Understand the Risks of Getting a Mortgage
Most homebuyers need a mortgage1 to buy a home2 —and whether you’re buying your first home, or moving up, a mortgage is likely the biggest financial commitment you’ll ever 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.
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.
1 The term “mortgage” includes all types of debt secured on property (e.g., a house, condominium, land, etc.). 2 The term “home” includes all types of homes (e.g., single family homes, semidetached homes, townhouses, condominium units, mobile homes, etc.).
When deciding how much money you can afford to borrow, consider:
• your current financial situation • the total cost of owning a home (e.g., property taxes,
• your future financial situation home repairs, condominium fees, etc.)
• how long you plan to own a home or have a mortgage • how much your home may increase or decrease in value
• any extra expenses you plan to incur (e.g., buying a car, over time starting a family, etc.) • the potential for higher mortgage payments
• the economic climate • the risks of a drop in your income
• interest rates • your personal tolerance for debt and risk
Getting a mortgage is an important decision. You may want to consider putting together a team of professionals, which could include a real estate agent, mortgage provider, financial adviser, accountant and/or lawyer, to help you with your decision.
Do you know the risks?
You may be able to afford a mortgage now, but your financial situation can change. Financial setbacks 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.
Your income could fall and/or your expenses could rise if you:
• start a family • get into debt
• change careers/return to school • become ill or disabled, or get injured
• assume caregiver responsibilities • run into business or legal problems
• have an income based on sales commissions, tips, • get divorced or separated bonuses or other incentives • lose a spouse, partner or family member
• lose your job(s)
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.
Do you know the consequences?
Whether you’re late making mortgage payments, or cannot make them at all, not being able to meet your mortgage payments can have serious consequences. It is important to be aware of these consequences before taking on a mortgage.
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 provider may sell your home to cover your debt or become the owner through foreclosure.
• You may be responsible for paying any shortfall, if your mortgage provider cannot fully cover the debt by selling your home.
• You may lose the money you invested in your home, if you lose your home due to mortgage default.
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.
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.
Clarify what payment options are available in your mortgage contract (e.g., some mortgage providers give you the option of applying prepayments you have made to a current payment that is due).
• Investigate insurance products3 that may help you cover your expenses if you become ill or disabled, or get injured (e.g., disability insurance, critical illness insurance, etc.).
• Find out what tax credits you’re entitled to.
• Ask your mortgage provider, broker or agent if a better interest rate 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.
Before entering into a mortgage agreement, make sure you carefully 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.
Are you using the services of a mortgage brokerage, broker or agent?
If you plan to use the services of a mortgage brokerage, broker or agent, make sure the individual(s) and business are licensed with the Financial Services Commission of Ontario (FSCO)— the government agency responsible for overseeing the mortgage brokering industry in Ontario. To check if an individual or business is licensed to deal or trade in mortgages in Ontario, visit FSCO’s website at www.fsco.gov.on.ca and click on Mortgage Brokers.4
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, broker or agent, or before you make a payment under a mortgage, whichever is earlier.5
3 Before purchasing any insurance products, it is important to make sure you understand their restrictions and limitations (e.g., when and how much they pay out). Speak to your financial adviser, accountant and/or lawyer for advice on these products. 4 Some persons or entities are exempt from the requirements to be licensed as a mortgage brokerage, broker or agent, and therefore will not appear on FSCO’s website (e.g., financial institutions such as banks and credit unions, and other persons and entities, such as lawyers, under certain conditions). 5 Under the Mortgage Brokerages, Lenders and Administrators Act, 2006, this disclosure requirement does not apply if you consent in writing to waive it before you enter into a mortgage agreement or make a mortgage payment.
About FSCO
FSCO is an arm’s length agency of the Ministry of Finance that is responsible for regulating the mortgage brokering industry in Ontario. In order to carry out mortgage brokering activities in Ontario, all mortgage brokerages, brokers and agents must be licensed with FSCO.
In addition to mortgage brokers, FSCO regulates insurance, pension plans, credit unions, caisses populaires, loan and trust
companies and cooperatives. FSCO works with consumers, industry stakeholders and investors to provide regulatory services that protect the public interest, and enhance public confidence in and access to a fair and efficient financial services industry in Ontario.
For more information on any of these sectors, visit our website at www.fsco.gov.on.ca, or call our Contact Centre at:
(416) 2507250, Toll free: 18006680128, TTY Toll free: 18003870584.
For a complete list of licensed mortgage brokerages, brokers and agents, visit FSCO’s website at www.fsco.gov.on.ca
and click on Mortgage Brokers.
© Queen’s Printer for Ontario, 2009 ISBN 9781424995684
Mortgage Checklist
If you decide to get a mortgage,1 it is important to shop around and see what mortgage products and features different mortgage providers are offering. The more mortgages you compare, the greater your chance at getting one that best suits your needs.
To make the most of comparison shopping, you need to know what options are most important to you and have questions prepared to clarify what different options are available. You may wish to ask potential mortgage providers, brokers or agents the following questions:
What type of mortgage is best for my needs? In particular:
• a fixed, variable or adjustable rate mortgage
• an open, closed or convertible mortgage
• What mortgage features and options are best for my needs? For example:
• a short or long mortgage term
• a short or long amortization period