Mortgage Basics

UNDERSTANDING MORTGAGES

One of the first steps in buying a new home is to take a realistic look at what you can afford and how you are going to pay for it. If you are like most people, you will probably have to finance your home purchase with a mortgage loan.

What is a mortgage?
A mortgage is a loan that uses the home you buy as security. This loan is registered as a legal document against the title of your property. Here’s a quick overview of some of the most common aspects of a mortgage that you need to understand.

• The principal is the amount of the loan, or the cash actually borrowed.
• The interest is the amount the lender charges for the use of funds, or principal. Interest rates vary according to many factors, including terms and conditions of the mortgage. Mortgage payments are applied toward both principal and interest.
• The amortization period is the actual number of years that it will take to repay the entire mortgage loan in full. This normally ranges from 15 to 25 years.
• The term is the length of time for which a mortgage agreement exists between you and your lender. Typically, terms range between six months and seven years.
• The maturity date marks the end of the term, when you can either repay the balance of the principal or renegotiate the mortgage at then current interest rates.
• Options let you tailor the mortgage to fit your personal needs and circumstances. Open or closed mortgages, pre-payment options, fixed or variable rates or portable mortgages are just a few of the available options.

Types of Mortgages
There are two basic types of mortgages:

• Conventional Mortgage: The loan amount does not exceed 75% of the property value, defined as the lesser of the purchase price or the appraised value.
• High-ratio Mortgage, or National Housing Act mortgage: The amount is more than 75% of the property value (up to 95%). By law, a high-ratio mortgage must be insured against borrower default. The borrower pays a mortgage insurance premium (a percentage of the total loan amount) which can be added to the mortgage loan or paid in a lump sum in advance. The borrower must also pay an insurance application fee.

TYPES OF HOUSING

There are various types of properties you can buy in Canada. In each case, you are responsible for making the mortgage payments as well as paying the bills for your specific unit. Below is a list of several housing types.

Condominiums

Condominiums are a form of ownership that can apply to almost all types of housing. While condominiums are generally found in apartment buildings, other types of properties may also have a condo ownership model. You own the unit, or “condo”, but you do not own the land it is built on or any common space outside your unit. You are charged monthly “condo fees” to maintain indoor and outdoor common areas shared by condo owners, including parking areas, elevators, carpets, front entrances, and any recreation facilities. These monthly fees can vary widely and are in addition to your mortgage payments.

Detached House

This is a house that stands on its own. It is often referred to as a ‘detached’ home and tends to be the most expensive type of home to purchase due to the land costs. You own both the house and the land it is on. When your house needs repair or maintenance, you must pay for it yourself. House owners must also pay the monthly bills for water and heat, as well as their other bills. Owners are free to make changes to their house, inside and out, but they must obey local bylaws and apply for renovation and building permits when necessary.

Townhouse

A townhouse is a unit in a row of other units that look like houses, attached to each other. In each unit, you share a wall on either side with the people who live beside you. Often, especially in cities, there may also be a smaller unit above each townhouse, so there could also be someone living above you or below you. Townhouses (sometimes called row houses) are usually 2 or 3 levels tall (each level is called a ‘storey’).

Semi-detached House

This is a home joined to another on one side. Owners are only responsible for the care and maintenance of their own side, just like a detached house. Owners of semi-detached homes own their side of the property, including the land it is on, and are responsible for its care and maintenance, according to local bylaws. Semi-detached houses are usually less expensive than fully detached houses, although, like all real estate, this depends on the area.

Duplex/Triplex

A duplex/triplex is a building that is divided into multiple units. Like semi-detached houses, each household has its separate entrance and is responsible for the care of its own unit. Typically, you would buy the entire property and rent a unit to help offset your mortgage payments. Types of homes that are ‘duplexed’ or divided into two or more separate living units may be detached homes, semi-detached or even row houses.

(Source: Genworth Financial)(Source: Canadian Home Builder’s Association)

HOME BUYERS’ PLAN

Qualifying home buyers can withdraw up to $25,000 (couples can withdraw up to $50,000) from their RRSPs for a down payment. Home buyers who have repaid their RRSP may be eligible to use the program a second time. For more information: http://www.cra.gc.ca. Enter ‘Home Buyers’ Plan’ in the search box.

GST REBATE ON NEW HOMES

New home buyers can apply for a rebate of the federal portion of the HST (the 5% GST) if the purchase price is less than $350,000. The rebate is up to 36% of the GST to a maximum rebate of $6,300. There is a proportional GST rebate for new homes costing between $350,000 and $450,000. For more information: Canada Revenue Agency http://www.cra-arc. gc.ca. Enter ‘RC4028′ in the search box

FIRST-TIME HOME BUYERS’ TAX CREDIT (HBTC)

This federal non-refundable income tax credit is for qualifying buyers of detached, attached, apartment condominiums, mobile homes or shares in a cooperative housing corporation. The calculation: multiply the lowest personal income tax rate for the year (15% in 2010) x $5,000. For the 2010 tax year, the maximum credit is $750. For more information: www.cra.gc.ca/hbtc

CANADA MORTGAGE AND HOUSING (CMHC) RESIDENTIAL REHABILITATION ASSISTANCE PROGRAM (RRAP) GRANTS.

This federal program provides financial aid to qualifying low-income home-owners to repair substandard housing. Eligible repairs include heating, structural, electrical, plumbing and fire safety. Grants are available for seniors, persons with disabilities, owners of rental properties and owners creating secondary and garden suites. For more information: http://www.cmhc-schl.gc.ca/en/co/prfinas/prfinas_001.cfm

CMHC MORTGAGE LOAN INSURANCE PREMIUM REFUND

Provides home buyers with CMHC mortgage insurance, a 10% premium refund and possible extended amortization without surcharge when buyers purchase an energy efficient mortgage or make energy saving renovations. For more information: https://www.cmhc-schl.gc.ca/en/co/moloin/moloin_021.cfm

TAX TIPS FOR HOMEOWNERS: Download your copy of this great pdf that gives you some insight and tips to save more money.

Jamie Golombeck Tax tips for Homeowners

LEARN BEFORE YOU LEAP – What is it going to cost?

For First Time Home Buyers, the mortgage process can be daunting. Download your copy of the this handy 2-page pdf that gives you an overview, as well as a checklist of the upfront costs to be aware of, additional items often overlooked, and the extra fees involved in condo purchases.

What is it going to cost?

Generally, you will need a minimum of 5% of the purchase price for your down payment plus another 1.5% to cover closing costs. As itemized in the pdf, the closing costs can include items such as legal, survey, condo, and/or appraisal fees [see the checklists for the complete list]. As an example, if you were purchasing a home for $250,000.00 you would need $12,500.00 for the down payment plus another $3,750.00 to cover your costs.

There are situations where you may have access to specialty product that wouldn’t require as much cash savings. These are products like zero down or cash back mortgage packages. These products change with the market and are not always available. Your best option is to apply with a Mortgage Professional, who will access your situation and review all your options, including special promotions or products that may be the right fit for you.

TEN STEPS OF THE HOME BUYING PROCESS

How do I get there? Is there a road map?

Starting the journey to homeownership can be overwhelming and stressful. But with a little planning, you’ll get the home that’s right for you. A home that strikes a balance between your “wish list” items and the practical realities of the property, location and the housing market. Before you know it, you’ll have a place to call your very own. A place to entertain. A place to decorate. A place to raise a family. It really is an exciting time!

To help keep you on track, below is a step-by-step guide to buying your first home.

STEP 1 – Build a Budget
An effective budget will map out your plan to set aside money for your down payment and additional costs. It will also help determine the price of home you can afford.
STEP 2 – Investigate Mortgage Options
There are many different types of mortgages. If you don’t have the 20% down payment for a conventional mortgage, you can get a high ratio mortgage, combined with mortgage default insurance, that allows for a smaller down payment. You should be pre-approved for a mortgage before you start house hunting
STEP 3 – Choose a Realtor
Your realtor will play a vital role in your homebuying experience. The best realtor will be a combination of a personal advisor, consultant and negotiator. He/she will show you homes that match your criteria, guide you through the homebuying process, negotiate the best possible price for your home and deliver your closing documentation.

STEP 4 – Get a Lawyer
It’s important to hire a lawyer who specializes in real estate. You could find yourself in a bidding war for the home you want, and it doesn’t hurt to have a lawyer look over any offer to purchase before you submit it. A real estate lawyer will also conduct a title search and check for outstanding taxes and liens on the property.

STEP 5 – House Hunting

• Create a wish list
  House hunting can be a lengthy process. To save yourself time, know exactly what you want in a home beforehand. Think about your immediate needs, future plans and lifestyle. When you look at homes, you may be tempted to concentrate on the home, but don’t forget to look at the whole property: the lot, the neighbourhood, the surroundings. How close is the home to facilities and services important to you?
• Bring your checksheet
  When you’re ready to begin shopping for a home – often called “house hunting” – bring along this House Hunting Checksheet. You may end up seeing multiple homes in one day. This checksheet will help you compare and keep track of the homes you visit. And help you remember the features you did or didn’t like.

STEP 6 – Make the Offer
Your agent presents the offer to the seller. This document includes the price, conditions, deposit and closing date. The seller either accepts, rejects or counters the offer (also called “signing back” the offer).

STEP 7 – Home Inspection or New Home Warranty
Hiring an inspector is voluntary, but it’s a smart idea for resale homes. You can choose to make your offer to purchase the home conditional on the outcome of your inspection. If your inspection reveals major problems, you can negotiate those repairs with the seller before your deal closes, or legally withdraw your offer.

What is a New Home Warranty?
New Home Warranties are typically used when you buy a brand new home. The builder provides a New Home Warranty to cover things like deposits and completion dates, along with labour and materials for at least one year after the home was built. It also protects you against structural problems for a minimum of five years.

STEP 8 – Finalizing The Deal
Finalizing the deal will include the final approval of your mortgage, a meeting with your lawyer to finalize details like insurance and conditions, and the results of a title search.

STEP 9 – Moving Preparations
There’s a lot to do before you move. Line up utilities and other services like phone, cable and internet. If you rent, you must give your landlord notice. Also, forward your mail to your new address and hire a moving company. Preparing these things well in advance will help you make a smooth transition to your new home.

STEP 10 – Closing Day
This is the day you legally get possession of the house. Your lawyer completes the paperwork (so the home is in your name), payments are finalized and you receive the deed and the keys. Congratulations on your new home!

BUDGET: SHOPPING FOR A HOME

One of the most frustrating things for first time homebuyers is the unexpected costs, especially if you are not aware of them and you do not budget for them. Many fees and costs are associated with a purchase of a home, some are unavoidable and others are optional. Also some only apply in certain provinces. Check with your real estate agent as to what “hidden costs” are going to come up.

Here is a list of the most common costs, with an estimated price, not all will apply to every situation or province, check with your real estate agent as to which costs will affect you.

Appraisal $150-$330

These are fast becoming extinct, especially if you are purchasing a home and using CMHC, or GE Capital. They no longer require an appraisal in most cases. If you are buying a “for sale by owner” home or if you are putting more than 25% down you may still want an appraisal done so that you can be sure that the home is being sold at a fair market price. Sometimes lenders will pay for an appraisal; speak to me to see if there are any special offers.

Home Inspection $250-$300

It is a very good idea to make any offer subject to a home inspection, especially if you are buying a “for sale by owner” home. Like buying a used car you want to ensure that all major components of the home are in good working order, and that the structure is sound. If there are problem areas found then you have good standing to renegotiate the purchase price or walk away from the deal.

GST/HST for New Homes Only
The tax is often paid by the builder, but it’s a good idea to ask before you buy.

Default Insurance: fees up to 3.75% of the mortgage

If you are taking out a high ratio mortgage (less than 25% down payment) then you will need to pay the default insurance premium. This is levied on a sliding scale from a low of .5% of the loan amount to 3.75%. It is important to know that this does not have to an out of pocket expense, you are permitted to add this to your mortgage, and in fact most people do.

Surveyors Certificate $450

All lenders require at least a copy of the most recent property survey completed on your new home. Most often these surveys are handed down from owner to owner. A potential snag can come up if a copy is lost or if there are improvements to the lot (example a garage) and no new survey is completed. As a home owner you also want the satisfaction of knowing that everything on your lot is actually located within your lot, if not you may have some potential liability down the road.

Legal Fees $500 plus

There are many components of the all encompassing term legal fees”. There is the actual fee the lawyer is charging, government land titles fees, and misc. incidentals such as courier charges, photocopying, or file administration fee. The best advice here is to shop lawyers much the same as you shopped mortgage companies, real estate agents, and insurance agents. Quite often people just go to whomever their realtor recommends without shopping around. It’s worth your time to get at least 3 quotes and don’t assume a lawyer is more expensive than a notary. Find out the differences of their responsibility and service to you.

Home Insurance $450

Admittedly most people have tenant insurance and simply need to convert to a homeowner’s policy when they buy a home, which may reduce this cost. However there will be some form of increased insurance cost because fire insurance is absolutely mandatory and your lawyer will not be permitted to give you possession of your home until you have it.

Title Insurance $250

In lieu of a new property survey most lenders will accept title insurance. Essentially the insurer guarantees that if any encroachments become a problem in the future that they will pay the associated costs, this protects you and your lender. Title insurance is also available to protect you, discuss this with your solicitor so you understand how this one time fee can protect your interests, not just the lenders.

Prepaid Property Tax and Utility Adjustments

If the previous owners have prepaid there property taxes or utilities you will need to reimburse them for the months of the current year that you will be occupying the home. Also if your city does not have a tax payment installment plan where you can pay monthly property taxes to the city, then you will need to give up to 6 months of the taxes in total to your lender to hold in escrow until you taxes are due. It is usually best to always use a city installment plan whenever possible.

Land Transfer Tax

Land Transfer Tax is a tax that is levied by some provinces whenever property changes hands. Check with your Real Estate agent or Lawyer if this applies to you.

Property Transfer Tax and The First Time Home Buyer’s Program

Land Title Registration Fees

These are percentage of the purchase price to register your ownership interest and a percentage of the mortgage amount to register your mortgage. A rule of thumb is $20 for the first thousand and $2 for every thousand after that for both the purchase price and the mortgage amount.

Interest Adjustment (varies but can be as high as one monthly payment)

This is a common up front expense. If your possession date does not match up with the date your payments were to start you will pay interest from the time the money is advanced until your payments start. For example if your monthly payments are on the first of every month, but your possession date is on the 15th. You will pay approx. 15 days interest.

Moving Expenses

These costs obviously depend on whether you get you hockey team with a few pickups, rent your own truck, or hire professional movers. Just keep in mind all avenues have a cost and you should budget accordingly.

Utility Hook-Ups

Most, if not all, utility companies charge a hook-up fee or administration charge to hook up their service, these fees range so you should call ahead to each company and ask them so that you can include them in your budget.

This list pretty much covers all of the “hidden costs” in purchasing a home. I recommend making a budget of all of these items prior to making a purchase so that you are prepared for them and that you hold back some money to cover them all.

click on this link for a Shopping for a Home Checklist of this checklist to download.