Where Do You Get the Money?
It is important, before beginning shopping for a new home, to determine how much home you can buy. This is where you go to your bank, or a mortgage broker, and have them pre-qualify you. They will look at what you have for a down payment and determine, based on your income, how much mortgage you can have. You should also look at what kind of mortgage payment you are comfortable with. You may find, based on your lifestyle, that you aren’t comfortable borrowing as much as your bank will let you borrow – only you can determine this. See Appendix "A" at the end of this chapter "Mortgage Brokers Demystified" for an explanation of how a mortgage broker can help with this step.
Although you can borrow up to 95% of the purchase price, keep in mind that, as discussed earlier, you will require approximately 4% on top of your 5% down payment to cover the costs of purchasing your home.
As well as your savings, under the Home Buyers Plan, each spouse can borrow up to $20,000 from their RRSPs (for a total of $40,000) in order to get a larger down payment. This could reduce the amount of mortgage you require and even save you the costs of mortgage default insurance if you can come up with at least a 25% down payment. The money you borrow from your RRSPs must be repaid over a period of years at a particular rate in order to avoid paying income tax. Details of this program can be obtained from your bank, Canada Customs and Revenue Agency and CMHC. Appendix “B” : "Should You Use Your RRSPs To Purchase a New Home?" explains briefly how this works and gives one opinion on whether you should consider it.
All or part of the minimum down payment may be provided by way of a financial gift, as long as all of the following conditions are met:
· The donor is an immediate relative of the borrower
· The approved lender has verified that the money is a genuine gift
· The approved lender has verified that the funds are in the borrower’s possession 15 days prior to the closing date.
· High ratio (CMHC insured) mortgages will require the above including default insurance.
The lender will verify the authenticity of the gift by obtaining a written confirmation signed by the borrower and donor stating that the gift does not have to be repaid, and that the gift is not being provided by any party with an interest in the sale of the property.
Questions to Ask your Lender
The following is a list of questions you should ask your mortgage lender to be sure you get terms suitable to your particular situation. Appendix “G” contains a glossary of mortgage terms. You should familiarize yourself with these terms so that you will be better able to understand what your lender is telling you. Don’t be afraid to ask for clarification of anything you hear. Its important!
· What is the current interest rate?
· Will the lender negotiate the interest rate and other terms? (Sometimes, lenders may be more flexible if you have other business with them such as bank accounts, RRSPs or other loans).
· What terms does the lender offer?
· Does the lender offer accelerated payments? What are the advantages?
· Is your mortgage portable? If so, does the lender provide service in your new location?
· Is the mortgage assumable? If so, under what conditions?
· Will the financial institution remove you from the covenant of the mortgage if you allow a future buyer to assume that mortgage?
· Is your pre-approval honoured by all of the lender’s branch offices across Canada?
· What is the length of time the rate is guaranteed? (It must cover up to the closing date). What are the prepayment penalties or any other penalties incurred if you discharge the mortgage?
· What are the prepayment privileges?
· What are the total costs to obtain a mortgage? Application fee? Appraisal? Legal? Financial institutions may waive, reimburse you for or reduce these fees if you have other business with them.
Documents you will require to negotiate a mortgage:
· A confirmation of employment, including salary, position and length of service
· A complete list of all assets and liabilities including all debts
· Photocopies of the assets you intend to use as down payment. If part of your down payment is a gift, you will need a letter indicating its origin.
See Appendix “C” : "How a Loan Pre-Approval Letter Can Help with Your Home Search" for an explanation of how important it is to have a mortgage pre-qualification in hand before you begin shopping for a home.
Appendix “A”
Mortgage Brokers Demystified |
Unclear as to what a mortgage broker can do for you? This article discusses some of the many benefits and services provided by mortgage brokers in Canada. After reading this article, we hope you will understand why you will benefit by using a mortgage broker for mortgage financing.
What is a mortgage broker?
Simply stated, a mortgage broker is an agent for lenders in much the same way an insurance broker is an agent for insurance companies. Mortgage brokers act as agents for banks, trust companies, credit unions, mortgage corporations, mortgage investment corporations, finance companies and individual private investors. Some mortgage brokers are exclusively lenders of their own money and provide a direct source of mortgage funds (a topic to be discussed in a later issue). Mortgage brokers are trained professionals that have to meet a satisfactory educational requirement before they may become registered. As such, this requirement ensures you are being provided with a duty of care, a working knowledge of mortgage products and a standard of service to meet individual needs.
So, how would I benefit by using a mortgage broker?
Using the services of a mortgage broker for the first time usually results in the following testimonials: - I originally thought you only used mortgage brokers if you couldn’t qualify at the bank….I was wrong.
- I didn’t feel intimidated or left in the dark for days on end wondering if I would qualify;
- My mortgage was approved the very same day I applied;
- I didn’t realize there were so many terms and conditions that vary among the different institutions. My mortgage broker took the time to explain them to me;
- I didn’t realize many mortgage products and discounts were available exclusively through mortgage brokers;
- I always thought you had to pay fees but because my mortgage was approved based on my credit history and income, there were no lender or brokerage fees charged;
- I didn’t have to leave my home or take time off work to apply;
- The broker clearly explained the interest rates, prepayment privileges and other important terms and conditions which helped clarify some of my many questions and helped save me a great deal of money as a result;
- Within five minutes, the broker explained how much of a mortgage I qualified for;
- Within five minutes the broker told me that I had enough income to qualify for my $160,000 condominium purchase;
- The application process was pleasant and over the telephone;
- I didn’t have to take the time to shop financial institutions for the best mortgage myself, the broker did everything and got me what I wanted;
- The broker was always accessible on evenings or weekends when I needed an important question answered before making an offer on a property;
What will the mortgage broker need to know?
As you probably already know, lender terms and conditions are not created equal. So, whether you are purchasing a property or refinancing an existing mortgage, there are many factors to take into consideration. A quick analysis of your personal situation by a qualified mortgage broker, lets him/her know where to shop the market. Some things he/she will need to know are: - Net worth (i.e. your assets less your liabilities);
- Income (i.e. income from employment or self-employment);
- Credit history (i.e. your payment history with your other creditors, loans credit cards etc.);
- Property type (i.e. Residential, Land only, recreational, remote location etc.);
- Down payment amount;
Once your application is complete, the mortgage broker knows where you will qualify. With the click of a few buttons, he/she can tap into the vast network of computers which connect lenders and brokers electronically. As mentioned above, the broker can obtain rate discounts for you that you cannot obtain yourself.
Where will your next mortgage financing experience be?
Volumes of detailed important information are available to consumers right now but do you have the desire, time or where-with-all to effectively examine what’s out there? It can be a daunting, frustrating task. To limit your frustration, consider using the expertise of a qualified and knowledgeable mortgage broker to help you understand the mortgage process and meet your financial needs. |
Appendix “C”
Glossary Of Mortgage TermsA mortgage is generally a long-term loan primarily for the purpose of buying a home. A mortgage is a legal agreement in which the borrower pledges the property being purchased as security for the loan.
The amount of the loan – the cash you actually borrow – is called the principal. You are expected to repay the principal with interest, which is the amount the lender charges for the use of the money. Your regular mortgage payments will be applied toward the principal and interest.
Term refers to the number of months or years the mortgage covers. Normally, it will be anywhere from six months to five years.
Amortization refers to the actual number of years it will take to repay the mortgage in full. This is usually much longer than the term of the mortgage. For example, many mortgages have five-year terms but 25-year amortization periods.
Equity is the difference between the amount for which the property could be sold and the amount you still owe on the loan.
A pre-approved mortgage is preliminary approval by the lender of the borrower’s application for a mortgage to a certain maximum amount and usually with a guaranteed rate for a set period of time. It is subject to a satisfactory appraisal and credit review. So final approval and the actual mortgage agreement are not completed until after the offer to purchase is accepted. If the property appraisal is unsatisfactory or if the lender has doubts about the purchase, final approval may not be given.
The conventional mortgage is a loan for no more than 75 per cent of the appraised value or purchase price of the property, whichever is less.
The high ratio mortgage is a mortgage usually for more than 75 per cent of the appraised value or purchase price of the property. Such a mortgage is often referred to as an NHA mortgage because it is granted under the provisions of the National Housing Act. These mortgages must, by law, be insured through the
Canada Mortgage and Housing Corporation (CMHC) or an approved private insurer. The borrower must pay an insurance fee to the insurer. This fee is usually added to the principal amount of the mortgage.
The first mortgage is the debt registered against your property that has to be paid first in the event of sale or default.
The second mortgage is a mortgage granted when there is already one other mortgage registered against the property. If the borrower defaults and the property is sold, the second mortgage is paid after the first mortgage. The interest rate is usually higher to reflect this increased risk to the lender.
The leasehold mortgage is a mortgage on a home and/or improvements where the land is rented rather than owned. These mortgages must be amortized over a period that is shorter than the length of the land lease.
The collateral mortgage is a mortgage backed by a promissory note and the security of a mortgage on real property. The money borrowed is usually used for other purposes, such as home improvements, a vacation or a business investment.
Bridge financing refers to a special, short-term loan needed to cover the time gap between completing the purchase of a property as agreed and finalizing arrangements to pay. This usually occurs when two properties are involved and the closing dates do not match. You may find yourself the temporary owner of both properties.
A fixed rate mortgage is one for which the rate of interest is set for a specific period of time (the term of the mortgage). The regular payment of the principal and interest remains the same throughout the term.
A variable rate mortgage is one for which the rate of interest changes from time to time as money market conditions change. In some cases, the agreement contains a conversion clause. This permits the borrower to lock in the interest rate by converting the mortgage to a fixed rate mortgage. The amount of the regular payment of a variable rate mortgage does not change. The difference lies
in the way the payment is applied. If interest rates go up, more of the regular payment will be applied toward interest. If interest rates go down, more of the regular payment will be applied toward the principal.
An open mortgage allows the borrower to repay the loan more quickly than agreed, usually with prepayment charges.
A closed mortgage generally does not allow the borrower to repay the loan more quickly than agreed. Payments must be made regularly, as specified in the agreement. If extra payments are allowed, the lender has the right to levy a prepayment charge, which may be specified in the mortgage agreement. In some cases, the agreement permits extra payments without charge.
Some lenders offer portable mortgages. The principal balance, the term remaining and the interest rate are transferred to a mortgage on your new property.
Blended means combining the mortgage balance outstanding on the home you are leaving and adding additional financing to purchase your new home. The interest rate will change to one that combines the rate on your old mortgage with the rate in effect at the time you add additional financing.
Compound interest means interest charged on interest owing. The more frequent the compounding, the more interest will be paid.
Buying down is a term used when quoting interest rates. It means that someone, usually the vendor or seller, has arranged with the mortgage lender to prepay a portion of the interest owing on the mortgage. This allows you, the new borrower, to assume a mortgage debt at an interest rate lower than the current or stated rate.
