Whether you are buying your first home, trading up to a larger home, building your dream home, or even trading down once the kids are out on their own, a house is probably the single biggest investment you will ever make.
As almost everyone who is buying a home will need financing, they are also interested and often need guidance on what to look for in a mortgage and how they can pay the least amount of interest over the term of the mortgage.
This site is designed to help answer some of your questions. To let you know how much you can afford to spend and what your payments will be, suggest ways to save thousands in interest over the life of the mortgage, and present the special programs that some borrowers could participate in and save from.
What is a mortgage?
A mortgage is a loan that uses a property as security to ensure that the debt is repaid. The borrower is referred to as the mortgagor, the lender as the mortgagee. The actual loan amount is referred to as the principal, and the mortgagor is expected to repay that principal, along with interest, over the repayment period (amortization) of the mortgage.
A mortgage can be used for financing many different things, including:
Purchasing or constructing a new home
Purchasing an existing home
Refinancing to consolidate debts
Financing a renovation
Financing the purchase of other investments
Financing the purchase of investment property
Since a mortgage is a fully secured form of financing, the interest you pay is usually less than with most other types of financing. Many people use the equity in their homes to finance the purchase of investments. Using a Secured Line of Credit, or a fixed-rate mortgage, the interest costs are lower, and they can even write off those interest costs against their taxable incomes.
What term should you take? That’s a good question. Before you look at the issue of term specifically, there are things you should consider:
When you’re looking at term and interest rates, look also at what you can live with in terms of payment amounts, because trying to predict where interest rates are going is a tough job. There are many forces that affect Canadian interest rates – economic, political, domestic, and international.
Predicting interest rates is very much a gamble and one should be prepared to keep a close eye on the market.
Here’s a suggestion:If you feel that rates are at a point you can live with and you want to guarantee that rate as long as possible, go with a long term (5 years, 7 years, and 10 years). If interest rates appear to be rising, take advantage of the lower rate for as long as possible, and remember, if you sell your property, you can take the mortgage with you to the new property or have someone assume the mortgage. It could prove to be a great selling feature if you have an assumable mortgage at very low rate.
If rates appear to be falling, you can choose a shorter term (6-month convertible or variable-rate mortgage) that offers the flexibility to lock-in to longer term at any time, just in case the rates start going the other way.
With a fixed-rate mortgage, the interest rate is set for the term of the mortgage so that the monthly payment of principal and interest remains the same throughout the term. Regardless of whether rates move up or down, you know exactly how much your payments will be and this simplifies your personal budgeting. In a low rate climate, it is a good idea to take a longer term, fixed-rate mortgage for protection from upward fluctuations in interest rates.
A variable-rate mortgage (also called adjustable-rate) provides a lot of flexibility, especially when interest rates are on their way down. The rate is based on prime and can be adjusted monthly to reflect current rates. Typically, the mortgage payment remains constant, but the ratio between principal and interest fluctuates. When interest rates are falling, you pay less interest and more principal. If rates are rising, you pay more interest and less principal, and if they rise substantially, the original payment may not cover both the interest and principal. Any portion not paid is still owed, or you may be asked to increase your monthly payment. Make sure that your variable-rate mortgage is open or convertible to a fixed-rate mortgage at any time, so that when rates begin to rise, you can lock-in your rate for a specific term.
An open mortgage allows you the flexibility to repay the mortgage at any time without penalty. Open mortgages are available in shorter terms, 6 months or 1 year only, and the interest rate is higher than closed mortgages by as much as 1%, or more. They are normally chosen if you are thinking of selling your home, or if expecting to pay off the whole mortgage from the sale of another property, or an inheritance (that would be nice).
A closed mortgage offers the security of fixed payment for terms from 6 months to 10 years. The interest rates are considerably lower than open, and if you are not planning on any one of the above reasons, then choose a closed mortgage. Nowadays, they offer as much as 20% prepayment of the original principal, and that is more than most of us can hope to prepay on a yearly basis. If one wanted to pay off the full mortgage prior to the maturity, a penalty would be charged to break that mortgage. The penalty is usually 3 months interest, or interest rate differential (I.R.D. – please refer to glossary for detailed explanation).
Which comes first–the purchase or the sale–is the greatest dilemma facing homeowners planning to move-up.
If you choose to buy first, make sure the offer to purchase is conditional on selling your current house. That way, if you sell your house, both deals proceed; if not, the deal is off, and you won’t be stuck with two homes. Selling first though will give you considerable peace of mind.
Knowing how much money you’ll get on the sale will help you establish a price range for the new house. Selling first allows you to negotiate the purchase more vigorously, too, since unconditional offers carry a lot more weight with sellers.
Market conditions are another important consideration in deciding which route to follow. In a seller’s market, you’ll probably do better selling after you’ve bought, but in a buyer’s market, it makes more sense to sell.
If you obtained an insured mortgage after April 1’st, 1997, the premium you paid on the mortgage is now portable to another property (if you closed before this date, it is not portable, meaning that if you bought another home and your mortgage needed to be insured, you must pay the applicable premium again.
The Amortization Period is the number of years it would take to repay the entire mortgage amount based on a set of fixed payments. The longer the amortization, the more interest is paid over the life of the mortgage. Therefore, when choosing the amortization period, careful planning should be done to meet your cash flows. Remember, the amortization can be easily shortened after the closing, by simply making arrangements to increase your payments.
MORTGAGE FEATURES – To Help You Become Mortgage-Free Faster
Once you have the mortgage amount, rate and amortization period, your monthly payment can be calculated. Now is the time to decide how often you want to make your payments, because by selecting the right payment frequency could literally mean thousands of dollars in savings. For example, on a $100,000 mortgage at 8% interest, amortized over 25 years, the monthly payments would be $763.21. However, by simply switching to bi-weekly payments (every two weeks) with payments of $381.61 (half of the monthly payment), there would be a saving of $30,484 in interest! Weekly payments of $190.80 will save $30,839 in interest, and you will be mortgage free in the 19’th year.
You notice that there is very little difference between weekly and bi-weekly payments, however. If you have other payments throughout the month, bi-weekly may be less stressful and easier to budget. If you are self-employed or commissioned, and your income varies greatly from week to week, it may be easier to pay monthly and use your prepayment privileges to knock the amortization period. Also, not all weekly and bi-weekly payments work the same as above. Let us show you how to manage your mortgage to your best advantage.
This is one of the most important features to look for when you are getting a mortgage. Having the prepayment privilege that works to your specific needs could mean a difference of thousands of dollars over the life of your mortgage. Although all financial institutions offer some form of prepayment privilege, the amount and how it can be applied varies from one to another. Some offer only up to 10%, once per year, and on the anniversary date. Then there are others that offer as high as 20% per year, and prepayments can be done throughout the whole year as long as the total does not exceed 20%. Ideally, you should work your prepayment privilege as often as possible throughout the year. Saving aside to make that big prepayment is not the best strategy. We have found that the small, regular prepayments will get you quicker to that mortgage burning party (I hope we’re invited).
(TIP: Put your tax refund to good use. The average tax refund for Canadians in 1995 was $1,000. Even this amount will pay large dividends over the life of the mortgage)
Often times most mortgage shoppers are only looking at rates and overlooking this interest saving feature. That is why it is important to have a mortgage specialist make some recommendations for your specific needs. Not only can we find you the lowest rates, we can also get you the features that will work to your advantage.
The secret to borrowing is borrow early in your life. The reason is that the future value of the dollar decreases. Why we are bringing up this fact is that when you borrow early, your payments are set. As time goes, our incomes increase (hopefully), but our mortgage payments stay the same, provided you locked-in to a long term, fixed mortgage. Therefore, in the future we may be in a position to increase our payment on the mortgage, regardless if you are paying weekly, bi-weekly, or monthly. Any increase in payment is directly going to pay down the mortgage, thus saving you thousands down the road due to the effect of interest not compounding on that amount for the life of the mortgage. Neat little feature.
Again, this feature varies from bank to bank. Some allow increasing payment up to 10%, and others as high as 25% per year, some up to 15% only once in the term of the mortgage. If you increased your payments, should the need arise, you can go back to the original payments as well. A mortgage specialist will run a “Mortgage Reduction” model for you and make some recommendations.
A few lenders will allow you to double-up on your payments, and the extra payment goes directly in the principal. If you double-up once in the year, you have just achieved the benefits of the weekly or bi-weekly mortgage. This is a neat little feature for someone who prefers the monthly payments but wants the results of the weekly and bi-weekly payments. And some lenders allow you the flexibility to skip a payment if you have made a double payment previously. This defeats the purpose, but when times are tough, a neat little feature to have.
This is a great feature to have when interest rates are on a rise. If you are locked-in to a term and the mortgage will be maturing in months or years down the road, and the mortgage rates are on a rise, you can renew your mortgage before the maturity and lock-in the low rates for a new term. You may not even have to pay anything out of pocket and still save over the term, especially if rates move up considerably.
If you want to take your mortgage with you when you move, you can if your mortgage has a clause that allows you to do that. This option allows you to continue your savings on your lower rate if the going rates are higher, as well as avoid any penalties if you were to break that mortgage. If you need a larger mortgage for the new property, your existing mortgage amount can be increased. As for the associated costs, since a new mortgage document must be registered on title, legal fees and normal appraisal fees would be applicable.
If you are moving and don’t want to take your mortgage with you, or you are selling and not buying, an assumable feature will allow the buyer(s) of your property to take over the mortgage, providing they meet the lender’s qualifying criteria. By doing so, you will not pay any penalties as you are not breaking the mortgage contract. In fact, if your interest rate is lower than those available at the time, your assumable mortgage suddenly became a great selling feature for your property.
A word of caution here: Just because someone assumes your mortgage does not necessarily mean you are off the hook for the responsibility. You must get a release from the Mortgage Company to ensure that you are no longer liable for it. Some mortgage companies automatically offer a release, but with others, you must make the request, and do it through your lawyer.
Since your home is likely your single largest investment, you may want to protect that investment. Many financial institutions offer mortgage life insurance at an affordable and competitive price, and the requirements for eligibility are usually quite simple to meet. If you or your co-borrower (if you choose joint coverage) die, the insurance company will pay off your mortgage. Also, some institutions now offer job-loss and/or disability insurance to borrowers. The best thing to do in making a decision about how to insure your mortgage is to have an insurance agent work out the figures for a private term insurance and mortgage life insurance.
The Right Home
You have a pretty good idea of the price range you can afford, and now it's time to fine tune and have everything come together.
Step 1: Pre-approved Mortgage
Obtaining a pre-approval tells you exactly how much you can afford and guarantees your rate for up to 120 days. Now, you can buy a home with the confidence of knowing you qualify. It also shows the vendor you are serious about buying the home and keeps you several steps ahead of others in the market.
Step 2: Preparation
Now that you know your price range, you can begin the search. First, make a Checklist of your needs the home will fulfill, such as: type of home, type of ownership, location, inside and outside features, condition, and other matters such as property tax levels, etc. At this time, you should decide on a lawyer so that he/she will be ready to check all legal documents to ensure your interests are protected.
Step 3: The Search, for house and agent
With your pre-approval, personalized needs checklist, and lawyer at hand, you are ready to start looking at properties. At this time, it is important to find yourself a real estate agent to help you with your search. The real estate agents have a lot of information readily available for sale and the current selling prices. They can help you fine tune your personalized needs checklist; explaining the types of property and ownership, recommending neighborhoods, pointing out inside and outside features, and condition of a particular property.
The agent also is skilled at preparing the paperwork involved in making an offer to purchase and closing the sale (your lawyer will be handy here to review any offers). Make sure that you communicate your needs clearly, as you are responsible for all decisions. Choosing the right agent is important for you as you are placing a lot of trust on them to help you with your purchase. Ask friends and relatives if they could recommend someone. Chances are, if they are recommending them, there was something about the level of service and commitment they received from them.
Once you have found the right home, visit it at least twice, once in the daylight and once at night, and have your needs checklist with you.
Step 4: Making An Offer
If you have decided that this is the right home for you, decide on a figure and have your agent prepare the Offer (Agreement of Purchase And Sale). With your agent, list everything you want included (i.e., conditions on financing and inspection, survey clause, appliances, light fixtures, etc.). At this time, you may want your lawyer to check it out, and certainly prior to waiving any conditions to make the offer firm.
A firm offer: means that you will buy the property as outlined in the offer of purchase and that there are no conditions attached. Once the vendor accepts the offer, you are both bound to the agreement.
A conditional offer: means that you will buy the property if those certain conditions are met. We recommend that a condition on financing is included, especially for high-ratio insured mortgages. If you have a condition on financing clause, get in contact with us right away. We’ll get right on it to finalize the mortgage approval. At this time, you will need the following information:
Copy of the accepted Offer To Purchase
Copy of listing (if listed on The MLS® System)
Completed and signed application (if one is not on file yet, so that we can run a credit check).
Confirmation of your earnings: if you are salaried, a signed letter of employment, 3 years tax returns and assessments if commissioned, and 3 years tax returns and financial statements if self-employed.
Confirmation of your down payment: it may be from your savings, RRSP, equity from sale of another home (copy of sales agreement), a gift letter for any money gift.
If purchasing a condominium, a copy of the financial statements for the condominium corporation
Once all conditions have been satisfied (the offer has been accepted), a deposit is required as a symbol of commitment to the offer of purchase, and it is made payable to the listing Real Estate Firm “In Trust”. Interest on the deposit can be requested, and this deposit will be applied towards your down payment on closing.
Step 5: Closing the deal and taking possession
After the mortgage has been approved and all conditions waived, you must deliver the following documents to your lawyer:
Copy of the complete accepted offer to purchase (all schedules, waivers, etc)
Certificate of Fire Insurance – The insurance company will need to know the details of property and Mortgage Company to prepare this. Lenders usually require you to arrange for full replacement value of the building.
A copy of a Survey, signed by a qualified land surveyor. In lieu of a survey, title insurance is acceptable with most lenders.
Advise us of the name, address, and phone number of your lawyer so that the mortgage instructions can be sent to him/her.
You should arrange for utilities (such as electricity, water, fuel, and telephone) to begin service in your name.
A few days before the closing date, you will meet with your lawyer to go over all details. At this time, you will also be provided with a dollar figure so that you can prepare your certified cheque, made in trust to the lawyer. This amount will cover for the balance of the down payment, closing costs and adjustments (please refer to section: “Closing Costs and Adjustments” for details and estimated costs).
On closing day, the lender will provide your lawyer with the agreed mortgage funds to close the transaction. Your lawyer will register the property and the mortgage in your name, and obtain the keys and the deed for you.
Mortgage Closing Costs
Now that you know what you can afford, the next step is to determine the additional costs of the home-buying process. According to CMHC and GE Capital, one should have, in addition to the down payment, at least 1.5% of the purchase price for closing costs (we say 2-2.5%, just to be on the safe side). The costs vary across provinces, and for that matter, cities.
Below you will find a brief explanation of these costs, yet it may not include all items required specific to your property, or the area in which you have purchased. This is a guideline, but your lawyer can provide a fairly close estimate, and is the best resource.
The appraisal provides the lenders with a professional opinion of the market value of the property. This cost is normally the borrower’s responsibility and it ranges as low as $100 for a drive-by appraisal to as much as $200 for a full appraisal, and the average being $175, plus H.S.T./G.S.T. Occasionally, the costs could be slightly higher for larger, custom-built homes, or homes in remote parts.
Home Inspection Fee:
A professional inspection of the home, top to bottom, is for the benefit of the buyer, therefore, that’s who absorbs the cost. A typical home inspection can cost anywhere from $250-$350, but our opinion is that they are well worth the investment. New home buyers may not worry about it, but a definite must for buyers purchasing properties older than 5 years. When hiring a home inspector, make sure the inspector has liability insurance, just in case a mistake is made.
All mortgage lenders will require a certificate of fire insurance to be in place from the time you take possession of the home. The amount required is generally at least the amount of the mortgage or the replacement cost of the home. This cost can vary on the property size and extras being insured, as well as the insurance company and the municipality. The cost can vary anywhere from $250-$600 for most properties.
Land Survey Fee Or Title Insurance Fee:
A recent Survey of the property is usually required by the lender, and if one is not available, it normally costs anywhere from $600-$900 for a new survey. In lieu of the Survey, most lenders today will accept Title Insurance, at a much lower price of approximately $225.
Legal Costs and Disbursements:
A lawyer or notary will charge a fee for their professional services involved in drafting the title deed, preparing the mortgage, and conducting the various searches. The disbursements, on the other hand, are out-of-pocket expenses incurred, such as registrations, searches, supplies, etc., plus G.S.T/H.S.T.
Land Transfer Tax:
Most provinces charge a land transfer tax, payable by the purchaser, and the amount varies from province to province. This tax is based on the purchase price (refer to mortgage ABC’s for exact calculation).
New Home Warranty:
In many provinces, new homes are covered by a new home warranty program. The cost to the purchaser for this warranty is approximately $600 and should the builder default or fail to build to an agreed-upon standard, the fund will finish or repair the deficiencies.
Mortgage Application and Processing Fee:
On a high-ratio insured mortgage (mortgages above 75% of the purchase price), the mortgage insurer (CMHC or GE Capital) charges a fee of $165-$185 for applying and processing the file, as well as appraising the property. On new homes, this fee drops to $75.
An estimate should be made for closing adjustments for bills that the seller has prepaid such as property taxes, utility bills, and other charges. Any bills after the closing date are the purchaser’s responsibility. Your lawyer/notary will let you know what they are exactly once the various searches have been completed.
On the purchase of a newly constructed home, G.S.T/H.S.T. is payable, but make sure you know who pays this, you or the builder. Therefore, on the offer, the purchase price will say “Plus G.S.T/H.S.T.” or “G.S.T/H.S.T. Included”, and who gets the G.S.T/H.S.T. new home rebate. A lot of builders have included this cost into the purchase price so that the buyer does not have to come up with that at closing. (As well, this tax is also charged on all professional fees).