Home Builders in Edmonton | Infill North Blog
Understanding the New Mortgage Rules
When You're Building a New Home
Navigating the world of mortgages can feel overwhelming, especially with so many options, terms, and requirements to consider. Whether you’re a first-time homebuyer, planning to build, or exploring investment properties, understanding your mortgage options is key to making informed decisions.
We worked with our mortgage broker, Karen Pacheco, to break down the types of mortgages available, the qualifications needed, and how to plan your purchase effectively. From understanding fixed vs. variable rates to the benefits of pre-approval, we’ll guide you through the essentials. Plus, we’ll explore recent changes to mortgage insurance caps and what they mean for buyers, especially those eyeing properties above $1M.
We’ll keep this simple and straight to the point, but you can skip ahead to the new mortgage rules if that’s what you’re looking for!
TYPES OF MORTGAGES
Insured (High Ratio) vs. Uninsured (Conventional)
An insured or high-ratio mortgage includes default mortgage insurance, applied when the buyer places less than a 20% down payment. Conversely, an uninsured or conventional mortgage requires at least a 20% down payment and avoids the additional insurance cost.
Fixed vs. Variable Rates
A fixed-rate mortgage offers a stable interest rate throughout the term, providing predictable payments. A variable-rate mortgage, tied to the Bank of Canada’s prime rate, can fluctuate, potentially offering lower rates but introducing more risk due to rate changes.
Closed vs. Open Mortgages
Closed mortgages have restrictions on early repayment or lump-sum payments without penalties, often offering lower interest rates. Open mortgages allow flexibility for early repayment without penalties but typically come with higher rates.
Draw Mortgage vs. Completion Mortgage
For new builds, a draw mortgage allows funds to be advanced in stages during construction, while a completion mortgage releases funds only upon possession. Builders usually dictate which option applies.
Mortgage Qualification: Key Requirements
To secure a mortgage, lenders evaluate:
Income: Stable, verifiable income with supporting documents like pay stubs and tax forms.
Credit Score: A strong credit score can lead to better rates, but options exist for those with lower scores.
Down Payment: Required for all purchases, sourced from savings, investments, or gifts. Programs may assist with down payments in specific cases.
Debt-to-income ratios, property conditions, and savings also factor into approval
Why Pre-Approval Matters
A pre-approval provides an accurate understanding of your affordability, ensuring confidence in your home search. Unlike a pre-qualification, it involves verifying income documents and running a credit check, offering a clearer financial picture. This proactive step helps you:
Set a realistic budget
Address potential qualification issues early
Streamline the home-buying process
Mortgage Insurance: What You Need to Know
Mortgage Insurance, otherwise known as Mandatory Default Insurance is applied when a client is placing less than 20% down payment onto their home purchase.
This is mandatory and the lender places the mortgage with one of the default insurance companies which are CMHC, Canada Guaranty and Sagen (formerly known as Genworth). This protects the lender in case the borrower were to default on the mortgage. The insurance is calculated on the purchase price LESS the downpayment and the percentage changes with each 5% increment of downpayment. This cost is passed onto the borrower however is not paid upfront out of pocket. This is added to the mortgage amount and amortized over the life of the mortgage. The only way to avoid having default mortgage insurance applied to a mortgage is to pay 20% or more down payment.
Understanding Downpayments
The well known minimum is 5% however the actual rule is 5% on the 1st $500,000 and 10% on any portion above $500,000.
As an example, if someone was purchasing a home for $850,000 then there would be $25,000 on the first $500,000 and then $35,000 on the additional $350,000 (10%) for a total minimum downpayment of $60,000.
In some areas and with some lenders, there is a sliding scale applied to mortgages that may require an increased down payment. This is usually for homes over certain price points and can vary from lender to lender. If a client is purchasing a 2nd home – which could be a home for an immediate family member or a vacation home – they may be able to purchase this with the minimum down payment.
If a client is purchasing a rental/investment property where they will not be living in any portion of the home, then they would be required to place 20% or more down payment.
New Rules for High-Value Homes
Starting December 15, 2024, buyers can secure homes between $1M and $1.5M with reduced down payment requirements.
This change expands affordability but includes mandatory mortgage insurance.
There is still the minimum down payment policy of any portion over $500,000 would have 10% applied; however they will no longer require 20%. This means that more clients may be able to purchase at a higher price point as they now have the downpayment available where they may not have had 20%.
Keep in mind, there would now be the mandatory default insurance applied to the purchase. For example: If someone was building a home for $1.3M, the minimum down payment would be $25K on the first $500K and then $80K on the remaining which totals $105,000 instead of the previous requirement of $260,000. Then they would have the default insurance premium added to the remaining $1,220,000 which would equate to $48,800 therefore their total new mortgage would be $1,268,800
In Alberta, sliding scale calculations for down payments may apply to homes over $800,000 or $1M, depending on the lender. These scales primarily affect conventional mortgages and remain relevant under the new rules.
Planning to Build a New home
Financial planning should begin well before purchasing or building a home. Early preparation ensures you understand your maximum affordability, address any debt or co-signer needs, and time the sale or refinancing of existing properties effectively. This foresight creates a smoother transition into your new home.
If you are looking at the pre-approval process early on, then you can know upfront:
- What your maximum purchase price and affordability is so you do not fall in love with a home that is outside of your purchasing power
Know upfront if there are any items that need to be dealt with beforehand such as paying down some debts in order to qualify for what you are looking for or wanting to purchase/build - If a co-signer is needed or not for your purchase. If one is required or needed, then it will provide some time for the co-signer(s) to provide all of the required documentation to the mortgage professional
- Perhaps there is an existing home that needs to be sold within the process. If pre-planning happens, then we can determine if the home needs to be sold prior to condition removals or if it would just need to be completed prior to taking possession of the new home or we can look at the option of turning the existing home into a rental property.
- At times, a client may need to refinance an existing home in order to obtain some equity from the home for their down payment. Working on this ahead of time ensures that the funds for the down payment will be available when required.
Still Have Questions
We get it. This post was a long-winded way to say that it’s now an easier and more affordable process to obtain a mortgage when your building a custom home at a higher price range.
Karen Pacheco is a trusted Mortgage Broker helping clients across Alberta achieve their financial goals, whether buying a first home, upgrading, investing, or consolidating debt. With access to multiple lenders, Karen finds the best rates and mortgage options. If pre-approval isn’t possible, she’ll help estimate what you can qualify for, guiding you toward your dream home.
Have questions about building a custom infill home in Edmonton? Reach out on social media or send us a message directly through our contact page.
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