If you're like most buyers, a home is the most expensive purchase you'll ever make, and you'll probably need some form of financing.
There are many lending institutions that offer a variety of mortgage products. Financing options and rates can vary widely, so it is important to do your research and shop around to ensure you get the mortgage that best meets your needs at the best price.
I would be happy to refer you to some very good mortgage contacts I have in Toronto, or to help you in any other way I can to secure the best possible rate for your home purchase.
Use my mortgage calculator to assist you in making some decisions around financing your new home.
This calculator will help you determine how much money you qualify to borrow. The results are informal. You will be subject to a credit approval from your financial institution taking into consideration existing debt load, amount of down payment, income and other variables.
ELEMENTS OF A MORTGAGE
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.
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.
Tip: The more money you can put towards a down payment, the more you will save interest on your 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.
Tip: While your amortization period can be as long as 25 years, you can save a lot of money by choosing a shorter period. The shorter the amortization period, the less interest you will pay.
YOUR MORTGAGE TYPE (OPEN OR CLOSED)
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.
Tip: You can save a substantial amount of money on an open mortgage if you are planning on selling your home without buying another, or if you think you may be able to pay down a large portion of your loan in the near future.
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.
Tip: If you plan on being a homeowner for a few years, and if your financial situation is unlikely to change much, you will probably find that a closed mortgage is flexible enough for you. Also, you can still save money on the interest costs by bringing down the principal in a variety of ways, without penalty.
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.
Tip: A shortcut to a rough estimate of your eligibility is PIT x 40. This will give you a 30% GDS. For example, if you have a monthly PIT of $1,500, you will require an annual gross income of $60,000 to qualify (1,500 x 40= 60,000)
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.
Tip: The PIT is considered to be the upper limit for borrowers.
HIGH RATIO FINANCING
This is financing for 75.1% to 95% of sale price or appraised value.
Tip: There are no restrictions on who can qualify for this, but any financing beyond 75% of the value must be insured against default.
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.
Tip: The CMHC is constantly releasing new programs and initiatives. Ask your realtor for the latest options.
THE FIRST TIME BUYERS 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.
Tip: These programs may vary by institution or location. If you are a first time home buyer, ask your realtor for details.
THREE P'S OF MORTGAGE
The three Ps refer to Pre-Approval, Pre-Payment, and Penalties.
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.
Tip: If interest rates go up during your 90 day guarantee, you pay the lower rate. If interest rates go down, the lowest rate up to the date the funds are received will apply.
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.
Tip: Different banks offer different pre-payment options
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.
Tip: Many lenders will allow you to blend mortgage rates if you continue to do your business with their institution.
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 YOUR RRSP 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.