Frequently asked questions
The interest rate on a fixed-rate mortgage is set for a pre-determined term. This offers the security of knowing what you will be paying for the term selected.
A mortgage in which payments may fluctuate from month to month depending on market conditions. If interest rates go down, more of the payment goes towards reducing the principal; if rates go up, a larger portion of the monthly payment goes towards covering the interest. Open variable rate mortgages allow prepayment of any amount (with certain minimums) on any payment date.
First and foremost, you have to make sure you have enough money for a down payment – the portion of the purchase price that you furnish yourself. To qualify for a conventional mortgage you will need a down payment of 20% or more. However, you can qualify for a low down payment insured mortgage with a down payment as low as 5%.
Secondly, you will require money for closing costs (typically 1.5% of the purchase price). If you want to have the home inspected by a professional building inspector – which we highly recommend – you will need to pay an inspection fee. The inspection may bring to light areas where repairs or maintenance are required and will assure you that the house is structurally sound. Usually the inspector will provide you with a written report. If they don’t, then ask for one.You will be responsible for paying the fees and disbursements for the lawyer or notary acting for you in the purchase of your home. We suggest you shop around before making your decision on who you are going to use, because fees for these services may vary significantly. There are closing and adjustment costs, interest adjustment costs between buyer and seller and (depending on where you live) land transfer tax – a one-time tax based on a percentage of the purchase price of the property and/or mortgage amount.Finally, you will be required to have property insurance in place by the closing date. And you will be responsible for the cost of moving.Remember, there will be all kinds of things you’ll have to purchase early on – appliances, garden tools, cleaning materials etc. So factor these expenses into your initial costs.
What Are The Monthly Costs Of Owning A Home?
Needless to say, you’ll have financial responsibilities as a home owner. Some of them, like taxes, may not be billed monthly, so do the calculations to break them down into monthly costs. Below you will find a list of these expenses.
The Mortgage Payment is the largest monthly expense. The actual amount of the mortgage payment can vary widely since it is based on a number of variables, such as mortgage term or amortization.Property Taxes. Property tax can be paid in two ways – remitted directly to the municipality by you, in which case you may be required to periodically show proof of payment to your financial institution; or paid as part of your monthly mortgage payment.School Taxes In some municipalities, these taxes are integrated into the property taxes. In others, they are collected separately and are payable in a single lump sum, usually due at the end of the current school year.Utilities. As a home owner, you’ll be responsible for all utility bills including heating, gas, electricity, water, telephone and cable.Maintenance and Upkeep. You will also have to cover the cost of painting, roof repairs, electrical and plumbing, walks and driveway, lawn care and snow removal. A well-maintained property helps to preserve your home’s market value, enhances the neighbourhood and, depending on the kind of renovations you make could add to the worth of your property.
A minimum down payment of 5% is required to purchase a home, subject to certain price restrictions for homes purchased above $500,000 and 1 million. In addition to the down payment, you must also be able to show that you can cover the applicable closing costs (i.e. legal fees and disbursements, appraisal fees and a survey certificate, when applicable). Regardless of the amount of your down payment, at least 5% of it must be from your own resources or a gift from a family member. Lenders will generally accept a gift from a family member as an acceptable down payment provided a letter stating it is a true gift, not a loan, is signed by the donor. Mortgages with less than 20% down must have mortgage loan insurance provided by either CMHC, GE, or CG.
Most lenders will accept down payment funds that are gifted from family. A gift letter signed by the donor is usually required to confirm that the funds are a true gift and not a loan. Where the mortgage requires mortgage loan insurance, Canada mortgage and housing corporation requires the gift money to be in the purchaser’s possession before the approval. See ‘what is mortgage loan insurance?’ for further information.
Very few home buyers have the cash available to buy a home outright. Most of us will turn to a financial institution for a mortgage, the first step in a potentially long-standing relationship. But even with a mortgage, you will need to raise the money for a down payment. The down payment is that portion of the purchase price you furnish yourself. The amount of the down payment (which represents your financial stake, or the equity in your new home) should be determined well before you start house hunting. The larger the down payment, the less your home costs in the long run. With a smaller mortgage, interest costs will be lower and over time this will add up to significant savings.
Today, about 50% of first-time home buyers use their RRSP savings to help finance a down payment. If you are a first-time home buyer, the Home Buyers Plan (HBP) allows you to withdraw money from your Registered Retirement Savings Plan (RRSP) tax-free to make your down payment. The HBP is administered by the Canada Revenue Agency (CRA). There are certain conditions you must meet to be eligible for the HBP. The withdrawal from your RRSP does not need to be included in your income on your annual income tax return, and no tax is taken off the money you withdraw. What is the payback period? – You don’t have to start paying back the money to your RRSP until two years after the purchase of the home. – You must pay back all withdrawals from your RRSP within 15 years by making RRSP deposits each year, starting the second year following your withdrawal. CRA will determine what your minimum yearly repayment will be and will notify you once you need to start repaying the amount. – If you do not repay the amount due in a given year, it is included in your taxable income for that year and you’ll have to pay income tax on this amount. source: Financial Consumer Agency of Canada.
To determine ‘affordability’ you will first need to know your taxable income along with the amount of any debt outstanding and their monthly payments. Assuming it is your principal residence you are purchasing, calculate 35% of your income for use toward a mortgage payment, property taxes and heating costs. If applicable, half of the estimated monthly condominium maintenance fees will also be included in this calculation.
Second, calculate 42% of your taxable income and deduct all of your monthly debt payments, including car loans, credit cards, lines of credit payments. The lesser of the first or second calculation will be used to help determine how much of your income may be used towards housing related payments, including your mortgage payment. These calculations are based on lenders’ usual guidelines.
In addition to considering what the ratios say you can afford, make sure you calculate how much you think you can afford. If the payment amount you are comfortable with is less than 32% of your income you may want to settle for the lower amount rather than stretch yourself financially. Make sure you don’t leave yourself house poor. Structure your payments so that you can still afford simple luxuries.
A pre-approved mortgage provides an interest rate guarantee from a lender for a specified period of time (usually up to 120 days) and for a set amount of money. The pre-approval is calculated based on information provided by you and is generally subject to certain conditions being met before the mortgage is finalized. Conditions would usually be things like ‘written employment and income confirmation’ and ‘down payment from your own resources’, for example. Most successful real estate professionals will want to ensure you have a pre-approved mortgage in place before they take you out looking for a home. This is to ensure that they are showing you property within your affordable price range. In summary, a pre-approved mortgage is one of the first steps a home buyer should take before beginning the buying process.
Mortgage loan insurance is insurance provided by Canada Mortgage and Housing Corporation (CMHC), a crown corporation, Genworth Capital Mortgage Insurance Company (GE), and Canada Guaranty (CG). This insurance is required by law to insure lenders against default on mortgages with a loan to value ratio greater than 80% or in other words when the borrower puts less than 20% down when purchasing. The insurance premiums, ranging from .50% to 4.50%, are paid by the borrower and can be added directly onto the mortgage amount. This is not the same as mortgage life insurance.
A conventional mortgage is usually one where the down payment is equal to 20% or more of the purchase price, a loan to value of or less than 80%, and does not normally require mortgage loan insurance.
How Will Child Support Affect Mortgage Qualification?
Where child support and alimony are paid by you to another person, generally the amount paid out is deducted from your total income before determining the size of mortgage you will qualify for.
Where child support and alimony are received by you from another person, generally the amount paid may be added to your total income before determining the size of mortgage you will qualify for, provided proof of regular receipt is available for a period of time determined by the lender.
Depending on the circumstances surrounding your bankruptcy, generally some lenders would consider providing mortgage financing.
Subject to qualification, yes. In fact, even purchasers with 5% down may qualify to buy a home and make improvements to it. For high-ratio financing, both Canada Mortgage and Housing Corporation, GE Capital, and Canada Guaranty insured mortgages are available to cover the purchase price of a home as well as an amount to pay for immediate major renovations or improvements that the purchaser may wish to make to the property. This option eliminates the need to finance the renovations or improvements separately. Some conditions apply.
The length of mortgage terms varies widely – from six months right up to 10 years. While four or five year mortgages are what most home buyers typically choose, you may consider a short-term mortgage if you have a higher tolerance for risk, if you have time to watch rates or are not prepared to make a long-term commitment right now. Before selecting your mortgage term, we suggest you answer the following questions:
1. Do you plan to sell your house in the short-term without buying another? If so, a short mortgage term may be the best option.2. Do you believe that interest rates have bottomed out and are not likely to drop more? If that’s the case, a long mortgage term may be the right choice for you. Similarly, if you think rates are currently high, you may want to opt for a short to medium length mortgage term hoping that rates drop by the time your term expires.3. Are you looking for security as a first-time home buyer? Then you may prefer a longer mortgage term, so that you can budget for and manage your monthly expenses.4. Are you willing to follow interest rates closely and risk their being increased mortgage payments following a renewal? If that’s the case, a short mortgage term may best suit your needs.
Should I Wait For My Mortgage To Mature?
Lenders will often send out their mortgage renewals 120 days prior to your mortgage maturing. I refer to this as their “Convenience Rate” as it is generally not the best rate but appears convenient for the borrower. Oddly enough about 60% of Canadians go this route and pay a premium. Therefore it is always a good idea to contact your broker months prior to your mortgage maturing so they can begin the process and capture the best rate for you. The savings could outweigh a penalty if there is one. It’s also a good time to re-evaluate your mortgage so you won’t get charged with hidden fees or penalties down the road.
How Can You Pay Off Your Mortgage Sooner?
There are ways to reduce the number of years to pay down your mortgage. You’ll enjoy significant savings by:Selecting a non-monthly or accelerated payment schedule.Increasing your payment frequency schedule Making principal prepayments.Making Double-Up Payments, and/or
Selecting a shorter amortization at renewal.
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