan, you must put together at least 5 to 20% of the purchase price as a down payment. If the house is worth $500,000 or less, you must put down 5%. It is mandatory to pay a 20% down payment for properties worth one million dollars or more. You’re also going to need mortgage insurance from the Canadian Mortgage Housing Corporation (CMHC) if you make a down payment of under 20%.

If you’re looking to use a private lender, equity becomes a deciding factor, and you’ll need a professional property appraisal. 

A first mortgage in Ontario is an integral part of your financial future. It’s a legal agreement between a lender and borrower, with the house or property as collateral. These house loans for first-time buyers can be used for purchasing or building a home.

First mortgages differ from second and third mortgages, and getting the best product means working with an approved mortgage broker.

Different mortgage lenders for first-time buyers have different processes and requirements. Banks tend to focus on income and credit scores, while private lenders emphasize equity more.

Mortgage Broker Store can help you find competitive rates on a first mortgage in Ontario. One of our priorities is loans that don’t meet traditional lending institution requirements. Our team includes private lenders, brokers, and authorized mortgage agents. Let us help you prepare for and get a product that meets your requirements. 

Email ron@mortgagebrokerstore.com or call 416-499-2122.