Mortgages

Are you ready to make your move from renting to owing?

PURCHASING YOUR OWN HOME MAY BE THE SINGLE BIGGEST INVESTMENT YOU’LL EVER MAKE, ONE THAT COULD PAY OFF SIGNIFICANTLY IN THE LONG RUN. GIVE AN EXAMPLE OF THIS CONSIDERING THAT THERE HAS BEEN A 65% INCREASE IN THE VALUE OF THE AVERAGE CANADIAN HOME IN THE PAST 10 YEARS.

Over the past 10 years there has been a 65% increase in the value of the average Canadian home. To put that into dollar amounts, the average home in Canada in 1985 cost $150,720.

Today, that same house would be valued at $248,176.

That is a substantial increase over time.

PURCHASING YOUR OWN HOME MAY BE THE SINGLE BIGGEST INVESTMENT YOU’LL EVER MAKE, ONE THAT COULD PAY OF SIGNIFICANTLY IN THE LONG RUN. GIVE AN EXAMPLE OF THIS CONSIDERING THAT THERE HAS BEEN A 65% INCREASE IN THE VALUE OF THE AVERAGE CANADIAN HOME IN THE PAST 10 YEARS. (CONT.)

It is evident by that increase that your house could potentially be one of the most profitable investments you ever make, stressing the importance of buying an adequate home and putting money into it early.

The earlier you invest in your home the longer and faster you will be able to build equity in your home, allowing for a larger margin of profit down the road.

What Does “Building equity in your home” Mean?Equity in your home is the difference between the value of your home and the amount of money you owe on it. The equity you have in your home will go up when you make mortgage payments, and when the value of your home appreciates in general. In general, building equity in your home is purchasing a home and slowly owning more of that home. If my house is worth $300,000 and I owe $100,000 in mortgage payments, I own $200,000 of equity in my home.

Why is purchasing a home, a good investment compared to the stock market?

Housing is typically a stable investment which offers good rates of return

There is less risk involved when you invest in a home In the long run you are most likely going to have a large increase on the

value of your home

Vs. The stock market is unstable and is subject to fluctuations You have no guarantee that in the long run your portfolio will be

successful do to the uncertainty of the market You cannot live in your stock market portfolio

THE ARTICLE TALKS ABOUT THE NO ROLLER COASTER RIDE FOR TODAY’S BUYERS...IS THIS TRUE EVEN TODAY? EXPLAIN.

Unlike the 1980’s panic home buying, and over supply of homes is not evident

>No swings in housing price Now there is low inflation and low interest rates

>These two factors help maintain a strong, steady market The only chance of a roller coaster ride is if the

buyer wants to buy in an area of high demand>Home prices in high demand areas are more likely to

increase in price Demographics, immigration, and a sound

economy are deciding factors to whether a home is a good investment at the moment

What is the tax advantage to purchasing a home?

SCENARIO: you sell your residence for higher than you paid for it.

>The capital gain you earn off of this sale is YOURS and tax free.

The government does not earn money off of your sale

Example: your home sells for 25% more than you paid for it, any profit that you earn goes in your pocket.

What are the four new financial obligations that you should be prepared to assume as a homeowner?

Initial costs: Down payment, closing costs and extras (eg. Moving costs, property insurance)

Monthly costs: Mortgage payments and other monthly obligations. (Eg. Property taxes, utilities)

GENERALLY HOW MUCH OF A DOWN PAYMENT IS NEEDED? ARE THERE EXCEPTIONS TO THIS? EXPLAIN HOW THESE TWO TYPES OF MORTGAGES DIFFER.

To qualify for a conventional mortgage, you generally need a down payment of 20% or more. You can qualify for a low down payment insured mortgage with a down payment as low as 5%. This would be a high-ratio mortgage- and it requires you to purchase default insurance

Generally how much of a down payment is needed? Are there exceptions to this? Explain how these two types of mortgages differ. (Cont.)

Question 3 Why is it beneficial to put a larger down payment

down when purchasing a home?

It is beneficial to put a larger down payment when buying a home because it will the cost of the home in the long run. The interest costs on the house will be lower and it will amount to significant savings over time. An example of the savings made on interest will be shown in question 4.

Question 4

How much would you save in the interest costs on the purchase of a $100,000 home if you put 25% down versus 5%?

Down Payment %

Down Payment Amount

Mortgage Principal

Total Interest Paid

5% $5,000 $95,000 $122,512

25% $25,000 $75,000 $96,717

Interest Saved: $25,795

11 Sales Closing Costs & Extras1. Inspection fee: Fees paid when house is initially

inspected by professional building inspector.

2. Mortgage application fee: A charge you may have for processing your mortgage application. This fee may also be charged for renewing your mortgage. Appraisal fee: Fee paid for hiring an appraiser that will insure that the property you are buying meets its criteria for a mortgage.

3. Legal/Notarial fees: Fees paid when you hire a lawyer or notary to act for you in the purchase and mortgaging of the property. You will be responsible for paying the legal or notarial fees and disbursements. (Fees for these services may vary significantly).

4. Closing or adjustments costs: Fees paid when the sale of a house is closed.

5. Interest adjustment costs: Lenders might charge a pro-rated interest if you close the purchase of a mortgage in the middle of the month. This is only if your mortgage payment is exactly one month after the purchase, which means they have the make up the difference.

6. Land transfer tax: A tax that most provinces levy a one-time tax based on a percentage of the purchase price of the property.

7. Property insurance: Insurance covering the risks of fire, theft, liability, and other risks of loss. Mortgage lender require lawyer or notary with proof that your insurance is in place by the closing date.

8. Moving costs: Costs involved in moving to a new home.

9. Additional costs: There may be additional costs depending upon the type of mortgage you decide and the province in which you buy. An example of this is the cost of a survey of the property or a new home warranty fee.

10. New home costs: Most new homeowners will likely need to buy certain items early on. Examples of items are kitchen appliances, tools, cleaning materials, carpets, and perhaps new furniture.

11. Appraisal fee: Fee paid for hiring an appraiser that will insure that the property you are buying meets its criteria for a mortgage.

Question 6 Aside from the actual mortgage payment, what are other monthly obligations you will

have as a home owner? Briefly describe them.

The monthly obligations, other than your mortgage payment, that you have as a home owner are property taxes, school taxes, utilities, condominium fees, and maintenance and upkeep.

Property taxes are typically billed twice a year at six-month intervals. You can either pay them directly to the municipality or the financial institution may make an agreement for you to pay a portion of the payment of your property taxes in your monthly mortgage payment. The portion paid is calculated at 1/12 of the previous year’s tax bill

Depending on your municipality, school taxes could be integrated into your property taxes or they could be collected separately and are payable in a single lump sum.

As a homeowner, you’ll be responsible for all utility bills.

If you have purchased a condominium or a townhouse, it’s likely that you will be required to contribute to the exterior maintenance and upkeep of the common grounds and public areas on a monthly basis.

You will also have the responsibility of covering the costs of maintenance, lawn care, snow removal, and periodic renovations if you choose to do so.

Question 7 How does a prospective lender determine whether

a borrower has the financial ability to meet a specific mortgage? (explain both guidelines, with examples)

There are two guidelines that a prospective lender uses to determine if you can meet a specific mortgage and they are the Gross Debt Service ratio (GDS) and the Total Debt Service ratio (TDS)

The GDS ratio compares the total cost of your monthly mortgage payment, taxes, and heating with your gross monthly (pre-tax) income from all sources. The general rule is that these monthly payments should not exceed 32% of your gross income

GDS = (Monthly Mortgage Payments + Property Taxes) / Monthly Income * 100%

Monthly Payments Amount

Mortgage $800

Property Taxes $1,000

Heating $200

Total = $2,000

Total Monthly Income = $6,500

GDS = ($2,000 / $6,500) * 100%

GDS = 30.7%

The general rule for GDS is that these monthly payments should not exceed 32% of your gross income. Banks may also not give you the mortgage if your GDS exceeds the 32%

The TDS ratio examines the relationship between all monthly debts (i.e. mortgage payments, car loans, and credit cards) and your gross monthly income. These total monthly payments should not exceed 40% of your income.

TDS = (Monthly Mortgage Payments + Property Taxes + Other Debt Payments) / Monthly Income * 100%

Monthly Payments Amount

Mortgage $800

Credit Card $1,200

Student Loan $300

Car Loan $250

Total = $2,550

Total Monthly Income = $6,500

TDS = ($2,550 / $6,500) * 100%

TDS = 39.2%

Your TDs ratio should not exceed 40%. This is likely the case because exceeding the 40% ratio may not allow you to cover your other expenses comfortably. The TDS ratio allows you to assess your situation and expenses to see if you have too many. Some banks not even lend you any more money if your TDS ratio exceeds 40%

10. What is a pre-approved 10. What is a pre-approved mortgage? Why would you mortgage? Why would you want to have one?want to have one?

This type of mortgage occurs when you go in to This type of mortgage occurs when you go in to the bank and see how much of a mortgage you the bank and see how much of a mortgage you can get; this allows you to know your budget for can get; this allows you to know your budget for your house buying before you even start looking.your house buying before you even start looking.A pre-approved mortgage gives you a gauge on A pre-approved mortgage gives you a gauge on what you can afford. what you can afford. When you do a pre-approved mortgage, you are When you do a pre-approved mortgage, you are usually guaranteed a 60 day zone in which the usually guaranteed a 60 day zone in which the interest rate promised will not go up. This can be interest rate promised will not go up. This can be good since interest rates are always changing.good since interest rates are always changing.With a pre-approved mortgage, it is easier to With a pre-approved mortgage, it is easier to judge what you can and can not afford, since your judge what you can and can not afford, since your budget has already been set. budget has already been set.

11. Why would it be a good 11. Why would it be a good idea to use a realtor?idea to use a realtor?

Through a realtor, you can not only get a good Through a realtor, you can not only get a good idea of what properties are available, but can also idea of what properties are available, but can also compare these various listings.compare these various listings. Realtors can also arrange for visits to any Realtors can also arrange for visits to any property you are interested in, and can also help property you are interested in, and can also help in making an offer once you have decided on the in making an offer once you have decided on the place you wish to buy.place you wish to buy.Realtors may also notice things you might Realtors may also notice things you might normally miss about the house, and could save normally miss about the house, and could save you from falling in love with the wrong place.you from falling in love with the wrong place.Overall, realtors are there simply to help you find Overall, realtors are there simply to help you find a place which you like, and do their best to work a place which you like, and do their best to work with you to meet your needs, since they are the with you to meet your needs, since they are the experts in the area, working with them would experts in the area, working with them would benefit you greatly.benefit you greatly.

12. What should you do before you 12. What should you do before you begin to visit potential homes you begin to visit potential homes you are interested in buying?are interested in buying?

Before you begin to visit potential homes you are Before you begin to visit potential homes you are interested in buying you should prepare a checklist interested in buying you should prepare a checklist of specific details so that you can compare them of specific details so that you can compare them later. Some of these details include the building later. Some of these details include the building itself, location, ongoing costs, additional features, itself, location, ongoing costs, additional features, legal requirements, existing mortgage, and legal requirements, existing mortgage, and structure and facilities. An example of a home-structure and facilities. An example of a home-buying checklist could be seen as next slide. buying checklist could be seen as next slide.

Home-buying Checklist Home-buying Checklist ExampleExample

13. What does a “clean bill of 13. What does a “clean bill of health” mean?  What should you do health” mean?  What should you do while going through this process?while going through this process?

Clean Bill of Health- Clean Bill of Health- Something that is given after a house is Something that is given after a house is examined by you and you state that everything is in good examined by you and you state that everything is in good condition to buy (after inspection).condition to buy (after inspection).

  

What to do:What to do:

Check the roof, foundation, insulation, beams, gutters, Check the roof, foundation, insulation, beams, gutters, bricks, siding and caulking. bricks, siding and caulking.

Plumbing, heating and electrical systems should be tested Plumbing, heating and electrical systems should be tested and fully examined.and fully examined.

Any evidence of leaks, moisture accumulation, rot or faulty Any evidence of leaks, moisture accumulation, rot or faulty workmanship should be cited in the inspection report.workmanship should be cited in the inspection report.

Take notes on estimated costs for specific repairs and Take notes on estimated costs for specific repairs and maintenance.maintenance.

How do you determine your How do you determine your proposed purchase price?proposed purchase price?

The number of homes available (in general and in that The number of homes available (in general and in that neighborhood).neighborhood).

The asking price of other comparable homes in the area.The asking price of other comparable homes in the area.

The recent history of sales of comparable properties in The recent history of sales of comparable properties in the area.the area.

Unique selling features (eg. pool, fireplace, etc.).Unique selling features (eg. pool, fireplace, etc.).

The general condition of the property and the area.The general condition of the property and the area.

The immediacy of your need to purchase and the The immediacy of your need to purchase and the vendor’s need to sell.vendor’s need to sell.

  

*asking price is usually higher than they’re actually willing *asking price is usually higher than they’re actually willing to sell for.to sell for.

16. What is a counter offer?16. What is a counter offer?

A counter offer is a response to your preliminary A counter offer is a response to your preliminary offer (original offer), detailing specific changes offer (original offer), detailing specific changes before the agreement can be accepted. After a before the agreement can be accepted. After a counter offer is made by the seller, you in turn are counter offer is made by the seller, you in turn are able to either present your own counter offer, or to able to either present your own counter offer, or to withdraw your original offer entirely. withdraw your original offer entirely.

Buying a Home

17. What is an advantage to purchasing a new home from a builder?

the homeowner can get everything they want from the start. There is no dreading of previous homeowners furniture etc. due to the house being “used”.

You know the house is built with superior engineering because the builder lays everything out for you at your request. With a second generation house, you do not know what kind of extensive renovations had to be done or what problems still need to be fixed. And even if you did, you still have to usually pay a hefty amount of money to fix them.

Depending on your builder and contractors, a new homeowner can enjoy very beneficial warranty policies that cover their property or key components of the property for as long as 10 years.

Buying a Home

18. What questions should you as before choosing a builder?

Are they a professional home builder by trade? What is their track record and how long have they been in

business? What is the reputation of the trades people who work for the

builder? Are they members of the Canadian Home Builders’ Association? What do they offer in terms of after-sales service? What kind of warranty do they offer? Do they have solid references? Will they allow you to visit their work site?

Buying a Home

19. What is the agreement of purchase and sale?

a document that details every aspect of one’s purchase including appliances

the closing date (when the house is taken possession) is fixed

able to make a firm offer where one is bound once the seller accepts or a conditional offer where certain conditions must be met

a counter offer or acceptance of the offer must be made within a specified amount of time

a 5-15% deposit is usually required with the offer as an advance on down payment

should be reviewed by a lawyer and statements are legitimate only if acknowledged in this agreement

22. What is a pre-delivery inspection? Why is it important?

3-5 days before moving in, you should have an inspection of the house Any not to your satisfaction – be noted in the pre-delivery inspection

report Scratches and incomplete paintwork should be fixed by the day you

move in/other items should be completed after you’re settled in Inspections should address the following areas:

Exterior: sod is rolled and watered, clean shingles with no lifting corners, etc.Interior: clean basement with no cracks, correct paint colour and even paint coverage, etc.

Buying a Home

23. What is the certificate of completion and possession? Contains information regarding the enrolment number of

the home, the address of the home, the homeowners name, the date of possession/occupancy and the final sale price of the home.

 It also records any outstanding items or deficiencies. There’s a sticker on this certificate that your builder

should remove and place on the electrical panel of your home. At the end of your inspection, you will be asked to sign the certificate, which does not in any way limit your warranty rights.

Buying a Home

24. List and define fundamental components of a mortgage

 The fundamental components of a mortgage include the principal, interest, mortgage payment and amortization period.  The principal is the amount of money needed to be borrowed. This is usually calculated as the difference between the selling price of a property and the down payment made on the home.  The interest is the amount being paid for borrowing the money. It is usually calculated as a percentage of the payment. The mortgage payment is made up of the principal amount and the interest amount and is divided by the chosen payment plan. These payments can be made monthly, accelerated bi-weekly, bi-weekly, semi-monthly, weekly, etc. This is how the mortgage is repaid over its term to maturity.  The amortization period is the total amount of years that it would take to repay the mortgage (principal + interest). These periods can range anywhere from 15 to 40 years.

25. What is a closed mortgage? Who would this be a good choice for and why?

A closed mortgage is defined as a mortgage with where the interest rate is locked in for the entire term of the mortgage. At no point does this rate change, regardless of whether or not interest rates increase or decrease over the years. The mortgage is locked in at the interest rate for the time that the mortgage taken out. In order to negotiate the interest rate that the mortgage is locked in for or if you would like to pay out the mortgage before the term-end, breakage fees have to be paid to the mortgage lender.  Closed mortgages are not for everybody. These mortgages usually appeal to those who are not interested in moving soon after the mortgage was taken out and for those who suspect that the interest rates will soon rise.

26. What is a breakage cost?

A breakage cost is the penalty for not following the “terms and conditions” of a contract. In the case of a mortgage, the home owner would be charged a breakage cost as a penalty for breaking a mortgage. Breaking a mortgage is basically when a home owner leaves a closed mortgage before the term expires. The breakage cost compensates for the money the bank would lose when prepayments of a mortgage are made. Breakage costs usually vary from bank to bank.

27. What are open mortgages? What would you choose this type of mortgage?

Open mortgages are mortgages that allow more flexibility with payment options. In comparison to a closed mortgage, an open mortgage allows a home buyer to make payments at anytime before the term expires without breakage costs. Because of the added flexibility, interest rates are generally higher for open mortgages. Someone would choose an open mortgage if they feel that interest rates are going to fall or if they are planning to move in the immediate future.

28. What is a convertible mortgage?

A convertible mortgage is a fixed-rate mortgage that offers the same security as a closed mortgage but can be converted to a longer, closed mortgage at any time without penalty. These are fixed rate mortgages for terms of 6 months or 1 year. Not all lending institutions offer convertible mortgages. With a convertible rate mortgage you can lock into a longer term during the current term of your mortgage without penalty - but only with the same lender. For example, if after a couple of months you hear that interest rates are going to increase, you may change to a longer term mortgage such as the 5 year term.

29. What are fixed and variable rate mortgages?

A fixed rate mortgage is the interest rate on a fixed-rate mortgage is set for a pre-determined term – usually between six months and 25 years – and can be open or closed.

Variable rate mortgages or “floating rate” is a mortgage in which payments are set for a period of one to two years or longer although interest rates may fluctuate during that time. If rates go down, more of the payment goes towards reducing the principal; if rates go up, a larger portion of the monthly payment goes towards covering the interest. Variable-rate mortgages may be open or closed.

30. Why is it important to consider the interest rate of your mortgage?

The impact of interest rates is that the lower they are, the less you will pay towards your mortgage over the amortization period and the higher they are, more money will be paid to your mortgage. Sometimes, the interest rates can double the amount of the mortgage. It is VERY important to consider how high or how low your interest rate is when choosing a mortgage. Ideally, everyone wishes to save money as they pay for their home. If the interest rate is high on the loan they take out, then it will be harder to save money. The interest rate is the cost you pay for taking out the loan. The higher the cost, the more expensive your mortgage will be over time.

31. How can you choose the best mortgage term?

Give some examples.

Mortgage terms are available in several different terms, ranging from 6 months to 30 years. Longer mortgage term Higher interest rate Shorter mortgage term Lower interest rate

Choosing interest rate is based on risk tolerance. Although individuals wish to choose the lowest interest rate as possible, you must safeguard your mortgage from fluctuations in interest rates.

33. The total amount of interest that you will pay over the life of your mortgage varies according to the length of the amortization period. Explain what this means?

The amount of interest that is paid during the lifetime of the mortgage is dependant on the length of the amortization period. Longer amortization period less paid during a monthly basis,

higher interest rates Shorter amortization period more paid during a monthly

basis, lower interest rates The period of amortization greatly depends on the level of

income that the individual earns; they must be able to cover the monthly costs, as well as have enough savings for necessities.

33. The total amount of interest that you will pay over the life of your mortgage varies according to the length of the amortization period. Explain what this means?

The chart above reflects that the longer the amortization period, the lower the lower the total interest that is repaid. As well, it shows that the shorter the amortization period, the higher the interest that must be paid.

34. What is payment frequency? How can this affect how much your mortgage will cost over its lifetime?

Payment Frequency: paying your mortgage payments more frequently beneficial because it lowers your interest costs, saving you thousands of dollars,

and you can pay off your mortgage faster

35. What is a prepayment clause?

Prepayment Clause: allows you to reduce your mortgage principle at specific time intervals or anniversary dates without incurring breakage costs.

A breakage cost is the same as a prepayment penalty This is when your mortgage contract states that a

penalty will be assessed if you prepay the mortgage within a certain time period.

For a prepayment clause, you must make a payment of at least 10% of the original principle.

By increasing monthly payments or making additional ones without paying breakage costs, you can significantly reduce your mortgage over time.

36. Explain how making one doubled payment one time each year can reduce the number of years in your mortgage?

Double-Up payment is applied directly against the principal balance of your mortgage.

It cuts down the life of your mortgage

Saves interest costs.

Buying a Home #39

1. What happens on “closing day” Closing day is the day you officially become a homeowner.

Majority of the documents have been completed when you arrive at the lawyer’s or notary’s office.

You and your lawyer will review the statement of adjustments stating the exact amount you owe the dealer. A check or any other sort of payment should be prepared to the lawyer to cover the costs. Also, costs such as legal and disbursements are also due during closing.

8 common mistakes most first-time homebuyer make and how to avoid them #

List the 8 common mistakes Not knowing your credit Being unrealistic about how much you can afford to

pay for your home Not considering a mortgage preapproval Thinking you won’t qualify for a mortgage Not knowing all the down payment choices Focusing too much on the interest rate, rather than

the overall solution Not choosing your own mortgage payments

schedule Forgetting about closing costs