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WHAT IS A DOWN PAYMENT?

Very few homebuyers have the cash available to buy a home outright. Most of us will turn to a financial institution for a mortgage. However, even with a mortgage, you will need to raise the money for a down payment.

The down payment is that portion of the purchase price you furnish yourself. The amount of 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 end. With a smaller mortgage, interest costs will be lower and over time, this will add up to significant savings.

HOW MUCH DO I NEED FOR A DOWN PAYMENT?

According to the guidelines of the Canadian Mortgage and Housing Corporation (CMHC), one must have a minimum down payment of at least 5% of the total cost of the prospective property. With a down payment between 5 – 19.99%, one’s mortgage is deemed “high-ratio”. A high ratio mortgage is subject to a CMHC premium in accordance with the following schedule:

With a down payment of 20% or greater, the mortgage is deemed “conventional”. A conventional mortgage is not subject to any CMHC fees. Thus, a larger down payment represents a two-fold advantage to the prospective homebuyer. First, the prospective homebuyer will avoid CMHC premiums with 20% down payment. Secondly, a larger down payment will relate into smaller monthly payments, or a shorter amortization; both of which lead to interest savings over the life of the mortgage.

HOW MUCH CAN I AFFORD TO PAY FOR A HOME?

To determine ‘affordability’ you will first need to know your taxable income along with the amount of any debt outstanding and the monthly payments. Assuming it is your principal residence, you are purchasing; calculate 32% of your income use toward a mortgage payment, property taxes, and heating costs. If applicable, half of the estimated monthly condominium maintenance fees will also be included in this calculation

Second, calculate 40% 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 will be used to help determine how much of your income may be used towards housing related payments, including your mortgage payment. These calculations are based on lenders’ usual guidelines.

In addition to considering, what the ratios say 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. Make sure you don’t leave yourself house poor. Structure your payments so that you can still afford simple luxuries.

HOW MUCH MORTGAGE CAN I AFFORD?

The amount of a mortgage for which one can qualify is generally founded in what are known as qualification ratios: Gross Debt Service ratio and Total Debt Service ratio, or “GDS” and “TDS”. Lenders evaluate one’s monthly income, as well as their monthly debt obligations, to determine a fair and feasible amount of mortgage available to the prospective borrower. This figure is calculated via their GDS and TDS guidelines. Generally, lenders will have an acceptable Gross Debt Service ratio ranging from 28-32%. In other words, 28-32% of one’s monthly household income can be reasonably set aside for one’s mortgage payment, in the eyes of the lender. Furthermore, most lenders will have an acceptable Total Debt Service ratio of 36-40%. In other words, 36-40% of one’s monthly household income can be reasonably set aside for one’s total debt obligations, including their impending mortgage payment. To calculate exactly how much you may borrow, please refer to our CALCULATOR available by clicking on the HOME tab above. Make sure that you incorporate the proper interest rate, as this can have a profound effect over the life of a mortgage. NOTE: As part of this calculation, you also need to estimate and include the property taxes, homeowner’s insurance, and CMHC fees (if applicable) you might need to pay.

WHAT IS A MORTGAGE AGENT?

A Mortgage Agent is an independent Real Estate financing professional who specializes in the origination of residential and/or commercial mortgages. Typically, they do not fund or service the loan itself, but instead, they act as an Agent or Manager for capital sources who act as loan wholesalers.

A Mortgage Agent is also an independent contractor working, on average, with 40 lenders at any one time. By combining professional expertise with direct access to hundreds of loan products, a agent provides consumers the most efficient and cost-effective method of offering suitable financing options tailored to the consumer’s specific financial goals.

WHAT IS A PRE-APPROVED MORTGAGE?

A pre-approved mortgage provides an interest rate guarantee from a lender for a specified period of time (usually 60 to 90 days) and for a set amount of money. The pre-approval is calculated based on information provided by you and is generally subject to certain conditions being met before the mortgage is finalized. Conditions would usually be things like ‘written employment and income confirmation’ and ‘down payment from your own resources’, for example.

Most successful real estate professionals will want to ensure you have a pre-approved mortgage in place before they take you out looking for a home. This is to ensure that they are showing you property within your affordable price range.

In summary, a pre-approved mortgage is one of the first steps a homebuyer should take before beginning the buying process.

WHAT IS A FIXED RATE MORTGAGE?

The interest rate on a fixed-rate mortgage is set for a pre-determined term – usually between 6 months to 25 years. This offers the security of knowing what you will be paying for the term selected.

WHAT IS A VARIABLE RATE MORTGAGE?

A mortgage in which payments are fixed to bank prime rates, which can fluctuate several times a year. If interest 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.

WHAT IS A HOME INSPECTION?

A home inspection is an examination of the structure and systems: heating and air conditioning, plumbing and electrical, roof, attic, insulation, walls, floors, ceilings, windows, doors, foundation, and basement. If the inspector finds problems, it does not mean you cannot sell your house, but you can be certain a buyer inspection will find them too. Finding problems before you list your property can avoid accusations of misrepresentation, low offers, and even lawsuits. A home inspection can also help sellers comply with new, tougher disclosure laws enforced in many states.

You may or may not want to make the repairs and you can always adjust the selling price or contract terms if the problems are major. This information will also help you determine what type of financing will or will not be available for your home. You can find home inspectors under Professional Services section.

HOW CAN I SAVE MONEY ON MY MORTGAGE?

The simplest way to accomplish this is to decrease your principal; thus, decreasing your interest obligation. There are a number of very feasible approaches to performing this task:

Increase Payment Frequency – Instead of paying monthly, consider paying bi-weekly. This simple step is very feasible for most working Canadians who are paid bi-weekly. It can cut your mortgage amortization by up to five years, and can save you tens of thousands of dollars.

Prepay – Use every advantage that the term of your mortgage offers you to prepay your mortgage. One way to do this would be to use your RRSP tax refund to make a yearly pre-payment.

Increase Payments – Round up your bi-weekly payment. For example, if you have a bi-weekly payment of $531.59, round your payment to an even $550.00. This will have a profound effect on the interest paid, and the amortization of the mortgage.

WHAT ARE THE MONTHLY COSTS OF OWNING A HOME?

You will have financial responsibilities as a homeowner.

Some of them, like taxes, may not be billed monthly, so do the calculations to break them down into monthly costs. Below you will find a list of these expenses.

The Mortgage Payment For most homebuyers, this is the largest monthly expense. The actual amount of the mortgage payment can vary widely since it is based on a number of variables, such as mortgage term or amortization.

Property Taxes Property tax can be paid in two ways – remitted directly to the municipality by you, in which case you may be required to periodically show proof of payment to your financial institution; or paid as part of your monthly mortgage payment.

School Taxes In some municipalities, these taxes are integrated into the property taxes. In others, they are collected separately and are payable in a single lump sum, usually due at the end of the current school year.

Utilities As a homeowner, you will be responsible for all utility bills including heating, gas, electricity, water, telephone, and cable. Maintenance and Upkeep You will also have to cover the cost of painting, roof repairs, electrical and plumbing, walks and driveway, lawn care and snow removal. A well-maintained property helps to preserve your home’s market value, enhances the neighbourhood and, depending on the kind of renovations you make could add to the worth of your property.