How much can I afford to pay for a home?
To determine 'affordability' you will first need to know your gross taxable income along with the amount of any debt outstanding and the corresponding monthly payments. Assuming it is your principal residence you are purchasing, calculate 39% of your gross taxable income (income before income taxes and deductions) for use toward a mortgage payment, property taxes and heating costs (also known as your Gross Debt Service Ratio). If applicable, half of the estimated monthly condominium maintenance fees will also be included in this calculation.
(Mortgage Payment + Property Tax + Heat + ½ of your Condo Fee*)/Gross Taxable Income
Second, you will need to calculate your monthly debt payments. This includes your mortgage payment, property taxes, utilities, half of your condominium fees (if applicable), car loans, credit cards, lines of credit payments, etc. Calculate 44% of your gross taxable income for use towards all your monthly debt payments (also known as your Total Debt Service Ratio).
(Mortgage Payment + Property Tax + Utilities + ½ of your Condo Fee* + the total of your outside debt payments (credit cards, loans, lines of credit, etc.) )/Gross Taxable Income
The 39% (Gross Debt Service Ratio) and 44% (Total Debt Service Ratio) indicate your maximum mortgage affordability. These calculations are based on “A” Lenders' usual guidelines, assuming a High-Ratio mortgage (a mortgage with less than 20% down payment) using a 25-year amortization (the time it would take to pay off your mortgage completely) and the Federal Government benchmark rate (a rate used to qualify your mortgage also known as the stress test).
However, if your down payment is 20% or greater, your mortgage is considered a Conventional mortgage, which provides even more flexibility. You will be able to use a 30-year amortization as well as extended Debt Service Ratios to qualify. You will also have access to an even greater pool of institutional and alternative lenders.
In addition to considering what the ratios say you can afford, make sure you calculate how much you think you can afford. If the payment amount you are comfortable with is less than 39% of your gross taxable income, you may want to settle for a lower purchase price and mortgage amount rather than stretch yourself financially even though you can afford it on paper. Make sure you don't leave yourself house poor. Structure your payments so that you can still afford simple luxuries.
*Note: If heating is covered by the Condominium Maintenance Fee, you don’t have to include it in the calculation.
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 (roofs, 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 down payment needed for a home?
A minimum down payment of 5% is required to purchase a home, subject to certain maximum price restrictions depending on the property location. See “What is mortgage loan insurance?” for greater detail.
In addition to the 5% down payment, you must also be able to show that you can cover the applicable closing costs (i.e., legal fees and disbursements, mortgage registration, land transfer tax, tax on the mortgage insurance premium, condominium status certificate where applicable) calculated as 1.5% of the purchase price. The 1.5% figure is not an actual estimate of your closing costs. Your closing costs can vary significantly depending on the type of property you are purchasing as well as the property location, etc. Your lawyer will be able to provide a more accurate figure.
The Lender and the Mortgage Insurer* want to ensure that you have enough funds in your bank account 10 days prior to closing in order to cover the down payment and closing costs. They don’t want to see your dream of home ownership fall apart at the very end because you had insufficient funds to close.
Regardless of the amount of your down payment, at least 5% of it must be from your own cash resources, TFSAs, RRSPs, other investments, or a gift from a family member. It cannot be borrowed. Lenders will generally accept a gift from a direct family member as an acceptable down payment provided a letter stating it is a true gift, not a loan, is provided by the donor. The lender will also require proof that the gift money is deposited into the borrower’s account prior to closing.
* Note: Mortgages with less than 20% down payment must have mortgage loan insurance provided by either Canada Mortgage and Housing Corporation (CMHC), Sagen or Canada Guaranty. The lender will choose the Mortgage Insurer.
What is mortgage loan insurance?
If you want to buy a home with a down payment of less than 20%, you’ll need mortgage loan insurance. This protects your lender in case you can’t make your payments. Mortgage loan insurance is provided through either Canada Mortgage and Housing Corporation (CMHC), a crown corporation, or one of two private mortgage insurers, Sagen or Canada Guaranty. Your lender will choose the mortgage insurer. This is not the same as mortgage life insurance.
The benefits of mortgage loan insurance are that it allows you to get a mortgage of up to 95% of the purchase price of a home. It also ensures you get a reasonable interest rate, even with a smaller down payment. Mortgage loan insurance also helps to stabilize the housing market. During economic slumps, when down payments may be harder to save, it ensures the availability of mortgage funding.
To get mortgage loan insurance, you’ll need a minimum down payment. The amount depends on the home’s purchase price:
If the home costs $500,000 or less, you’ll need a minimum down payment of 5%.
If the home costs more than $500,000, you’ll need a minimum of 5% down on the first $500,000 and 10% on the remainder.
If the home costs $1,000,000 or more, mortgage loan insurance is not available. This could change in the future if the government decides to increase this ceiling amount.
What are the costs? The lender pays an insurance premium on the mortgage loan insurance. It’s calculated as a percentage of the mortgage and is based on the size of your down payment. The premium is usually passed on to you, the borrower, by the lender. You can pay it in a lump sum up front or add it to your mortgage and include it in your payments, and by doing so, you will not need to come up with the extra funds. Note: Premiums in Quebec, Ontario and Saskatchewan are subject to provincial sales tax. The provincial sales tax cannot be added to the mortgage amount.
CMHC Standard Premium Rates as of January 13, 2022
Mortgages with a Loan-to-Value of up to and including 65% your premium on the total loan is 0.60%
Mortgages with a Loan-to-Value of up to and including 75% your premium on the total loan is 1.70%
Mortgages with a Loan-to-Value of up to and including 80% your premium on the total loan is 2.40%
Mortgages with a Loan-to-Value of up to and including 85% your premium on the total loan is 2.80%
Mortgages with a Loan-to-Value of up to and including 90% your premium on the total loan is 3.10%
Mortgages with a Loan-to-Value of up to and including 95% your premium on the total loan is 4.00%
What is a conventional mortgage?
A conventional mortgage is usually one where a borrower can cover 20% or more of a home’s purchase price with the down payment. This means the loan they are paying down is equivalent to 80% or less of the value of the home. In this case, the borrower does not require mortgage insurance. However, in certain circumstances, a particular lender may request mortgage insurance, even if the home buyer is putting 20% or more down.
A benefit of a conventional mortgage is added flexibility. You will be able to use a 30-year amortization as well as extended Debt Service Ratios to qualify. You will also have access to an even greater pool of institutional and alternative lenders. You will not be required to come up with a mortgage insurance premium or have it added to your mortgage loan except in rare cases.
How does bankruptcy affect qualification for a mortgage?
After you have been discharged from bankruptcy, there is no legal waiting period before you can apply for a mortgage. However, each lender has their own policies in place when it comes to providing mortgage financing for past bankrupt applicants.
Most prime or traditional lenders will require that you have been discharged from bankruptcy for at least two years and a day before considering you for a mortgage. It is also imperative that you have at least one year of re-established credit showing on two credit items (i.e. credit cards, loans or car lease) with a minimum $1,000 credit limit per credit item. If the lender to whom you are applying was included in the bankruptcy, they are not likely to approve your mortgage request.
You may qualify for a sub-prime mortgage through an alternative lender or private lender as early as one day after your discharge from bankruptcy. These types of lenders will require a larger down payment and will be more concerned with the quality and location of your property than your credit. These lenders will charge higher interest rates and fees. This is normally a short-term solution until your credit is repaired and you can qualify with a more traditional lender.
How will alimony/child support affect mortgage qualification?
Alimony/Child Support Payable
Where you are responsible for the payment of alimony/child support, the lender will include your monthly alimony/child support payments in with your other monthly liabilities such as credit card and loan payments.
Alimony/Child Support Receivable
Where you are receiving payment of alimony/child support, the alimony/child support will be viewed as income. The alimony/support income cannot represent more than 50% of your total gross taxable income being used to qualify you for a mortgage.
Whether you are paying or receiving alimony/child support, the lender will require proof of your monthly alimony/child support payments by way of either a fully executed court order or legally binding separation agreement (signed by both parties and witnessed by a third party or executed by a lawyer/notary) OR a Statutory Declaration or Affidavit (witnessed by a solicitor/notary) in situations where a court order or separation agreement is not attainable (when reasonable to the situation). The lender will also require your most recently filed T1 General or bank statements showing 3 recent consecutive months history of payment.
Can I get a mortgage to purchase a home?
There are all types of lenders for all types of borrowers whether you are a permanent resident, a non-permanent resident, or a newcomer to Canada. There are common criteria that lenders will review when qualifying you for a mortgage including your income and employment history, your credit history and debt, your down payment and of course the property you wish to purchase.
Income. The lender will review your income to ensure that not only is it plausible and consistent but that it is sufficient to support your mortgage and property tax payments along with any outside debt payments. Income sources vary as widely as what lenders will accept as income. Income may come from full or part-time employment including overtime and bonuses, self-employment, commission, spousal and or child support, pension, rental properties, and other investments for example. To qualify your employment income, the lender will require a current employment letter and your most recent year-to-date pay stub. You may also be asked to provide your last two years of tax returns, T4s and Notices of Assessment showing no income taxes owing. This is all dependent on your income type. For example, if you earn overtime income and are using it to qualify for a mortgage, the lender will want to see your current job letter, recent year-to-date pay stub and your last two years of tax returns and/or T4s to prove that your income including overtime is consistent.
Employment History. The lender will require a job letter which states your date of hire, your position within the company, whether you are salaried or hourly, and your gross annual income. If you are paid hourly, the letter should include your weekly guaranteed hours and your rate of pay. It should also include any overtime and bonus income. The lender needs at least a 3-year history of your employment. As with income, the lender is looking for consistency in your employment. Have you worked at one job or one field continuously for several years? If you are new to a job, is there a probationary period? If so, have you completed the probationary period? Are you on contract? How long is your contract? These are all important discussions to have with your Mortgage Broker/Agent in the beginning of the mortgage application process.
Credit History. Your credit history is basically a track record of your ability to handle debt. Some may think that they have wonderful credit as they have never taken on any debt. They have never had a credit card, loan, or line of credit. They have paid cash for everything. This would be incorrect. Lenders need to see that you have the ability to manage debt. How can they get this information? They can access your credit report from one of two reporting companies, Equifax and/or Trans-Union. These companies provide updated credit information on all debts reported to them from various sources such as banks, credit card, phone, and car leasing companies for example. What kind of information is reported to them? The credit limits on your cards or loans, your current balance, your monthly payment, a record of any missed payments. Any registered child or spousal support and any judgements or written-off debts due to bankruptcy or consumer proposal can also be reported on your credit bureau. Your credit rating is essential in determining the type of mortgage products and mortgage rates available to you. This is yet another important conversation to have with your Mortgage Broker/Agent before starting your search for a home.
Debt. Lenders will look at your ability to manage debt, as discussed in Credit History, as well as your total debt and monthly debt obligations. This will determine your mortgage affordability. See “How much can I afford to pay for a home?” for more detailed information. Basically, the lender will require that your monthly mortgage payments, property taxes, heating, 50% of condo fees (if applicable) and all your monthly outside debt payments do not surpass a certain percentage of your gross income. Not only is it important for the lender to know that you can fulfill your monthly mortgage obligations, but it is also critical to you as a borrower to know that you can afford your new home while maintaining a healthy lifestyle and avoid being “House Poor”.
Down Payment. You will require a minimum 5% down payment to purchase a home in Canada. These funds must be non-borrowed savings. You will also need to prove that you have at least 1.5% of your purchase price in savings to go towards your closing costs. Note that this is not an actual estimate of your closing costs. Closing costs will vary depending on where you purchase as well as other related closing costs for your specific property. See “What are the costs associated with buying a home?”. The lender will require proof of your down payment and closing costs via 90 days most recent history on your bank accounts and/or RRSP statements and/or investment accounts for example. If part of your down payment is a gift from family, a pro forma gift letter will be required to be completed by the family member(s). Proof that the gift was deposited into your bank account will also be required. See “What is a down payment?”, “What is the minimum down payment needed for a home?”, “How can you use RRSPs to help you buy your first home?” and “Can I use gift funds as a down payment?” for more detailed information.
Property. When purchasing or refinancing a home, determining the value of the property is an essential step for both the purchaser(s)/ homeowner(s) and the lender. As a purchaser, you will want to confirm that the property is worth what you are paying for it. As your mortgage is being secured by your property, the lender will need to confirm that the value is accurate. The value of the property is determined by several different criteria, for example, its location, square footage, age, construction quality, and architectural design and features. The value of the property is not a fixed number. It is a snapshot in time based on the current market conditions and recent sales values of similar properties within the area of the property. This value will change over time based on changes in the housing market and the neighbourhood as well as any improvements made to the property. To determine the value of the property, an appraisal will normally be ordered on your behalf by your mortgage broker/agent or the lender directly. A professional appraiser will require access to both the outside and inside of the property to make a physical assessment. If your down payment is less than 20%, your mortgage will be insured by one of the three Canadian mortgage insurers. The insurer will normally make their own electronic property assessment utilizing their extensive database of home sales and market conditions. On occasion, especially for unique properties and non-arms length purchases, the insurer may require a physical appraisal to be conducted.
Can I use gift funds as a down payment?
Lenders will generally accept a gift from a direct family member, which includes parents, siblings, grandparents, legal guardians, or legal dependants, as an acceptable down payment provided a letter stating it is a true gift, not a loan, is provided by the donor. Friends cannot supply a gift letter.
The gift letter is a pre-written document that is provided by the specific lender financing your home. The donor(s) simply needs to fill out the giftor and giftee information, the gift amount, and the date the gift was transferred into your account.
The lender will also require proof that the gift money has been deposited into your account prior to closing by way of your most recent 3 months of bank account statements. It is good practice to have the gift and down payment deposited into your account at least 10 business days before closing.
What is a pre-approved mortgage?
Shopping for houses can be quite exciting but where do you start? A good first step is to get an estimate as to what you can afford. As a matter of fact, most Real Estate Agents require that their clients be prequalified for a mortgage prior to taking them out to look at homes. This will ensure that they are showing you properties within your affordable price range. It will also provide more confidence for a successful outcome when bidding on a property in a competitive real estate market. This is where prequalification and pre-approval can help.
Prequalification is exactly as it sounds. It is just a matter of collecting some basic financial information such as your gross household income, employment information, current assets and debts as well as your credit information and calculating what you can afford. This is done even before submitting your mortgage application to a lender for a pre-approval or approval.
A pre-approved mortgage is simply an interest rate guarantee from a lender for a specified period of time (usually up to 120 days) and for a set dollar value. 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. It is a promise, not a guarantee. Being pre-approved doesn’t necessarily mean you will get final approval. For example, if there is any change in your financial circumstances or the lender isn’t satisfied with the condition or valuation of the property between your pre-approval and approval, the lender may choose not to provide you with a mortgage. Note: some lenders will charge an extra premium on your guaranteed pre-approval interest rate.
When the lender has received your Offer of Purchase and Sale and reviewed your application and credit bureau, they are now able to offer you a full conditional approval. The lender will require you to meet certain conditions based on the information provided in your application such as written confirmation of employment and income, proof of down payment and closing costs and a satisfactory appraisal for example.
What should I do now that my mortgage is about to renew?
When you get a mortgage with a lender, your contract is in effect for a specific period of time. This is called the mortgage term and it can range from a few months to five years or longer. At the end of the term, you can either pay off the remaining balance if you are a lucky lottery winner, or if you are like most Canadians, you will have to renew your mortgage. You'll most likely require multiple terms to repay your mortgage in full.
Lenders will normally send you a renewal statement along with a renewal contract between 21 and 120 days before maturity, often guaranteeing an interest rate to you as much as 120 days before your mortgage matures. The renewal statement will indicate the balance or remaining principal at the renewal date, the interest rate, payment frequency, term, and any charges that may apply. The renewal statement will specify that the interest rate offered won't increase until your renewal date.
It's 120 days before my renewal so what do I do now?
This is an ideal time to consider your current circumstances. Your financial situation, short-term and long-term goals, and lifestyle may have changed since you last signed your mortgage documents.
Maybe your income has changed, and your budget allows you to increase your payments to pay off your mortgage sooner and save on interest. However, it may be that your income has decreased, and you want to consider lowering your monthly payments.
It may be that your property has increased in value, and you wish to use the equity in your home. You may want to save money by consolidating other debts that have higher interest rates. Maybe you are planning a family and need to make some extra space in your home for your little ones. It could be that your little ones are not so little any longer and you want to help them with the cost of higher education, getting married or purchasing their own home. It could simply be that you want to save for your retirement and use the equity in your home to invest in RRSPs or Mutual funds or a rental property for example.
Whatever your situation, it is important to contact a mortgage agent/broker to weigh your options before singing the dotted line on that renewal contract. Even if your circumstances haven’t changed, we may be able to save you thousands of dollars just by getting a better interest rate.
What is a down payment?
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. But even with a mortgage, you will need to raise the money for a down payment. A down payment is the amount of money you put towards the purchase of a home. Your lender deducts the down payment from the purchase price of your home. Your mortgage covers the rest of the price of the home.
A minimum down payment of 5% is required to purchase a home, subject to certain maximum price restrictions depending on the property location. If your down payment is less than 20% of the price of your home, you must purchase mortgage loan insurance. See “What is mortgage loan insurance?” for greater detail.
If your down payment is 20% or more of the home’s purchase price, you will normally not be required to purchase mortgage loan insurance. However, in certain circumstances, a particular lender may request mortgage insurance.
The amount of the down payment should be determined well before you start house hunting. The larger the down payment, the less your home costs in the long run. With a smaller mortgage, interest costs will be lower and over time this will add up to significant savings.
How can you pay off your mortgage sooner?
There are several ways to pay off your mortgage sooner. Most lenders offer prepayment privileges with their mortgages. These prepayment privileges will allow you to either increase the amount of your regular principal and interest payments or make lump-sum payments without paying a penalty. Each lender will vary in the timing and the amount allowed to be paid down which is shown as a percentage of your original mortgage amount. These privileges can be taken advantage of each calendar year and are noncumulative. For example, if you took full advantage of a 20% increase payment + a 20% lump-sum payment privilege in the first year of an original mortgage of $400,000 with principal and interest payments of $1,850. You could increase your payments by $370 and pay down the principal amount of your mortgage by $80,000. This would provide you with significant savings in interest and help pay down your mortgage faster.
Many lenders also provide you with the ability to make accelerated bi-weekly and accelerated-weekly payments. By accelerating your payments, you make the equivalent of one extra monthly payment per year which will save you money on interest charges and reduce your mortgage sooner.
If you have chosen a variable rate mortgage with a discount on the Prime rate and have very low monthly principal and interest payments, you may want to consider increasing your monthly principal and interest payments to what you would be paying on a fixed rate. For example, if your current monthly payments on a 5-year variable rate mortgage are $1,525 and the payments on a 5-year fixed rate mortgage are $1,850, you may choose to pay at the 5-year fixed rate. The extra $325 in your monthly payment will go directly to paying down your principal, saving you in interest and reducing your mortgage quicker.
You may also choose to lower your amortization period at renewal. The lower amortization period will increase your monthly principal and interest payments and the speed at which you pay down your mortgage. A note of caution in reducing your amortization, if there is a negative change in your financial situation, you will be unable to lower your payments.
There are times when it may be more prudent not to be as aggressive in paying down your mortgage. If, for example, you are in a period of historically low interest rates, it may be more advantageous to direct your money into investments with a higher rate of return. If you have a rental property with all the associated tax write-offs, it may make sense not to pay that mortgage down quicker.
It is important to discuss all these options with your experienced mortgage agent/broker.
How can you use your RRSP to help you buy your first home?
Today, about 50% of first-time home buyers use their RRSP savings to help finance a down payment. If you are a first-time home buyer, the Home Buyers Plan (HBP) allows you to withdraw money from your Registered Retirement Savings Plan (RRSP) tax-free to make your down payment. The HBP is administered by the Canada Revenue Agency (CRA).
Certain conditions must be met to be eligible to participate in the HBP, including the following:
1. You must be considered a first-time home buyer
2.You must have a written agreement to buy or build a qualifying home, either for yourself or for a related person with a disability
3. You must be a resident of Canada when you withdraw funds from your RRSPs under the HBP and up to the time a qualifying home is bought or built
4. You must intend to occupy the qualifying home as your principal place of residence within one year after buying or building it. If you buy or build a qualifying home for a related person with a disability, or help a related person with a disability to buy or build a qualifying home, you must intend that the related person with a disability occupies the qualifying home as their principal place of residence
In all cases, if you have previously participated in the HBP, you may be able to do so again if your repayable HBP balance on January 1st of the year of the withdrawal is zero and you meet all the other HBP eligibility conditions.
How much can you withdraw?
You can withdraw funds from more than one RRSP as long as you are the owner of each RRSP account. The HBP allows first time homebuyers to borrow up to $35,000 from their RRSPs for a tax free down payment. If you buy the home together with your spouse, partner, each of you can withdraw up to $35,000, for a total of up to $70,000. Some RRSPs, such as locked-in or group RRSPs, do not allow you to withdraw funds from them.
What is the payback period?
You will have 15 years to pay the funds back into your RRSP account by making RRSP deposits each year starting the second year following your withdrawal. We would highly recommend that you prepare a budget to not only make your mortgage payments but also the repayment of your RRSPs. If you don’t repay the expected amount each year, the government will treat the amount as income for that year and tax you on it.
For more detail, refer to https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/what-home-buyers-plan.html
What are the costs associated with buying a home?
It is important to take into consideration all the possible costs involved when purchasing a property so that you are not surprised on closing/moving day. There are several one-time associated costs when buying a property. They will vary depending on the area in which you are buying as well as the type of property you are buying. There are some common costs no matter what type of property you are purchasing.
Down payment cost. Your down payment is the total amount of money you are paying towards the purchase of your new home, including your deposit. This may be a cost, however, it should also be considered built-in equity in your property. A minimum down payment of 5% is required to purchase a home, subject to certain maximum price restrictions depending on the property location.
Mortgage default insurance. You will be required to pay for mortgage default insurance if your down payment is less than 20% of the purchase price of your home. Some lenders will also require default insurance for down payments greater than 20% in certain circumstances. The premium is calculated as a percentage of the mortgage and is based on the size of your down payment. The lender pays the insurance premium on your behalf but then passes it on to you. You can pay it in a lump sum up front or add it to your mortgage and include it in your payments, and by doing so, you will not need to come up with the extra funds. Note: Premiums in Quebec, Ontario and Saskatchewan are subject to provincial sales tax. The provincial sales tax cannot be added to the mortgage amount. See “What is mortgage loan insurance?” for greater detail.
Appraisal fee. The lender may require you to pay for an appraisal depending on the property you are purchasing. An appraisal is an independent evaluation to determine your property’s value as well as it’s physical condition.
Home Inspection fee. Before finalizing your offer to purchase, it may be prudent, especially if you are purchasing an older home, to have the property assessed by a home inspector to identify any possible major structural problems with the home.
Land Transfer Tax. The land transfer tax is a one-time payment to the provincial government, and sometimes, the municipal government when you take ownership of a property. The land transfer tax is calculated as a percentage of the purchase price of the property. First-time buyers may be eligible for a reduction in the land transfer tax.
Closing costs and legal fees. To close your mortgage, you will require the services of a lawyer. The legal fees will vary depending on the lawyer and type of property you are purchasing. You should ask for an estimate up front.
Title Insurance. Title insurance is a form of indemnity insurance that not only protects you as a homebuyer, but also the lender, from any financial loss due to defects in the title/ownership of your property. Title insurance has replaced the need for a property survey. You would normally be required to cover the title insurance cost for the lender. Your personal title insurance is optional. We would highly recommend that you have a conversation with your lawyer regarding the merits of title insurance.
Home/Property Insurance. Property insurance is an ongoing cost, but the lender will require that you have set up property insurance prior to closing your mortgage that protects your home from fire at a minimum. Costs will vary depending on the location and the size of your property as well as the insurance options you choose.
Moving Expenses. Your moving costs may vary significantly depending on whether you choose to hire a moving company or hire a rental truck and bring in the troops “aka” family and friends.
Utility Set-Up Costs. You may be required to pay a set-up fee for hydro, electricity, gas, cable and internet when you are setting up an account for the first time.
New Home Costs. Then there are the costs of setting up your new home which will vary with the type of property you are purchasing as well as what you are bringing with you from your old home. First-time home buyers may have a larger set up list. Examples of costs that you may incur include furniture, major appliances, kitchen and bathroom items, paint, window coverings, lighting fixtures, air-conditioning, etc. You may want to create a list and determine what is most important in terms of when you will need them.
Should I choose a long term or a short term mortgage?
To start, what is a mortgage term? A mortgage term is the length of time of the mortgage agreement between you and the lender. It not only guarantees the rate of interest rate but all the terms and conditions of the mortgage. The mortgage term can vary widely between 6 months and 10 years, though 5 years is most common with homeowners in Canada.
The amortization period, on the other hand, is the length of time it will take to fully pay off your mortgage. Most Canadians choose a 25 year amortization, but 30 year amortization periods are also available. So, over the span of 25 or 30 years you will have several terms with either the same lender or multiple lenders.
The math is normally, the lengthier the term the higher the interest rate, as you are protecting yourself from interest rate fluctuations over a longer period of time. Longer terms can allow for financial piece of mind especially in an uncertain economy. Longer terms will also allow you to weather the storm of surprising life changes such as the loss of a spouse/partner or your job depending on when this occurs in the term of the mortgage.
Short term mortgages tend to be priced lower as the lender’s rate guarantee is for a shorter period of time. Most homeowners opt for short-term mortgages when they believe that rates are dropping and want to take advantage of the rate drop when their mortgage matures. Also, you may be planning on selling your home in the short term and want to avoid a cumbersome penalty to break the mortgage.
Before selecting your mortgage term, we suggest that 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 their being 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?
It’s important to factor in all the various one-time costs of purchasing a home prior to buying it. See “What are the costs associated with buying a home?” for more detail. However, you should also consider the financial responsibilities of being a homeowner even before you buy. These on-going expenses can vary depending on the type of property that you purchase as well as the location of the property. The on-going costs might even determine the type of property you choose while keeping your preferred lifestyle in mind.
Once again, depending on the type of property that you purchase, you will need to consider a number of on-going expenses.
Mortgage payments. Your mortgage payment, which is a combination of principal and interest, will most likely be your largest expense.
Property taxes. Property taxes are paid to the municipality to cover various costs such as schools, hospitals, roads, and garbage collection for example. You can pay your taxes directly to the municipality or have the lender collect them in your mortgage payment and pay them on your behalf. Your taxes are calculated based on the value, size, and location of your property.
Utilities. These may include services like heat, electricity, gas, water, telephone, internet, and cable. Note that if you have purchased a condominium, some of these fees may be included in your condominium fees.
Condominium fees. If you purchase an apartment condominium or a townhouse condominium, you will be required to pay monthly “condo” maintenance fees. The fees normally cover common areas of the property such as the lobby, concierge if applicable, parking, grounds, etc.. They may also include utilities or cable fees. Your realtor will be able to provide an accurate breakdown of the fees for you. It will also be included in the MLS Listing for the property.
Property insurance. Lenders will require you to purchase property insurance in case of fire. Make sure that you have adequate Home and Property insurance to protect your valuable assets and property in case of fire, theft or other damage and liability.
Property maintenance and repair costs. Depending on the type of property, these costs could include lawn care, snow removal, furnace maintenance, roof repairs, electrical, plumbing, eavestrough maintenance, drain repair, tree trimming etc.. It should be stressed that a well-maintained property helps to add to the enjoyment of your property, preserve your home's market value, enhance the neighbourhood and, depending on any kind of renovations you may make, could add to the value of your property.
Emergency fund. It would be a very good idea to build an emergency fund by setting aside a little bit of money each month for any unplanned expenses. You may also consider securing a line of credit. This will provide you with another pool of money to tap into for unplanned expenses.
Living expenses. Now that you are at the cusp of purchasing your dream home, it is important to ensure that you have budgeted enough of your hard-earned income for regular day to day life and lifestyle expenses. You want to avoid being house poor. We recommend that you budget for expenses such as groceries, clothing, transportation, entertainment, travel and so on. Check every few months to see if you are spending more than you earn. If you are, find new ways to save more money or spend less but don’t forget to live.
Mortgage life insurance. Mortgage life is an optional life insurance that you can purchase directly from your lender or other independent life insurance companies. It will repay some or all of your mortgage debt in the event of death. Mortgage disability and job loss insurance are also available. Coverage is important for families, so that in the unfortunate case where one homeowner passes away, the spouse/partner and children can remain in the house and won’t be forced to sell. There are other types of life insurance that you may want to consider depending on your circumstances. This would be a good conversation to have with your insurance broker.
Fixed Rate vs Variable Rate mortgage?
You have found the home of your dreams and now you need a mortgage. You own the home of your dreams and now your mortgage is coming up for renewal. Either way, whether you are buying or renewing, you need to decide between a fixed rate mortgage or a variable rate mortgage? To start, it’s important to know the difference between a fixed rate mortgage and a variable rate mortgage.
A fixed rate mortgage is exactly what you think. It is one in which the interest rate and the monthly principal and interest payments remain the same throughout the term of the mortgage. For example, if you have a 5-year mortgage with a fixed rate of 2.45% with monthly principal and interest payments of $886.27, your rate of 2.45% and payments of $886.27 will remain the same for the entire 5 years of the mortgage term.
A variable rate mortgage is one in which the mortgage rate can change, either up or down, throughout the term of the mortgage based on the prime lending rate as set by your lender. Variable rates are quoted at prime less or plus a specified amount. This specified amount will not change over the term of the mortgage. For example, if you have a 5-year variable rate of prime less 1.00% and the lender’s prime rate is currently 2.70%, your monthly principal and interest payments will be based on 1.70%. If the prime rate increases to 2.95%, your rate will increase to 1.95%. Your monthly principal and interest payments will increase respectively with the increase in the prime rate. Conversely, if the lender’s prime goes down by 0.25% to 2.45%, your payments will be based on 1.45%. Some lenders will maintain the same payment throughout the variable rate mortgage term up to a certain trigger point but most lenders will either increase or lower the payment based on the prime rate changes throughout the term.
Now…the question…fixed rate mortgage or variable rate mortgage? The answer? Well, it would be best to look at the pros and cons of each option and then factor in your current personal and financial circumstances along with your short and long term goals and objectives all while considering the financial market in which you are making your decision.
There are many benefits to a fixed rate mortgage, most importantly, piece of mind. Your mortgage interest rate and payments are fixed for the entire term of the mortgage. You will know exactly what your monthly mortgage payment is which allows you to easily plan your financial budget. If you are at the maximum mortgage that you can afford, the fixed rate mortgage will offer stability and reduce sleepless nights on the potential of your rate and payments increasing. If you find yourself in a market with increasing mortgage rates, the fixed rate will allow you to take advantage of the lower rate for a longer period of time.
As for drawbacks on the fixed rate mortgage, you may be missing out on potential interest rate savings. A variable rate mortgage tends to be priced lower than a fixed rate mortgage, and if the difference between the variable rate mortgage and the fixed rate mortgage is significant, does it make sense to pay more in interest for the stability protection of a fixed mortgage? Also, if you decide to break your fixed rate mortgage prior to maturity, you will most likely be paying the interest rate differential which can be quite significant depending on rates at that time you break your mortgage and the lender’s payout penalty policy.
The benefit of a variable rate mortgage is the interest rate is usually lower than the rate for a fixed rate term. If Prime is low or dropping down, then you will benefit from lower payments. If you choose to keep your payments higher, you will be able to pay down your mortgage principal faster and save on interest. You also have the added protection of being able to lock into a fixed rate mortgage without penalty from your variable mortgage if you see that the Prime rate is increasing and you no longer feel comfortable in the variable rate mortgage. If you choose to break your variable rate mortgage before maturity, your prepayment penalty will be 90 days of interest which will usually be much lower than a fixed rate mortgage prepayment penalty.
One of the major risks with a variable rate is increasing mortgage payments. If Prime increases, your monthly payment will increase. If your financial circumstances won’t allow you to absorb any increases in your mortgage payments, then this may not be a product for you. The other possible negative is locking into a fixed rate mortgage down the road where the fixed rates are higher than at the time you entered your mortgage, possibly erasing any savings you may have made while in the variable rate mortgage. Most importantly is your risk tolerance. If your tolerance for risk is low and any change in Prime may lead to many sleepless nights, even though you may save money, this may not be a good idea for you.
As you can see, the fixed rate vs. variable rate decision is based on your personal and financial circumstances as well as outside factors. This is where your mortgage broker/agent can discuss the pros and cons of each option and help guide you to an informed decision that makes sense for you.