Mortgages can be a bewildering part of buying a new home. I want to provide you with clear and relevant information so that you can face your mortgage negotiation with confidence. In the following pages, I’ll guide you through the basics. To help you estimate your monthly payments and affordability, try this mortgage calculator.
There are three basic elements to any mortgage: Down payment, Amortization Period, and Mortgage Type (Open or Closed) Here, you will learn about each element so that you can make the best decisions – for you. YOUR DOWN PAYMENT This is the first factor in choosing your mortgage. The down payment is the amount of money that you can pay up front, before your mortgage. There are minimum requirements for down payments, ranging from 5% to 30% of the purchase price, depending on whether you choose a low down payment insured mortgage, or a conventional mortgage.
YOUR AMORTIZATION PERIOD An amortization period is the amount of time you take to pay back the principal and the interest accumulated on your mortgage. This period is made up of smaller time periods called “mortgage terms” that can be as short as 6 months or as long as 25 years. These mortgage terms are set when you choose your mortgage, and each time you renew.
YOUR MORTGAGE TYPE (OPEN OR CLOSED) OPEN MORTGAGES: An open mortgage is more flexible than a closed mortgage. You can pay off some or all of the loan at any time, without cost. Open mortgages have short terms, usually 6 months or 1 year. However, variable rate open mortgages with terms of 1 or 2 years may be available. Open mortgages usually have a higher interest rate than closed mortgages.
CLOSED MORTGAGES: A closed mortgage has a locked interest rate for a longer term. This way, you can rest assured that the rate will not increase. Closed mortgages have terms that can range from 6 months to 25 years. You can get a lower interest rate with a fixed-rate closed mortgage than with a fixed-rate open mortgage.
Lenders use “qualifying ratios” to assess the ability of borrowers to make payments. GROSS DEBT SERVICE RATIO (GDS) Your GDS is your Principal Interest and Taxes (PIT), divided by your Monthly Gross income (MGI), multiplied by 100. GDS=PIT/Monthly Gross Income x 100 Let’s break this down so that you can understand the ratio. Your PIT should be no more than 32% of your MGI. MGI is the amount of money you make per month, before taxes or other deductions.
TOTAL DEBT SERVICE RATIO (TDS) Your TDS is your (PIT) divided by your Monthly Gross Income (MGI), multiplied by 100. TDS+PIT/Monthly Gross Income x 100 Your PIT, monthly principal, Interest, Taxes, and other Debts, should be no more than 42% of your MGI. MGI is the amount of money you make per month, before taxes or other deductions.
HIGH RATIO FINANCING This is financing for 75.1% to 95% of sale price or appraised value.
REGULAR CMHC PROGRAM The Canadian Mortgage and Housing Corporation (CMHC) offers a program whereby buyers can borrow between 75.1% and 95% of the purchase price.
THE FIRST-TIME HOMEBUYERS PROGRAM Many institutions offer incentives to first time homebuyers. Some allow for a small 5% down payment, although there may be a maximum purchase price. As well, CMHC insurance may be required.
The three Ps refer to Pre-Approval, Pre-Payment, and Penalties. PRE-APPROVAL Based on your current financial situation and credit rating, you may be able to get a pre-approved mortgage. A pre-approved mortgage sets out the amount that you can borrow, the interest rate, and the amount of payments. Once you set up a pre-approved mortgage, you can shop around for a property in your price range, and rest assured that your financing is secured. With a pre-approved mortgage, the fixed interest rates and payments are guaranteed for 90 days from when you receive your confirmation. This way, you are protected from interest rate fluctuations.
PRE-PAYMENT Depending on your lender and the specific terms of your agreement, you can negotiate pre-payment options that allow you to pay more than your regular monthly payments at a given time. Exercising pre-payment options can save you thousands of dollars, and can shorten your amortization time by years.
PENALTIES Lenders can impose monetary penalties for various activities. If interest rates are substantially lower than when you locked into your mortgage, it may actually be to your benefit to pay the bank penalty to refinance your home at the lower rate.
When people think about buying a new home, they usually think about mortgages. What you may not know is that with the RRSP Home Buyers’ Plan, you might be able to put some or all of your RRSP towards your purchase. How does the RRSP Home Buyers’ Plan work? Once you enter into an agreement to buy or build a qualifying home, you may withdraw funds from your RRSP, tax-free. What is a “Qualifying Home?” A qualifying home is located in Canada, was bought or built not more than 30 days before making your RRSP withdrawal, and/or is intended to be your principal place of residence within one year of buying or building it. What are the restrictions on the program? Generally, only first time buyers are eligible. The total money withdrawn must not exceed $20,000. You must buy or build your home before the October of the year following the year of your withdrawal. The money must be repaid to your RRSP within 15 years. If you think you might be eligible, contact me
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