Frequently Asked Questions
Down Payment
Very few homebuyers have the cash available to buy a home outright. Most of us will turn to a financial institution for a mortgage. However, 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 end. With a smaller mortgage, interest costs will be lower and over time, this will add up to significant savings.
According to the guidelines of the Canadian Mortgage and Housing Corporation (CMHC), one must have a minimum down payment of at least 5% of the total cost of the prospective property. With a down payment between 5 – 19.99%, one’s mortgage is deemed “high-ratio”. A high ratio mortgage is subject to a CMHC premium in accordance with the following schedule:
With a down payment of 20% or greater, the mortgage is deemed “conventional”. A conventional mortgage is not subject to any CMHC fees. Thus, a larger down payment represents a two-fold advantage to the prospective homebuyer. First, the prospective homebuyer will avoid CMHC premiums with 20% down payment. Secondly, a larger down payment will relate into smaller monthly payments, or a shorter amortization; both of which lead to interest savings over the life of the mortgage.
A minimum down payment of 5% is required to purchase a home, subject to certain maximum price restrictions.
Regardless of the amount of your down payment, at least 5% of it must be from your own cash resources or a gift from a family member. It cannot be borrowed.
Most lenders will accept down payment funds that are gifted from family as an acceptable down payment. A gift letter signed by the donor is usually required to confirm that the funds are true gift and not a loan. Mortgages with less than 20% down must have mortgage loan insurance provided by CMHC, Genworth, or AIG.
Today, about 50% of first-time homebuyers use their RRSP savings to help finance a down payment. With the federal government’s Home Buyers’ Plan, you can use up to $20,000 in RRSP savings ($40,000 for a couple) to help pay for your down payment on your first home. You then have 15 years to repay your RRSP.
To qualify, the RRSP funds you are using must be on deposit for at least 90 days. You will also need a signed agreement to buy a qualifying home.
Even if you have already saved for your down payment, it may make good financial sense to access your savings through the Home Buyers’ Plan. For example, if you had already saved $20,000 for a down payment – and assuming you still had enough “contribution room” in your RRSP for a contribution of that amount you could move your savings into a registered investment at least 90 days before your closing date. Then, simply withdraw the money through the Home Buyers’ Plan.
The advantage? Your $20,000 RRSP contribution will count as a tax deduction this year. Use any tax refund you receive to repay the RRSP or other expenses related to buying your home.
While using your RRSP for a down payment may help you buy a home sooner, it can also mean missing some tax-sheltered growth. So be sure to ask your financial planner whether this strategy makes sense for you, given your personal financial situation.
Affordability
To determine ‘affordability’ you will first need to know your taxable income along with the amount of any debt outstanding and the monthly payments. Assuming it is your principal residence, you are purchasing; calculate 32% of your income 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 40% 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.
The amount of a mortgage for which one can qualify is generally founded in what are known as qualification ratios: Gross Debt Service ratio and Total Debt Service ratio, or “GDS” and “TDS”. Lenders evaluate one’s monthly income, as well as their monthly debt obligations, to determine a fair and feasible amount of mortgage available to the prospective borrower. This figure is calculated via their GDS and TDS guidelines. Generally, lenders will have an acceptable Gross Debt Service ratio ranging from 28-32%. In other words, 28-32% of one’s monthly household income can be reasonably set aside for one’s mortgage payment, in the eyes of the lender. Furthermore, most lenders will have an acceptable Total Debt Service ratio of 36-40%. In other words, 36-40% of one’s monthly household income can be reasonably set aside for one’s total debt obligations, including their impending mortgage payment. To calculate exactly how much you may borrow, please refer to our CALCULATOR available by clicking on the HOME tab above. Make sure that you incorporate the proper interest rate, as this can have a profound effect over the life of a mortgage. NOTE: As part of this calculation, you also need to estimate and include the property taxes, homeowner’s insurance, and CMHC fees (if applicable) you might need to pay.
Depending on the circumstances surrounding your bankruptcy, some lenders will not consider providing mortgage financing.
Where you pay child support and alimony 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 you receive child support and alimony 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 determined by the lender.
Key Mortgage Terms
Mortgage loan insurance is insurance provided by Canada Mortgage and Housing Corporation (CMHC), a crown corporation, and Genworth, an approved private corporation. This insurance is required by law to insure lenders against default on mortgages with a loan to value ratio greater than 80%. The insurance premiums, ranging from .50% and up depending upon your down payment & amortization, are paid by the borrower and can be added directly onto the mortgage amount. This is not the same as mortgage life insurance.
A Mortgage Agent is an independent Real Estate financing professional who specializes in the origination of residential and/or commercial mortgages. Typically, they do not fund or service the loan itself, but instead, they act as an Agent or Manager for capital sources who act as loan wholesalers.
A Mortgage Agent is also an independent contractor working, on average, with 40 lenders at any one time. By combining professional expertise with direct access to hundreds of loan products, a agent provides consumers the most efficient and cost-effective method of offering suitable financing options tailored to the consumer’s specific financial goals.
A pre-approved mortgage provides an interest rate guarantee from a lender for a specified period of time (usually 60 to 90 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 homebuyer should take before beginning the buying process.
The interest rate on a fixed-rate mortgage is set for a pre-determined term – usually between 6 months to 25 years. This offers the security of knowing what you will be paying for the term selected.
A mortgage in which payments are fixed to bank prime rates, which can fluctuate several times a year. 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.
On the day one actually purchases their new home they are required to pay certain costs associated with this endeavor. In addition to one’s down payment, the prepaid property tax and homeowner’s insurance premiums there will be other fees to consider:
- Survey Charges
- Land Transfer Taxes
- Attorney Fees and Disbursements
- Garbage Disposal Fees
- Title Insurance
- Fire Insurance
Your real estate transaction may be subject to GST! Check with your real estate agent for this.
If you are just getting started in the hunt for a new home, it is important to know the difference between pre-qualifying, pre-approval and a loan commitment. It is not enough to simply begin looking for the home of your dreams. It is critical that you determine the price range that you can afford, get qualified for a loan, and understand all of the steps to assist you in securing that perfect property when you find it.
Pre-Qualification Pre-qualification does not mean that you have been approved for a loan, but it is an important component of the home buying process. You have to know what you can afford before you look. Pre-qualification will save you time and ultimately money. A mortgage professional can help you determine your qualification. You should candidly discuss your financial situation with him or her and not withhold any information. Most likely, your mortgage consultant will want to know your yearly household income as well as your assets and liabilities. If you can discuss your finances candidly and determine what you can reasonably qualify for a loan, then no one’s time will be wasted. Otherwise, your agent may end up being a tour guide, showing you beautiful houses that you will never be able to get a mortgage for rather than helping you find an appropriate property to make an offer on. However, pre-qualification does not mean that much to sellers. It is more of a tool to help potential buyers figure out their price range. Pre-Approval Pre-approval is a firmer commitment that is based on more information than pre-qualification. A mortgage broker or lender will need to do a thorough credit investigation and it is particularly important that you disclose all financial information that is requested. The amount that you are approved for will be the amount that the lender is committed to loan for the purchase of a house. Getting pre-approval may give you more bargaining power when you are negotiating the price of a home. If the seller knows that you are approved for the loan, already you may have more leverage. In fact, it is a good idea to plan to get pre-approved. Some real estate agents will not waste their time showing homes to potential buyers who do not have a pre-approval, especially in a hot market. However, pre-approval does not necessarily mean that you will ultimately get the loan. The final approval will still depend on verification of the information provided and approval of the home you wish to purchase. Mortgage Commitment A loan commitment is a letter that is issued by the lender that states that they will fund your mortgage. This letter may include details of your interest rate and the maximum amount of loan they will offer. This sort of commitment requires that both you and the house be approved. This means that the home will need to be appraised at the sale price or higher and must meet the lender’s guidelines. Regardless of what stage of home buying you are in, it is very important that you keep a few things in mind. Remember that just because you are approved for a large loan, does not necessarily mean that you should borrow at the upper limit of your loan approval. Homeownership involves more expenses than renting and some properties need more work than others need. Make sure you leave a financial cushion for repairs and upgrades to your new home. Once you are approved, do not make any big changes to your finances. Changing jobs, banks and taking out other loans can lower your credit rating, change your debt-to-income ratio and ultimately keep you from getting the loan. Now is not the time to buy that new car, big screen television or to take an expensive vacation. The mortgage company may make one last credit check even if you have a loan commitment. If you are educated and prepared, you may find that the home buying process is easy and stress free.
Protecting purchasers against loss is accomplished by the issuance of a title insurance policy, which states that if the status of the title to a parcel of real property is other than as represented, and if the insured suffers a loss as a result of title defect, the insurer will reimburse the insured for that loss and any related legal expenses, up to the face amount of the policy.
Title insurance differs significantly from other forms of insurance. While the functions of most other forms of insurance is to guard against future events (such as death or accidents or in the case of property, fire or flood), the primary purpose of title insurance is to eliminate risks and prevent losses caused by events that have happened in the past. To achieve this goal, title insurers perform an extensive search of the public records to determine whether there are any adverse claims to the subject of real estate. Either those claims are eliminated prior to the issuance of a title policy or their existence is exempted from coverage.
A home inspection is an examination of the structure and systems: heating and air conditioning, plumbing and electrical, roof, attic, insulation, walls, floors, ceilings, windows, doors, foundation, and basement. If the inspector finds problems, it does not mean you cannot sell your house, but you can be certain a buyer inspection will find them too. Finding problems before you list your property can avoid accusations of misrepresentation, low offers, and even lawsuits. A home inspection can also help sellers comply with new, tougher disclosure laws enforced in many states.
You may or may not want to make the repairs and you can always adjust the selling price or contract terms if the problems are major. This information will also help you determine what type of financing will or will not be available for your home. You can find home inspectors under Professional Services section.
A real estate appraiser is an impartial, independent third party who provides an appraisal — an objective report on the estimate of value of real estate. The appraisal is supported by the collection and analysis of data. Most licensed appraisers will provide an advance estimate of the cost to perform the appraisal, and many will commit to a fixed fee for the appraisal. It is always wise to obtain a written contract for services that includes a description.
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.
The “term” of the mortgage should not be confused with the “amortization”. The amortization of the mortgage refers to the entire length of time that it will take for the mortgage to be paid and the house to be “free and clear”. The term is the period for which your current payment obligations are valid. In other words, you may choose a five-year term and a 25-year amortization. This would mean that your interest rate, your payments, and your pre-payment options would be the same for the next five years. At the end of these five years, you would re-negotiate the term, and the amortization would now be 20 years. Fixed rate mortgages can be “closed” or “open”.
Open Mortgages Allow one to pre-pay some, or all of, their outstanding mortgage obligation at any time, without penalty. Generally, open mortgages have a six-month, and a one-year term option with higher interest rates than closed mortgages of the same term length.
Closed Mortgages Generally, closed mortgages are offered in terms ranging from six months to ten years. Generally, closed mortgages offer more stringent pre-payment options subject to various pre-set regulations. For most people, such pre-payment options can be vital to reducing the amortization of one’s mortgage and should be properly discussed with one’s lender/agent.
Mortgage Tips
Lenders will often guarantee an interest rate to you as much as 90 days before your mortgage matures. Moreover, as long as you are not increasing your mortgage, they will cover the costs of transferring your mortgage too. This means a rate promised well in advance of your maturity date, thus eliminating any worries of higher rates. In addition, if rates drop before the actual maturity rate, the new lender will usually adjust your interest rate lower as well.
Most lenders send out their mortgage renewal notices offering existing clients their posted interest rates. The rate you are being offered is usually not the best one. Always investigate the possibility of a lower interest rate with the lender or another lender. Or contact your local AR Mortgage Group agent. If you do not you may end up paying a much higher interest rate on your renewing mortgage than you need to.
There are ways to reduce the number of years to pay down your mortgage. You’ll enjoy significant savings by:
- electing a non-monthly or accelerated payment schedule
- Increasing your payment frequency schedule
- Making principal prepayments
- Making Double-Up Payments
- Selecting a shorter amortization at renewal
Primarily, 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 (up to 1.5% of the basic 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 do not, 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. In addition, you will be responsible for the cost of moving. Remember, there will be all kinds of things you will have to purchase early on – appliances, garden tools, cleaning materials etc. So factor these expenses into your initial costs.
The length of mortgage terms varies widely – from six months right up to 10 years. As a rule of thumb, the shorter the term, the lower the interest rate the longer the term, the higher the rate.
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:
- 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.
- Do you believe that interest rates have bottomed out and are not likely to drop more? If that is 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.
- Are you looking for security as a first-time homebuyer? Then you may prefer a longer mortgage term, so that you can budget for and manage your monthly expenses.
- Are you willing to follow interest rates closely and risk their being increased mortgage payments following a renewal? If that is the case, a short mortgage term may best suit your needs.
You will have financial responsibilities as a homeowner.
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 For most homebuyers, this 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 homeowner, you will 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.
The simplest way to accomplish this is to decrease your principal; thus, decreasing your interest obligation. There are a number of very feasible approaches to performing this task:
Increase Payment Frequency – Instead of paying monthly, consider paying bi-weekly. This simple step is very feasible for most working Canadians who are paid bi-weekly. It can cut your mortgage amortization by up to five years, and can save you tens of thousands of dollars.
Prepay – Use every advantage that the term of your mortgage offers you to prepay your mortgage. One way to do this would be to use your RRSP tax refund to make a yearly pre-payment.
Increase Payments – Round up your bi-weekly payment. For example, if you have a bi-weekly payment of $531.59, round your payment to an even $550.00. This will have a profound effect on the interest paid, and the amortization of the mortgage.
Privacy Concerns
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