Mortgage FAQ

How much can I afford to pay for a home?

To determine ‘affordability’ you will first need to know your taxable income along with the amount of any debt outstanding and your monthly payments. Assuming it is your principal residence you are purchasing: First, calculate 32% 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 40% of your taxable income and deduct all of your monthly debt payments including car loans, credit cards and 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 determine exactly how much debt you’re comfortable servicing. If the payment amount you’re 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.

What is a Home Inspection and should I have one done?

A Home Inspection is a visual examination of the property to determine the overall condition of the home. In the process, the inspector should be checking all major components (roof, ceilings, walls, floors, foundations, crawl spaces, attics, retaining walls, etc.) and systems (electrical, heating, plumbing, drainage, exterior weather proofing, etc.). The results of the inspection should be provided to the purchaser in written form, in detail, generally within 24 hours of the inspection. A pre-purchase Home Inspection can add peace of mind and make a
difficult decision much easier. It may indicate that the home needs major structural repairs which can be factored into your buying decision. A Home Inspection helps remove a number of unknowns and increases the likelihood of a successful purchase.

What is the minimum downpayment needed to purchase a home?

A minimum downpayment of 5% is required to purchase a home, subject to certain maximum price restrictions. In addition to the downpayment, 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, where applicable). For first-time home buyers, this will be between 1.5% and 2% of the purchase price. For non-first-time home buyers, this will be between 3% and 4% of the purchase price. Lenders will generally accept a gift from a family member as an acceptable downpayment 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 or Genworth Financial.

What is Mortgage Loan Insurance?

Mortgage loan insurance is insurance provided by Canada Mortgage and Housing Corporation (CMHC), a crown corporation, and GE Capital Mortgage Insurance Company, 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% of the value of the home. The insurance premiums, ranging from 0.50% to 7.0%, are paid by the borrower and can be added directly onto the mortgage amount. This is not the same as mortgage life insurance or home insurance.

What is a conventional mortgage?

A conventional mortgage is usually one where the downpayment 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 does bankruptcy affect qualifying for a mortgage?

Depending on the circumstances surrounding your bankruptcy, generally, some lenders will consider providing mortgage financing. Be prepared, however, to incur higher interest rates than bank-worthy clients.

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 the mortgage you can 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. All court-executed documents will be required for verification purposes).

Can I obtain a mortgage to renovate a home?

Yes, subject to qualification. In fact, even purchasers with 5% down may qualify you to buy a home and make improvements to it. This mortgage product is called Purchase Plus Improvements. For high-ratio financing, insured mortgages are available (from Canada Mortgage and Housing Corporation and GE Capital), 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.

Where the improvements are cosmetic, the Mortgage Loan Insurance premium is unchanged from the standard schedule. Where the improvements are deemed to be structural, the Mortgage Loan Insurance premium is increased by 0.50% over the standard schedule.

Can I use gift funds as a downpayment?

Most lenders will accept downpayment funds that are a gift from family as an acceptable downpayment. A gift letter signed by the donor is usually required to confirm that the funds are a true gift and not a loan.

What is a Pre-approved Mortgage?

A Pre-approved Mortgage provides an interest rate guarantee from a lender for a specified period of time (usually 60 to 120 days) and for a maximum amount of funds. 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.

Most real estate professionals will want to ensure you have been pre-approved for a mortgage before they take you out looking for a home. This is to ensure that they are showing you property within your affordable price range.

Should I wait for my mortgage to mature?

Lenders will often guarantee an interest rate to you as much as 120 days before your mortgage matures. This means a rate promised well in advance of your maturity date, thus eliminating any worries of higher rates. And if rates drop before the actual maturity date, the new lender will usually adjust your interest to a lower rate reflecting this drop.

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 and or another lender. Or better yet, give us a call. We only access your credit report once and shop over 50 lenders to find you the most flexible products with the most competitive interest rates.

What is a Downpayment?

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, which is the first step in a potentially long-standing relationship. But even with a mortgage, you will first need to raise the money for a downpayment.

The Downpayment is the portion of the purchase price you provide initially yourself. The amount of the Downpayment (which represents your financial stake, or the equity in your new home) should be determined well before you start house hunting.

The larger the Downpayment, the less your home costs in the long run. With a smaller mortgage, interest costs and possibly insurance fees (for High-Ratio Mortgages) will be lower and over time this will add up to significant savings.

How can you acquire a home with as little as 0% down?

Most lenders offer insured mortgages for both new and resale homes with lower Downpayment requirements than conventional mortgages – as low as 0%. Low-Downpayment Mortgages must be insured to cover potential default of payment, and their carrying costs are therefore higher than a conventional mortgage because they include the insurance premium. ‘Zero-down’ mortgages also have higher interest rates allowing the lender to make up the 5% down through your interest payments.

How can you pay off your mortgage sooner?

There are a number of ways to reduce the number of years it takes to pay down your mortgage. Some of the most simple ways to enjoy significant savings are:

• Selecting 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

How can you use your RRSPs to help buy your first home?

Today, about 50% of first-time homebuyers use their RRSP savings to help finance a Downpayment. With the federal government’s Home Buyers’ Plan, you can use up to $25,000 in RRSP savings ($50,000 for a couple) to help pay for your Downpayment on your first home. You then have 15 years to repay your RRSP. To qualify, the RRSP funds you’re using must have been in your account for at least 90 days.

Even if you have already saved for your Downpayment, 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 Downpayment – 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.

What’s the advantage? Your $25,000 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 Downpayment may help you buy a home sooner, it can also mean missing out on some tax-sheltered growth. So be sure to ask your financial planner whether this strategy makes sense for you, given your personal financial situation.

What are the costs associated with buying a home?

First and foremost, you have to make sure you have enough money for a Downpayment – the portion of the purchase price that you are required to furnish yourself.

To qualify for a conventional mortgage, you will need a Downpayment of 20% or more. However, you can qualify for a High-Ratio Insured Mortgage with a Downpayment as low as 5%.

Second, you will require money for closing costs (up to 2% of the purchase price for first-time home buyers and up to 4% of the purchase price for non-first-time home buyers).

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 reveal areas where repairs or maintenance are required and will confirm that the house is structurally sound. The inspector will provide you with a written report outlining the areas that will require immediate attention.

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.

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 should be the length of my mortgage term?

The length of mortgage terms varies widely, from six months up to 10 years. As a general rule, the shorter the term, the lower the interest rate; the longer the term, the higher the interest rate.

While four-year or five-year mortgages are what most home buyers typically choose, you may consider a short-term mortgage if there is a chance that you could be relocated by your employer (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 increased mortgage payments following a renewal? If that’s the case, a short mortgage term may best suit your needs.

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’ll find a list of these expenses.

The Mortgage Payment

For most home buyers, this is the largest monthly expense. The actual amount of the Mortgage Payment can vary widely since it is based on a number of factors, such as the amount, mortgage term, interest rate and 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’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 value of your property.

What is a Fixed-Rate Mortgage?

The interest rate on a Fixed-Rate Mortgage is set for a pre-determined term – usually from 6 months to 10 years. This means that the rate and the payment will not change until the mortgage is up for renewal.

What is a Variable-Rate Mortgage?

This is a mortgage in which payments are fluctuating with the prime rate for the term of the mortgage. 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. In the event that there is not enough money in your payment to cover the interest portion, the payment amount will either increase or your amortization (the years it takes to pay off the mortgage in full) may be extended.