Mortgage 101

Mortgage Basics

Term Vs. Amortization

Term is the amount of time the mortgage agreement can be enforced. The end of the term is called the maturity date, in which the mortgage can be renegotiated or paid out. Amortization is the length of time it would take for the whole mortgage to be paid out. A typical term is 5 years and the typical amortization is 25 years.

CLOSED VS. OPEN

Closed mortgages cannot be paid entirely before the mortgage matures without having to pay a penalty. However, you are allowed to make pre-payments up to the percentage set in the mortgage agreement. On the other hand, Open mortgages can be pre-paid in their entirety at any time.

FIXED VS. VARIABLE

Fixed mortgages have a set rate for the duration of the term. Variable rates fluctuate with the Prime rate, which is typically set by the Bank of Canada. Variable rates are also offered either on a discount or a premium against the Prime rate, depending on current economic factors.

CONVENTIONAL VS. HIGH RATIO

Conventional mortgages do not exceed 80% of the value of the home it is secured against. In Canada, if a borrower puts less than 20% down when they buy a home, it is considered 'higher-risk' or ‘High Ratio'. By government regulations that mortgage has to be insured by a default insurer that protects the lender in the case that the borrower defaults on their mortgage payments. The most popular default insurer in Canada is Canada Mortgage and Housing Corporation (CMHC).

DOWN PAYMENT VS. CLOSING COSTS

A down payment is the amount of money a borrower uses towards purchasing a home. The minimum down payment amount required is 5% of the purchase price of the house. To avoid paying the default insurance (see Conventional vs. High Ratio) you are required to put a 20% down payment. Closing costs include land-transfer taxes, legal fees and adjustments. Typically this is about 1.5-2.0% that the lender verifies. Down Payments and Closing Costs cannot be taken from borrowed funds.

PRIME RATE VS. QUALIFYING RATE

Prime rate is the lending rate issued by the Bank of Canada that is used as a benchmark by lenders. Variable rate mortgages follow the Prime rate. Qualifying rate is the rate used in calculating affordability of a mortgage when a variable rate mortgage, or a 1-4 year fixed term mortgage, is taken.

THREE MONTHS INTEREST VS. IRD

There are 2 ways to calculate mortgage penalties when you break the terms of your mortgage. For variable rate mortgages and fixed rates over five years it is always three months worth of interest. For mortgage terms five years or less, it is the higher of the three months interest or the Interest Rate Differential (IRD). IRD is calculated by comparing the existing mortgage rate vs. the current rate that a lender can charge today to re-lend the same amount of mortgage with the remaining term. We recommend contacting the lender regarding penalty information as calculators can vary and are only approximations.

MORTGAGE FEATURES

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PRE-PAYMENT OPTIONS

Most 'closed' mortgages allow you to 'prepay' by either increasing your regular payments up to 100% and by allowing you to pay a lump sum of up to 25% annually. This means as long that as you prepay within the prepayment guidelines, there are no penalties and you directly pay down your principal. Most mortgages allow you to prepay 15/15, meaning 15% payment increase and 15% lump sum annually.

ASSUMABLE MORTGAGE

This is a mortgage feature where a buyer is able to take over a seller's existing mortgage terms as the lender approves them. This provides the buyer with the opportunity to take advantage of any lower interest rates that the seller was locked in to.

PORTABLE MORTGAGE

This is a mortgage feature that allows the current homeowner to transfer their existing mortgage contract to another property. This allows a homeowner to buy and sell a home without paying any penalties as long as the mortgage on the new property is at least of the equal amount.

INSURANCE BASICS

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The word 'insurance' is tossed around a lot when you are purchasing a new home. Here are four types of insurances and a basic explanation of each to help you understand them when you are in the process of purchasing a home.

DEFAULT INSURANCE

Default Insurance is a mandatory insurance that protects lenders in the case that a homeowner defaults on their mortgage payments. Default insurance is required if less than 20% down payment was used in the home purchase. The most commonly used default insurer in Canada is Canada Mortgage Housing Corporation (CMHC)

HOME INSURANCE

Home Insurance protects both homeowner and the lender. Home owners are protected by way of their home being restored in case of fire or any natural disasters that can destroy the house. Lenders make this insurance a requirement to protect their interest in the value of that home.

TITLE INSURANCE

Ttitle Insurance is an optional insurance that protects home owners against losses related to title and ownership due to any defects or fraud.

MORTGAGE INSURANCE

Mortgage Insurance is optional insurance usually offered by lenders or a third party insurer that pays off the balance of a mortgage in the event of a homeowner's death.

TAX BASICS

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As Ben Franklin once said "the only certain thing in life is death and taxes". Here is some tax information related to home ownership:

LAND TRANSFER TAXES (LTT)

Land Transfer Taxes are taxes levied by the provincial government to a transfer of ownership of real estate. Taxes can range from 0.5 to 2.0 % depending on the province and city. Many provinces have multi-tiered taxation systems. For example, in Ontario, 0.5% is charged on the first $55,000; 1% is charged on $55,000 to $250,000, and 1.5% is charged on $250,000 to $400,000. The City of Toronto levies an additional LTT on Toronto real estate in addition to the provincial rate.

PROPERTY TAXES

Property Taxes are taxes paid by homeowners to the municipality on an annual basis. They can be paid in installments and each municipality has their own payment schedule. Most lenders collect property tax payments along with the homeowners mortgage payments to make sure the property taxes are paid on time. For people that hold a conventional mortgage, they are entitled to make this payment on their own straight to the municipality.

FIRST - TIME HOME BUYERS

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There are some government incentives that help encourage people to become first time home-owners and assist in alleviating some of the financial burden of home ownership. To qualify as a first time home buyer, neither you nor your spouse / common-law partner could have owned a home in the year of purchase or any of the four preceding years.

TAX CREDIT

The First time home buyers tax credit is available to buyers that purchased a home after January 27, 2009. Based on 2011's lowest tax bracket, this tax credit it $750. You can claim this tax credit when you file your taxes.

HOME BUYER'S PLAN (HBP)

HBP is a government program that allows each individual to withdraw up to $25,000 of their RRSP towards the purchase of a first-time home without any tax implications. The RRSPs have to be in the RRSP plan for over 90 days to be eligible for this withdrawal. The home buyer then needs to repay the amount within 15 years. An annual minimum payment is required until the whole RRSP amount is repaid.

OTHER COST TO CONSIDER

When purchasing a new home make sure you consider other costs aside from your mortgage payment. Reoccurring costs such as property taxes and utilities (hydro, gas, phone, cable, internet etc.) should be accounted for in your budgeting. One-time expenses can definitely add up as well such as appliances (if not included in home purchase) and furnishings.

OUTSIDE THE GUIDELINES

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Broker's have access to several lenders from banks and credit unions, to finance companies and private lenders. If your situation doesn't fit the traditional lending guidelines, let the professionals seek possible alternatives.

BUSINESS FOR SELF

Broker's have access to lenders that understand the nature of being self-employed. If your business is in operation for at least 2 years and you have 2 years worth of Notice of Assessments as well as a healthy financial situation, let our mortgage professionals help you. They will educate you as to what various lenders look for, guide you in demonstrating the profitability of your business, and help you get that mortgage.

RENTAL PROPERTY

Most major institutions require a sizable down payment (usually 35%) for properties that are going to be used for rental/investment purposes. For most people that is not an option so let our mortgage professionals explore other avenues for you.

New to Canada/ No Credit Score

If you are new to the country or do not have any credit history, our mortgage professionals can discuss obtaining a mortgage for you with a down payment as low as 15%.

CREDIT ISSUES

Broker's have access to alternate lenders. Whether you have had late repayments or have filed a bankruptcy in the past, we may have a lender for you. Most major financial institutions don't entertain any bankruptcies that haven't been discharged for over 7 years. If you have been discharged less than 7 years, have re-established some credit, and have saved at least 15% of a down-payment, our mortgage professional would be happy to discuss alternate mortgage solutions for you.

NO DOWN-PAYMENT

Some lenders still offer programs where they give a 'cashback' mortgage for a reasonable rate where you can use the money towards the minimum 5% down payment required to purchase your home. This option is ideal for first-time homebuyer's or young professionals with great credit, but have not had a chance to save the required down payment.

COMMERCIAL MORTGAGE

Each commercial mortgage application is considered individually based on such criteria as the property, the borrower's (individual or corporation) income and credit history, and the down payment. Let our mortgage professionals discuss this with you personally.

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