TOOLS • Mortgage FAQ

To determine ‘affordability,’ you will first need to know your taxable income and the amount of any outstanding debt. Assuming it is your principal residence you are purchasing, calculate 35% of your income for use toward a mortgage payment, property taxes and heating costs. If applicable, add half of the estimated monthly condominium maintenance fees in this calculation.

Second, calculate 42% of your taxable income and deduct all of your monthly debt payments, including car loans, credit cards, lines of credit payments. The lesser of the first or second calculation is used for housing-related payments, including your mortgage payment. These calculations are based on lender guidelines.

In addition to considering what you can afford, make sure you calculate how much you think you can afford. If the payment amount you are comfortable with is less than 32% of your income, you may want to settle for the lower amount rather than stretch yourself financially.

Depending on the circumstances surrounding your bankruptcy, generally, some lenders would consider providing mortgage financing.

A pre-approved mortgage provides an interest rate guarantee from a lender for a specified period (usually up to 120 days) and a set amount of money. The pre-approval is calculated based on information provided by you and is subject to conditions before the mortgage is finalized. Conditions would usually be things like ‘written employment and income confirmation’ and ‘down payment from your own resources,’ In summary, a pre-approved mortgage is one of the first steps a home buyer should take before beginning the buying process.

A conventional mortgage is where the down payment is equal to 20% or more of the purchase price, a loan to value of or less than 80%, and does not normally require mortgage loan insurance.

The interest rate on a fixed-rate mortgage is set for a pre-determined term. This offers the security of knowing what you will be paying for the term selected.

The minimum down payment is 5% of the purchase price, subject to certain price restrictions for homes purchased above $500,000 and 1 million. In addition to the down payment, are closing costs (i.e. legal fees and disbursements, appraisal fees and a survey certificate, when applicable). Mortgages with less than 20% down must have mortgage loan insurance provided by either CMHC, Sagen, or CG.

The down payment is that portion of the purchase price you provide yourself. The down payment (which represents your financial stake, or the equity in your new home) should be determined well before you start house hunting. The larger the down payment, the less your home costs in the long run. With a smaller mortgage, interest costs will be lower, and over time this will add up to significant savings.

Lenders will often send out their mortgage renewals 120 days before your mortgage maturing. I refer to this as their “Convenience Rate” as it is generally not the best rate but appears convenient for the borrower. Oddly enough, about 60% of Canadians go this route and pay a premium. Therefore it is good to contact your broker months before your mortgage maturing so they can begin the process and capture the best rate for you. The savings could outweigh a penalty if there is one. It’s also a good time to re-evaluate your mortgage so you won’t get charged with hidden fees or penalties down the road.

There are ways to reduce the number of years on your mortgage. You’ll enjoy significant savings by:
Selecting a non-monthly or accelerated payment schedule.
Increasing your payment frequency schedule

Making principal prepayments.
Making Double-Up Payments, and/or
Selecting a shorter amortization at renewal.

A mortgage in which payments may fluctuate depending on market conditions. If interest rates go down, more of the payment goes towards reducing the principal; if rates go up, a larger portion of the payment goes towards covering the interest.

Mortgage loan insurance is insurance provided by Canada Mortgage and Housing Corporation (CMHC), a crown corporation, Sagen Financial (formerly Genworth), and Canada Guaranty (CG). This insurance is required by law to insure lenders against default on mortgages with a loan to value ratio greater than 80% or, in other words, when the borrower puts less than 20% down when purchasing. The insurance premiums, ranging from .50% to 4.50%, are paid by the borrower and can be added directly onto the mortgage amount. This is not the same as mortgage life insurance.

First and foremost, you have to make sure you have enough money for a downpayment – the portion of the purchase price you provide yourself. To qualify for a conventional mortgage, you will need a down payment of 20% or more. However, you can qualify for a low down payment insured mortgage with a down payment as low as 5%.
Secondly, you will require money for closing costs (typically 1.5% of the purchase price). If you want to have the home inspected by a professional building inspector, you will need to pay an inspection fee. The inspection may bring to light areas where repairs or maintenance are required and assure you that the house is structurally sound. Usually, the inspector will provide you with a written report. If they don’t, then ask for one.

You will be responsible for paying the fees and disbursements for the lawyer.

Finally, you will be required to have property insurance in place by the closing date. And you will be responsible for the cost of moving.
Remember, there will be all kinds of things you’ll have to purchase early on – appliances, garden tools, cleaning materials etc. So factor these expenses into your initial costs.

Most lenders will accept a gifted down payment from and immediate family member. A gift letter signed by the donor is usually required to confirm that the funds are a gift and not a loan.

Most lenders will accept a gifted down payment from and immediate family member. A gift letter signed by the donor is usually required to confirm that the funds are a gift and not a loan.

Where you pay child support and alimony to another person, generally, the amount paid out is deducted from your total income before determining the size of mortgage you will qualify.
Where you receive child support and alimony from another person, generally, the amount paid may be added to your total income before determining the size of mortgage you will qualify for, provided proof of regular receipt is available for a period of time determined by the lender.

Today, about 50% of first-time home buyers use their RRSP savings to help finance a down payment. If you are a first-time home buyer, the Home Buyers Plan (HBP) allows you to withdraw money from your Registered Retirement Savings Plan (RRSP) tax-free to make your down payment. The HBP is administered by the Canada Revenue Agency (CRA). There are certain conditions you must meet to be eligible for the HBP. The withdrawal from your RRSP does not need to be included in your income on your annual income tax return, and no tax is taken off the money you withdraw. What is the payback period? – You don’t have to start paying back the money to your RRSP until two years after the purchase of the home. – You must pay back all withdrawals from your RRSP within 15 years by making RRSP deposits each year, starting the second year following your withdrawal. CRA will determine what your minimum yearly repayment will be and will notify you once you need to start repaying the amount. – If you do not repay the amount due in a given year, it is included in your taxable income for that year and you’ll have to pay income tax on this amount. source: Financial Consumer Agency of Canada.

The length of mortgage terms varies widely – from 6 months right up to 10 years. While 5-year mortgages are what most home buyers typically choose, you may consider a short-term mortgage if you have a higher tolerance for risk, if you have time to watch rates or are not prepared to make a long-term commitment.