Purchasing a home will likely be one of the largest financial transactions of your life. We have included some information below to assist you with the basics of mortgages and financing.
Conventional Mortgage (20% down)
A conventional mortgage is one that is offered on new and existing homes, for up to 80% of the purchase price. The home buyer must have at least 20% of the purchase price available for a down payment. Conventional mortgages do not have to be insured by one of the three Mortgage Insurers: Canadian Mortgage and Housing Corporation (CMHC), Genworth, or AIG Insurance.
High Ratio Mortgage
All the Mortgage Insurers have similar "5%" programs, or high-ratio mortgages. Insured through Mortgage Insurer, the mortgage is guaranteed for home buyers who need a high ratio mortgage (up to 19.9%). The insurance premium that is paid to the Mortgage Insurer is to protect the lender in the event that the mortgage is not paid. This program is not the same as life, disability or job loss insurance. The principal benefit to the borrower, is that it allows you to purchase a home with a minimum down payment. This program is often used by first-time buyers who could not afford a conventional 20% down payment.
The 5% down payment on a $175,000 house or condo, for example, is just $8,750.
An application must be submitted on your behalf to the Mortgage Insurer. Upon receipt of the application, the Mortgage Insurer undertakes to determine the lending value of the property, which may or may not include an actual inspection or appraisal of the property.
The Mortgage Insurer also requires that the home-related expenses (Gross Debt Service or GDS ) must not exceed 32% of your gross household income, and that your total monthly debt load (Total Debt Service or TDS) must not exceed 40% of your gross monthly household income. You must also be able to pay closing costs equivalent to 1.5% of the purchase price.
To calculate the total debt service (TDS), use the formula below:
In some instances, it may be necessary to insure a mortgage, even though it is not considered high ratio. This is also reflected in the chart below.
High Ratio Chart effective March 17th 2017.
|Loan to Value Ratio||Premium|
|1.0% to 65%||0.60% of mortgage|
|65.1% to 75%||0.75% of mortgage|
|75.1% to 80%||1.25% of mortgage|
|80.1% to 85%||2.80% of mortgage|
|85.1% to 90%||3.10% of mortgage|
|90.1% to 95%||4.00% of mortgage|
The mortgage insurance premium may be paid in full on closing or added to the mortgage amount. If added to the mortgage amount, interest is then paid on the insurance premium over the amortization of the mortgage. Most people opt for paying over the period of the mortgage rather than being saddled with a lump sum on closing.
We have put together some basic information on mortgage terminology, mortgage costs and some tips on how to make an informed decision on your mortgage needs. While this is not an all-inclusive list, we hope it will help you find the right mortgage for your needs.
A mortgage is amortized over a period of years. This amortization period is the length of time it takes to pay off the mortgage in full. The usual amortization period is 25 years, however, this can be accelerated to pay off the mortgage more quickly or in some cases can be stretched to 30 years to reduce the monthly payment. However there is an additional 0.20% premium for every additional 5 years beyond the traditional 25 year amortization schedule. The net result is that you will pay more interest over the term of the mortgage."
Some mortgages are assumable with qualification. This means that should you sell your house before the term of the mortgage is completed, the purchaser can take over your mortgage if they qualify. This allows you to avoid paying a penalty to break your mortgage.
Blend & Increase:
The ability to increase your existing mortgage or the term of the mortgage, with only the increased amount or term at today's interest rate. The interest rate for the existing mortgage is combined or blended with the interest rate of the increased amount. This is advantageous if you have a good rate on your existing mortgage or if you want to avoid a penalty to pay out an existing mortgage.
This is the document that your lender will confirm the basic terms and conditions upon which the lender will provide the mortgage and indicate the conditions that must be met before funding. The standard conditions include but are not limited to receipt of an appraisal, income verification by way of employment letters and income tax returns, as well as verification that the purchasers down payment has not been borrowed.
For reasons, planned or unplanned, the borrower may need to sell before the end of the mortgage term. Discharge fees vary widely between lenders which may result in thousands of dollars in penalties. Worse yet, if the discharge policy is "No Discharge", the borrower may be locked in for the entire term of the mortgage.
Early Pay-out Penalty:
Many people don't think about breaking their mortgage when they are in the midst of arranging it, however, this possibility cannot be overlooked. An individual's circumstances can change & transfer of employment, marriage breakdown, etc. Some mortgages are fully closed and cannot be broken under any circumstance. Other mortgages have a sales clause allowing for early payout of the mortgage upon an arms-length sale of the property, subject to a penalty (for example, three months interest). Some mortgages allow the borrower to break the mortgage, for any reason, upon payment of a penalty.
Interest Adjustment Date:
This may apply to mortgages that close on any day other than the requested day of payment. For instances: since some lenders want monthly payments to be made on the first day of the month, they will adjust the interest due on closing so that interest on your mortgage is paid up until the first of the coming month. If you close on the 20th of the month (and the month has 30 days), you will have to pay interest for 10 days so that you are paid up until the first of the coming month. Then your first full mortgage payment will be due on the first of the following month.
The rate of interest is a key consideration when arranging your mortgage. The interest is the payment to the lender for the use of the mortgage money.
The interest rate can be fixed (where the rate remains constant for the term) or floating (where the rate changes at regular intervals). Short term or convertible terms usually have lower interest rates and can be used to a borrower's advantage in an unstable market. These mortgages allow you to ride out a fluctuating or falling rate market until rates reach a level where you wish to "lock-in" to a longer term. On the other hand, long term rates offer stability and eliminate the need to monitor rates daily.
Interim or Bridge Financing:
When the purchase of your new home closes in 60 days but the sale of your current home closes in 90 days, you will need interim or bridge financing. This is because for 30 days, you will own both properties, and of course, not receive the equity out of your old property. Most lenders are happy to offer this product as part of their basic services.
A contract between a borrower and a lender, where the borrower pledges a property to a creditor as security for the payment of a debt. "Charge" is another word for mortgage.
Mortgage Life Insurance:
Life insurance that pays off the balance of the mortgage in the case of the borrowers death (i.e., if a spouse dies, the remaining spouse would not have to worry about mortgage payments - it would be paid in full).
Payment frequency options:
You will often have the choice of making payments on your mortgage on a monthly, semi-monthly, bi-weekly or weekly basis. Increasing the payment frequency, i.e., bi-weekly instead of monthly, can shorten the amortization of your mortgage and save you a considerable amount of interest.
By law, all mortgages in Ontario are registered as having monthly payments. Any change to this is done by an amendment to the mortgage. This amendment is a privilege and can be revoked in the event of failure to make payments.
In this computer age, mortgage payments are normally made by pre-authorized chequing or debit where the lender takes your regular monthly, semi-monthly, bi-weekly, or weekly payment out of a predetermined bank account automatically.
These prepayment privileges allow you to make extra lump sum payments, double your payments or increase your regular payments. Prepayment privileges vary from lender to lender. If you want to be able to pay your mortgage off quickly, check the flexibility of your prepayment privileges.
Portable:If you have a good mortgage rate and a number of years remaining on your term, you may want to take your mortgage with you to a new home when you move. This can be done if the
mortgage is portable. The property you are moving to will have to be reviewed and approved by the lender before you can "move" the mortgage to the new property.
The period of time, prior to closing of your house purchase ("the completion date") that a lender will guarantee that the interest rate they have offered will not rise. This is usually for a period between 60 and 120 days - although longer rate holds are available under special conditions. The commitment letter will also state under what conditions (if any) that they will decrease the interest rate if and when rates in general drop prior to your completion date.
Standard mortgage fees:
All mortgages have standard fees associated with them such as discharge fees, NSF fees, etc., These vary from lender to lender and should be considered.
When property taxes are included with your mortgage payments, your lender will hold back funds from your mortgage proceeds to cover interim or final property taxes payable to the municipality. The amount depends on the month the mortgage was funded and on the dates when interim and final taxes are due. Holdbacks are used to pay for the current year's taxes, while your monthly tax installments are accumulated in the account to pay for the next year's taxes.
This is the period of time that the interest rate and the loan is contracted for. Terms can vary from 3 months to 35 years..