Enter Postal Code
Mortgage 101 and HST
When looking to buy your first home, the size of your down payment will help determine which mortgage option is best suited for you. For most people, especially first time home buyers, saving the required down payment may be challenging. (See Downpayment Options on All About Financing)
There are two basic options for mortgages – Conventional or High Ratio:
A mortgage that does not exceed 80% of the purchase price is known as a conventional mortgage. The amortization (the length of time it would take to repay a loan in full based on the payment amount at the selected payment frequency and current interest rate) is usually 25 years. The term of the mortgage is the number of months or years (6 months to 5 years), for which the rate of interest is set. A conventional mortgage generally does not need mortgage loan insurance. Other circumstances may however also require mortgage loan insurance.
A high ratio mortgage exceeds 80% of the value of the property. Lenders can still offer competitive interest rates with a high ratio mortgage by means of mortgage loan insurance, a legal requirement for high ratio mortgages. You can put as little as 5% down on a home with mortgage loan insurance in place. Other circumstances may also require mortgage default insurance. The maximum amortization on mortgages with less than a 20% down payment is 25 years.
Understanding Mortgage Insurance
Mortgage Loan Insurance (or Mortgage Default Insurance) was developed to meet the needs of both home buyers and mortgage lenders. Mortgage Loan Insurance makes it possible for a home buyer to make a smaller down payment on their home while protecting the lender against loss in the event that the homeowner defaults on their mortgage.
Mortgage Loan Insurance is not to be confused with Mortgage Life Insurance which guarantees that your remaining mortgage at the time of your death will not be a burden to your estate. Mortgage Loan Insurance guarantees the mortgage loan by protecting the lender should the homeowner be unable to continue their payments for some unforeseen reason.
There are currently two main mortgage loan insurance providers in Canada – Genworth Financial Canada, the largest private insurer in Canada, and Canada Mortgage And Housing Corporation, a government agency. It is the lender’s choice as to which mortgage insurance company to use.
Mortgage loan insurance premiums are paid once, but can be added to the principle of the mortgage.
Understanding Mortgage Rates
FIXED RATE MORTGAGE
A Fixed Rate Mortgage has a locked rate for the entire term length, meaning your payments stay equal every month. For example, a 5 year fixed mortgage with 4.85% interest rate is locked in at 4.85% interest for 5 years, without changes.
VARIABLE RATE MORTGAGE
A Variable Rate Mortgage has a variable or floating rate which fluctuates every month. The interest rate may go up or down, affecting monthly mortgage payments. The interest rate is affected by Canadian economy and monetary policies set by the Bank of Canada.
Speak to a mortgage broker for more information on your financing needs. We would be happy to refer you to a mortgage broker who will help you determine which product is best suited for you. We can also recommend mortgage specialists with the major banks in the City.
Your Credit Score Affects How Much House You Will Be Able to Buy
In order to make it easy for mortgage companies to determine the risk of lending to you, they are using a system called credit scoring (also called "FICO" scores). When lenders look at your credit report, they can instantly see how much debt you have, how reliable you are with bill payments, and if you've had any bankruptcies within the last several years. With your credit report, lenders get a "credit score" which takes all of this information and boils it down to a number between 300 and 900. The higher the number, the less of a credit risk you are seen to be, and this is how lenders decide which types of loans you will be eligible for.
To be elligible for some types of loans, you require a minimum credit score without any exceptions. And credit scores fluctuate over time. In fact, the mere act of applying for credit can lower your credit score.
Get The Highest Credit Score PossibleTo maximize your credit score, you should avoid applying for any new credit cards or consumer loans. Don't go to the discount store and take them up on the "No interest, no payments for one year" offer -- and avoid financing a car!
After you buy your home and get your mortgage you can do all of these things, but before then it's a bad idea. Buying things on credit hurts your credit score, and leaves less money for your downpayment. Lenders also look at this figure to decide how much money they will lend you, and how much interest they will charge you on the loan. That's why it's best to wait until after you've bought your home to go shopping for furniture and appliances. There is also another reason to wait. Once you've bought your home, you can get a loan for up to 100% of your home's value to buy anything you want.
If you learn to play by the rules of the lenders' game, you can get the best credit score possible, which improves the odds that you can get the home of your dreams.
What Are The New Mortgage Rules?
On July 9, 2012, the Canadian Federal Government implemented changes to the lending requirements for government-backed insured mortgages - the fourth change in as many years:
- In 2008, the government reduced the maximum amortization period to 35 years from 40, required home buyers to have a minimum down payment of 5% (compared to the previous 0% down), and introduced new loan documentation standards.
- In 2010, the government required all borrowers to meet standards for a five-year fixed-rate mortgage, reduced the maximum amount borrowers could refinance to 90% from 95%, and for non-owner-occupied investment properties, required a minimum 20% down payment.
- In January 2011, the government reduced the maximum amortization period for government-backed insured mortgages to 30 years from 35 years and reduced the amount borrowers could refinance to 85% from 90%.
The new rules, which apply to mortgages on residential property with four units or less, include:
- Reducing the maximum amortization period (time it takes for a homeowner to pay back a mortgage) on a mortgage to 25 years from 30 years;
- Lowering the maximum amount borrowers can refinances to 80% loan-to-value (LTV) from 85%;
- Limiting the Gross Debt Service (GDS) ratio to a maximum of 39% of income. The GDS ratio represents the amount of household income spent on the mortgage, property taxes and heating;
- Limiting the Total Debt Service (TDS) ratio to a maximum of 44% of income. The TDS ratio represents the amount of household income spent on all debts including the mortgage; and
- Limiting government-insured mortgages to homes priced at less than $1 million. Buyers of homes priced at $1 million or more must have a minimum downpayment of 20%.
The new rules DO NOT apply to:
- Mortgages with a 20% downpayment or more which do not require government-backed mortgage insurance;
- Borrowers renewing their existing insured mortgages, where there are no new funds being added to the mortgage; or
- Development or construction of multi-unit buildings of five units or more, owned by a landlord.
The implementation of new mortgae requirements is an effort to make the Canadian lending industry that much more resistant to what happened in the United States in 2008.
Tips to Save Thousands of Dollars on Mortgage Interest
There are a few easy ways to make extra principle payments on your mortgage that can save you thousands of dollars in interest expenses and get you mortgage-free sooner than you thought possible. Here are a few simple strategies you can use:
ROUND UP YOUR MONTHLY PAYMENT
The results of this simple strategy can save you a fortune and drastically reduce the length of your mortgage. As an example, if your monthly mortgage payments were $734 dollars a month, but you rounded it up to $800 per month, you would save more than $48,000 in interest payments, and reduce the length of your mortgage by 7.5 years!
MAKE ONE-TIME PRE-PAYMENTS USING YOUR INCOME TAX REFUND
This is an easy way to save money and shorten your mortgage. For example, if you have a $100,000 mortgage, and you have a $1,000 tax refund this year, you take that refund and apply it to your mortgage. Over time, this will save you more than $8,600 and shave 1 year and 1 month off your mortgage!
CHOOSE A 15-YEAR MORTGAGE
If you can afford it, you are far better off getting a 15-year mortgage instead of 30 years. It won't cost you more more, and the interest savings are truly incredible. If you have a mortgage of $100,000 at 8% interest over 15 years, your monthly payment would be approximately $200 more, but you would end up saving $92,083 in interest over the life of your mortgage!
What's with HST?
The good news for homebuyers….there is no HST tax payable on the purchase of a resale residential home! There are some other exemptions including mortgages, mortgage interest, and condominium maintenance fees. However, many services involved in the real estate purchasing process such as legal costs, home inspections, surveys, appraisal fees, and condo status certificates, will be subject to the HST. Other items may include mover fees, electric bills, gas bills, water bills, insurance premiums, and pretty much every other good and service you purchase.
Home Ownership is Attainable
With careful planning and a balanced approach, investing in real estate remains a viable way of building equity over the long term. Contact us today to see if home ownership is right for you.
**For more information on the HST, please visit: http://www.rev.gov.on.ca/en/taxchange/faq.html#q33