Shoreh Forjani, Your Real Estate Broker of Record Presents:
Frequently Asked Questions about Mortgage, Click on each question to see the answers
Whether you are buying your first home, trading up to a larger home, building your
dream home, or even trading down once the kids are out on their own, a house is probably the single biggest investment you will ever
As almost everyone who is buying a home will need financing, they are also interested and often need guidance on what to look for
in a mortgage and how they can pay the least amount of interest over the term of the mortgage. This site is designed to help answer
some of your questions. To let you know how much you can afford to spend and what your payments will be, suggest ways to save
thousands in interest over the life of the mortgage, and present the special programs that some borrowers could participate in
and save from.
1- What are closing costs?
2- What is a Credit Rating?
3- Why a Pre-Approved mortgage?
4- What are the Mortgage features?
5- What is refinancing or renewing a mortgage?
6- What is a Rental Comparison?
7- How do I find the right Home?
8- What are different kinds of Mortgages?
9- How do I calculate a Mortgage Payment?
1- What are closing costs? Now that you know what you
can afford, the next step is to determine the additional costs of the home-buying process. According to CMHC and GE Capital, one
should have, in addition to the down payment, at least 1.5% of the purchase price for closing costs (we say 2-2.5%, just to be on
the safe side). The costs vary around the world. Below you will find a brief explanation of these costs, yet it may not include all
items required specific to your property, or the area in which you have purchased. This is a guideline, but your lawyer can provide
a fairly close estimate, and is the best resource.
Appraisal Fee: The appraisal provides the lenders with a professional opinion of the market value of the property.
This cost is normally the borrower's responsibility and it ranges as low as $100 for a drive-by appraisal to as much as $200 for a
full appraisal, and the average being $175, plus the applicable taxes. Occasionally, the costs could be slightly higher for larger,
custom-built homes, or homes in remote parts.
Home Inspection Fee: A professional inspection of the home, top to bottom, is for the benefit of the buyer,
therefore, that's who absorbs the cost. A typical home inspection can cost anywhere from $250-$350, but our opinion is that they are
well worth the investment. New home buyers may not worry about it, but a definite must for buyers purchasing properties older than
5 years. When hiring a home inspector, make sure the inspector has liability insurance, just in case a mistake is made.
Fire Insurance: All mortgage lenders will require a certificate of fire insurance to be in place from the time you
take possession of the home. The amount required is generally at least the amount of the mortgage or the replacement cost of the
home. This cost can vary on the property size and extras being insured, as well as the insurance company and the municipality.
The cost can vary anywhere from $250-$600 for most properties.
Land Survey Fee Or Title Insurance Fee: A recent Survey of the property is usually required by the lender, and
if one is not available, it normally costs anywhere from $600-$900 for a new survey. In lieu of the Survey, most lenders today
will accept Title Insurance, at a much lower price of approximately $225.
Legal Costs and Disbursements: A lawyer or notary will charge a fee for their professional services involved in
drafting the title deed, preparing the mortgage, and conducting the various searches. The disbursements, on the other hand, are
out-of-pocket expenses incurred, such as registrations, searches, supplies, etc., plus applicable taxes.
Land Transfer Tax: Most regions charge a land transfer tax, payable by the purchaser, and the amount varies from
region to region. This tax is based on the purchase price.
New Home Warranty: In many regions, new homes are covered by a new home warranty program. The cost to the purchaser
for this warranty is approximately $600 and should the builder default or fail to build to an agreed-upon standard, the fund will
finish or repair the deficiencies.
Mortgage Application and Processing Fee: On a high-ratio insured mortgage (mortgages above 75% of the purchase price),
the mortgage insurer (CMHC or GE Capital) charges a fee of $165-$185 for applying and processing the file, as well as appraising the
property. On new homes, this fee drops to $75.
Closing Adjustments: An estimate should be made for closing adjustments for bills that the seller has prepaid such as
property taxes, utility bills, and other charges. Any bills after the closing date are the purchaser's responsibility. Your
lawyer/notary will let you know what they are exactly once the various searches have been completed.
G.S.T. (for Canada): On the purchase of a newly constructed home, GST is payable, but make sure you know who pays
you or the builder. Therefore, on the offer, the purchase price will say "Plus GST" or "GST Included", and who gets the GST new home
rebate. A lot of builders have included this cost into the purchase price so that the buyer does not have to come up with that at
closing. (As well, this tax is also charged on all professional fees). For applicable tax/es for a newly build property in your
region, please consult your lawyer/notary.
Other costs may include: Landscaping, Redecorating, Furnishings, Appliances repairs or replacement Typical monthly costs incurred with
home ownership are mortgage payments,
maintenance, insurance, condo fees, property taxes and utilities.
2- What is a Credit Rating?
Your credit rating is a measure of your credit-worthiness or in other words, your record of borrowing and repayment.
Without a credit rating, few institutions will lend you money. Governed by regional laws, the credit bureau - the
clearing-house of information on consumers' use of credit - provides a credit history, which is a list of facts
about how you handle debt. This information is gathered from financial institutions, retailers and other lenders.
Most of your credit information remains on your file for seven years. In addition to negative information, positive
information is also reported on your file.
Here is how to build a good credit rating:
- Pay your bills promptly, especially credit cards.
- Borrow only what you need and what you can afford.
- Try to pay off loans on time and as quickly as possible. Not only does it help your credit rating, you also save valuable
Checking Your Credit Rating As a consumer, it's your right to know your credit rating.
Credit can be denied based on inaccurate or insufficient information. You may want to check your file if you aren't sure of your credit
rating, if you are refused credit or if you plan to apply for a large amount of credit such as a mortgage. You can get a copy of your
credit report through one of the many credit bureaus across your region for free or for a nominal charge.
Here are some guidelines:
- Contact your local credit bureau, which you can find in the yellow pages.
- Call to find out how you can review your file. You'll be asked to provide identification
to ensure the confidentiality of your file. A written report may take two to three weeks.
- If you notice any errors and can offer written proof, your file will be changed
immediately. If you can't supply written proof, give the facts to the credit bureau, which will then investigate. If your facts
are confirmed, your file will be updated.
- If you see an error but proof cannot be found, what happens next depends on where
you live. Each region has its own legislation relating to credit bureaus. The information you are challenging may be taken
off your file or a note may be added, saying the information is "in dispute".
- If an error has been corrected, the credit bureau must notify members who have
inquired about you during previous months (as required by provincial law).
Dealing with a Credit Crisis? Chances are you have a credit problem if you:
Here are some tips to help you recover:
- Can't make your minimum monthly payments on your credit cards,
- Take cash advances for living expenses,
- Aren't sure how much you owe and
- Never seem to be out of debt.
- Put away all of your credit cards.If you have several debts, consider
consolidating them into one consumer loan. You'll save on the interest rate alone, especially if your debt is from credit cards.
- If slow payments are affecting your credit rating, consider contacting your creditors to see if you can make alternative
arrangements. Be honest with your creditors. Let them know you're in difficulty and work with them to find the best way to
meet your financial obligations.
- Try and figure out how you got into debt and stick to a plan to prevent it from happening again.
- Re-evaluate your spending habits and lifestyle.
- Seek the advice of a credit counselor if you can't sort things out yourself.
There might be a not-for-profit credit counseling agencies in your region. An experienced counselor will sit down with you
to look at your situation, discuss your options and help you develop a course of action.
When you begin to recover financially, consider keeping only one credit card.
It will be easier to track your spending and you won't have the collective credit limit to tempt you.
3- Why a Pre-Aproved Mortgage?
A mortgage is a loan that uses a property as security to ensure that the debt is repaid. The borrower is referred to as the mortgagor,
the lender as the mortgagee. The actual loan amount is referred to as the principal, and the mortgagor is expected to repay that
principal, along with interest, over the repayment period (amortization) of the mortgage.
A mortgage can be used for financing many different things, including:
Since a mortgage is a fully secured form of financing,
the interest you pay is usually less than with most other types of financing. Many people use the
equity in their homes to finance the purchase of investments. Using a Secured Line of Credit, or
a fixed-rate mortgage, the interest costs are lower, and they can even write off those interest
costs against their taxable incomes.
- Purchasing or constructing a new home
- Purchasing an existing home
- Refinancing to consolidate debts
- Financing a renovation
- Financing the purchase of other investments
- Financing the purchase of investment property
SIMPLE GLOSSARY OF MORTGAGE TERMS
Here is a simple
glossary of mortgage terms. To help you find the term you are looking for quickly, simply click on the
letter below. For example, to find the "mortgage", click the letter "M".
Agreement of Purchase and Sale: The legal contract a purchaser and a seller go into. We recommend that you have your offer prepared
by a your professional realtor - Shoreh Forjani's team - that has the knowledge and experience to satisfactorily protect you with the most suitable clauses and
Amortization Period: The number of years it takes to repay the entire amount of the financing based on a set of fixed
Appraisal: The process of determining the value of a property.
Assets: What you own or can call upon. Often used in determining
net worth or in securing financing.
Assumption Agreement: A legal document signed by a buyer that requires the buyer assume responsibility
for the obligations of an existing mortgage. If someone assumes your mortgage, make sure that you get a release from the mortgage
company to ensure that you are no longer liable for the debt.
Blended Payments: Equal payments consisting of both an interest and a principal component. Typically, while the payment amount does not
change, the principal portion increases, while the interest portion decreases.
Canada Mortgage and Housing Corporation (CMHC): CMHC is a federal Crown corporation that administers the National Housing Act (NHA).
Among other services, they also insure mortgages for lenders that are greater than 75% of the purchase price or value of the home.
The cost of that insurance is paid for by the borrower and is generally added to the mortgage amount. These mortgages are often referred
to as "Hi-Ratio" mortgages.
Closed Mortgage: A mortgage that cannot be prepaid or renegotiated.
Closing Date: The date on which the new
owner takes possession of the property and the sale becomes final.
Conventional Mortgage: A mortgage up to 75% of the purchase price or
the value of the property. A mortgage exceeding 75% is referred to as a "Hi-Ratio" mortgage and the lender will require insurance for
Collateral: An asset, such as term deposit, Canada Savings Bond, or automobile, that you offer as security for a loan.
Credit Scoring: A system that assesses a borrower on a number of items, assigning points that are used to determine the borrower's credit
Demand Loan: A loan where the balance must be repaid upon request.
Deposit: A sum of money deposited
in trust by the purchaser on making an offer to purchase. When the offer is accepted by the vendor (seller), the deposit
is held in trust by the listing broker, lawyer, or notary until the closing of the sale, at which point it is given to the vendor.
If a house does not close because of the purchaser's failure to comply with the terms set out in the offer, the purchaser forgoes the
deposit, and it is given to the vendor as compensation for the breaking of the contract (the offer).
Equity: The difference between the market value of the property and any outstanding mortgages registered against the property.
This difference belongs to the owner of that property.
First Mortgage A debt registered against a property that has first call on that property.
Fixed-Rate Mortgage: A mortgage for which the interest is set for the term of the mortgage.
Gross Debt Service (GDS.) Ratio: It is one of the mathematical calculations used by lenders to determine a borrower's capacity to repay
a mortgage. It takes into account the mortgage payments, property taxes, approximate heating costs, and 50% of any maintenance fees,
and this sum is then divided by the gross income of the applicants. Ratios up to 32 % are acceptable.
Guarantor: A person with an
established credit rating and sufficient earnings who guarantees to repay the loan for the borrower if the borrower does not.
Hi-Ratio Mortgage: A mortgage that exceeds 75% of the purchase price or appraised value of the property. This type of mortgage
must be insured. To avoid the cost of the insurance, a 1'st mortgage up to 75% is arranged and a 2'nd mortgage for the balance
(up to 90% of the purchase price).
Home Equity Line of Credit: A personal line of credit secured against the borrower's property.
Generally, up to 75% of the purchase price or appraised value of the property is allowed to be borrowed with this product.
Interest Adjustment Date (IAD): The date on which the mortgage term will begin. This date is usually the first day of the month following
the closing. The interest cost for those days from the closing date to the first of the month are usually paid at closing. That
is why it is always better to close your deal towards the end of the month.
Interest-Only Mortgage: A mortgage on which only the
monthly interest cost is paid each month. The full principal remains outstanding. The payment is lower than an amortized mortgage
since one is not paying any principal.
Mortgage: A mortgage is a loan that uses a piece of real estate as a security. Once that loan is paid-off, the lender provides a
discharge for that mortgage.
Mortgagee: The financial institution or person (lender) who is lending the money using a mortgage.
Mortgagor: The person who borrows the money using a mortgage.
Open Mortgage: A mortgage that can be repaid at any time during the term without any penalty. For this convenience, the interest
rate is between 0.75-1.00% higher than a closed mortgage. A good option if you are planning to sell your property or pay-off the
P.I.T.: Principal, interest, and property tax due on a mortgage. If your down payment is greater than 25% of the purchase price
or appraised value, the lender will allow you to make your own property tax payments.
Portable Mortgage: An existing mortgage
that can be transferred to a new property. One would want to port their mortgage in order to avoid any penalties, or if the
interest rate is much lower than the current rates.
Prime: The lowest rate a financial institution charges its best customers.
Prepayment Penalty: A fee charged a borrower by the lender when the borrower prepays all or part of a mortgage over and above
the amount agreed upon. Although there is no law as to how a lender can charge you the penalty, a usual charge is the greater
of the Interest Rate Differential (IRD) or 3 months interest.
Principal: The original amount of a loan, before interest.
Rate Commitment: The number of days the lender will guarantee the mortgage rate on a mortgage approval. This can vary from lender
to lender anywhere from 30 to 120 days.
Renewal: When the mortgage term has concluded, your mortgage is up for renewal. It is
open at this time for prepayment in part or in full, then renew with same lender or transfer to another lender at no cost
(we can arrange).
Second Mortgage: A debt registered against a property that is secured by a second charge on the property.
Switch: To transfer
an existing mortgage from one financial institution to another.
Term: The period of time the financing agreement covers. The terms available are: 6 month, 1,2,3,4,5,6,7,10 year terms, and the
interest rates will be fixed for whatever term one chooses.
Total Debt Service (TDS) Ratio: It is the other mathematical
calculations used by lenders to determine a borrower's capacity to repay a mortgage. It takes into account the mortgage payments,
property taxes, approximate heating costs, and 50% of any maintenance fees, and any other monthly obligations (i.e. personal
loans, car payments, lines of credit, credit card debts, other mortgages, etc.), and this sum is then divided by the gross
income of the applicants. Ratios up to 40 % are acceptable.
Variable-Rate Mortgage: A mortgage for which the interest rate fluctuates based on changes in prime. Vendor Take Back (VTB)
mortgage: A mortgage provided by the vendor (seller) to the buyer
4- What are the Mortgage features?
Choosing A Term You Can Live With
What term should you take?
That's a good question. Before you look at the issue of term specifically, there are things you should consider: When you're
looking at term and interest rates, look also at what you can live with in terms of payment amounts, because trying to predict
where interest rates are going is a tough job. There are many forces that affect interest rates - economic,
political, domestic, and international.
Even the best economists cannot pinpoint this, so how can we. You can twist yourself
into knots worrying what will happen. When the rates dropped in 1992 to their lowest in 35 years, no one thought that they
will get that low again. They dropped even further. Since then we have enjoyed low rates and we don't think of rates going
in the double digits again. That's wrong to assume as well. Who would have thought in 1978 that rates only 3 years later
would go as high as 21.5%? Please check the graph below for a historical account.
Predicting interest rates is very much a gamble and one should be prepared
to keep a close eye on the market.
Here's a suggestion: If you feel that rates
are at a point you can live with and you want to guarantee that rate as long as possible, go with a long term
(5 years, 7 years, and 10 years). If interest rates appear to be rising, take advantage of the lower rate for as
long as possible, and remember, if you sell your property, you can take the mortgage with you to the new property
or have someone assume the mortgage. It could prove to be a great selling feature if you have an assumable mortgage
at very low rate. If rates appear to be falling, you can choose a shorter term (6-month convertible or
variable-rate mortgage) that offers the flexibility to lock-in to longer term at any time, just in case the rates start
going the other way.
Fixed vs. Variable Rate Mortgages
With a fixed-rate mortgage, the interest
rate is set for the term of the mortgage so that the monthly payment of principal and interest remains the same
throughout the term. Regardless of whether rates move up or down, you know exactly how much your payments will be
and this simplifies your personal budgeting. In a low rate climate, it is a good idea to take a longer term,
fixed-rate mortgage for protection from upward fluctuations in interest rates.
A variable-rate mortgage (also
called adjustable-rate) provides a lot of flexibility, especially when interest rates are on their way down. The
rate is based on prime and can be adjusted monthly to reflect current rates. Typically, the mortgage payment
remains constant, but the ratio between principal and interest fluctuates. When interest rates are falling, you
pay less interest and more principal. If rates are rising, you pay more interest and less principal, and if they
rise substantially, the original payment may not cover both the interest and principal. Any portion not paid is
still owed, or you may be asked to increase your monthly payment. Make sure that your variable-rate mortgage is
open or convertible to a fixed-rate mortgage at any time, so that when rates begin to rise, you can lock-in your
rate for a specific term.
Closed and Open Mortgages - What's the Difference
An open mortgage allows you the flexibility to repay the mortgage at any time without penalty. Open mortgages are
available in shorter terms, and the interest rate could be higher than closed mortgages by as much as 1%,
or more. They are normally chosen if you are thinking of selling your home, or if expecting to pay off the whole mortgage
from the sale of another property, or an inheritance (that would be nice).
A closed mortgage offers the security of fixed
payment for terms from 6 months to 10 years. The interest rates are considerably lower than open, and if you are not
planning on any one of the above reasons, then choose a closed mortgage. Nowadays, they offer as much as 20% prepayment
of the original principal, and that is more than most of us can hope to prepay on a yearly basis. If one wanted to pay
off the full mortgage prior to the maturity, a penalty would be charged to break that mortgage. The penalty is usually
3 months interest, or interest rate differential (I.R.D. - please refer to glossary for detailed explanation).
Buy first or sell first?
Which comes first - the purchase or the sale - is the greatest dilemma facing homeowners
planning to move-up.
If you choose to buy first, make sure the offer to purchase is conditional on selling your current
house. That way, if you sell your house, both deals proceed; if not, the deal is off, and you won't be stuck with two
homes. Selling first though will give you considerable peace of mind.
Knowing how much money you'll get on the sale
will help you establish a price range for the new house. Selling first allows you to negotiate the purchase more
vigorously, too, since unconditional offers carry a lot more weight with sellers.
Market conditions are another
important consideration in deciding which route to follow. In a seller's market, you'll probably do better selling
after you've bought, but in a buyer's market, it makes more sense to sell.
If you obtained an insured mortgage
after April 1st, 1997, the premium you paid on the mortgage is now portable to another property (if you closed before
this date, it is not portable, meaning that if you bought another home and your mortgage needed to be insured, you must
pay the applicable premium again.
The Amortization Period is the
number of years it would take to repay the entire mortgage amount based on a set of fixed payments. The longer the amortization,
the more interest is paid over the life of the mortgage. Therefore, when choosing the amortization period, careful planning
should be done to meet your cash flows. Remember, the amortization can be easily shortened after the closing, by simply making
arrangements to increase your payments.
MORTGAGE FEATURES - To Help You Become Mortgage-Free Faster
or weekly payments?
Once you have the mortgage amount, rate and amortization period, your monthly payment can be calculated.
Now is the time to decide how often you want to make your payments, because by selecting the right payment frequency could
literally mean thousands of dollars in savings. For example, on a $100,000 mortgage at 8% interest, amortized over 25 years,
the monthly payments would be $763.21. However, by simply switching to bi-weekly payments (every two weeks) with payments of
$381.61 (half of the monthly payment), there would be a saving of $30,484 in interest! Weekly payments of $190.80 will save
$30,839 in interest, and you will be mortgage free in the 19th year.
You notice that there is very little difference between
weekly and bi-weekly payments, however. If you have other payments throughout the month, bi-weekly may be less stressful and
easier to budget. If you are self-employed or commissioned, and your income varies greatly from week to week, it may be easier
to pay monthly and use your prepayment privileges to knock the amortization period. Also, not all weekly and bi-weekly payments
work the same as above. Let us show you how to manage your mortgage to your best advantage.
Prepayments - Extra Payments against Principal
This is one of the most important features to look for when you are getting a mortgage. Having the prepayment privilege that
works to your specific needs could mean a difference of thousands of dollars over the life of your mortgage. Although all
lenders offer some form of prepayment privilege, the amount and how it can be applied varies from one to another.
Some offer only up to 10%, once per year, and on the anniversary date. Then there are others that offer as high as 20% per year,
and prepayments can be done throughout the whole year as long as the total does not exceed 20%. Ideally, you should work your prepayment
privilege as often as possible throughout the year. Saving aside to make that big prepayment is not the best strategy. We have
found that the small, regular prepayments will get you quicker to that mortgage burning party (I hope we're invited).
Often times most mortgage shoppers are only looking at rates and overlooking this interest saving feature.
That is why it is important to have a mortgage specialist make some recommendations for your specific needs. Not only can we be of further help to find you
lenders who offer the lowest rates, we can also guide you to get the features that will work to your advantage.
Increase Your Regular Payment
The secret to borrowing is borrow early in your life. The reason is that the future value of the dollar decreases. Why we are bringing
up this fact is that when you borrow early, your payments are set. As time goes, our incomes increase (hopefully), but our mortgage
payments stay the same, provided you locked-in to a long term, fixed mortgage. Therefore, in the future we may be in a position to
increase our payment on the mortgage, regardless if you are paying weekly, bi-weekly, or monthly. Any increase in payment is directly
going to pay down the mortgage, thus saving you thousands down the road due to the effect of interest not compounding on that amount
for the life of the mortgage. Neat little feature.
Again, this feature varies from bank to
bank. Some allow increasing payment up to 10%, and others as high as 25% per year, some up to 15% only once in the term of the mortgage.
If you increased your payments, should the need arise, you can go back to the original payments as well. A mortgage specialist will run
a "Mortgage Reduction" model for you and make some recommendations.
Double-Up on Payments
A few lenders will allow you to
double-up on your payments, and the extra payment goes directly in the principal. If you double-up once in the year, you have just
achieved the benefits of the weekly or bi-weekly mortgage. This is a neat little feature for someone who prefers the monthly
payments but wants the results of the weekly and bi-weekly payments. And some lenders allow you the flexibility to skip a payment
if you have made a double payment previously. This defeats the purpose, but when times are tough, a neat little feature to have.
Early Renewal Option This is a great feature to have when interest rates are on a rise. If you are locked-in to
a term and the mortgage will be maturing in months or years down the road, and the mortgage rates are on a rise, you can renew
your mortgage before the maturity and lock-in the low rates for a new term. You may not even have to pay anything out of pocket
and still save over the term, especially if rates move up considerably.
Portable Mortgage If you want to take
your mortgage with you when you move, you can if your mortgage has a clause that allows you to do that. This option allows you to
continue your savings on your lower rate if the going rates are higher, as well as avoid any penalties if you were to break that
mortgage. If you need a larger mortgage for the new property, your existing mortgage amount can be increased. As for the associated
costs, since a new mortgage document must be registered on title, legal fees and normal appraisal fees would be applicable.
Assumable Mortgage If you are moving and don't want to
take your mortgage with you, or you are selling and not buying, an assumable feature will allow the buyer(s) of your property to take
over the mortgage, providing they meet the lender's qualifying criteria. By doing so, you will not pay any penalties as you are not
breaking the mortgage contract. In fact, if your interest rate is lower than those available at the time, your assumable mortgage suddenly
became a great selling feature for your property.
A word of caution here: Just because someone assumes your mortgage does not
necessarily mean you are off the hook for the responsibility. You must get a release from the Mortgage Company to ensure that you are no
longer liable for it. Some mortgage companies automatically offer a release, but with others, you must make the request, and do it through
Mortgage Life Insurance (optional)
Since your home is likely your single largest investment, you may want to protect that
investment. Many lenders offer mortgage life insurance at an affordable and competitive price, and the requirements for
eligibility are usually quite simple to meet. If you or your co-borrower (if you choose joint coverage) die, the insurance company will
pay off your mortgage. Also, some institutions now offer job-loss and/or disability insurance to borrowers. The best thing to do in
making a decision about how to insure your mortgage is to have an insurance agent work out the figures for a private term insurance
and mortgage life insurance.
5- What is refinancing or renewing a Mortgage?
Refinancing is the process that pays the existing mortgage and/or any other legal claims
against the property and sets-up a completely new mortgage(s). There are many reasons as to why you should consider refinancing your
Consolidate debts: If your monthly bills have gotten out of control, you might be able to refinance your
home and pay them off. The advantage of doing this is to lower your total monthly payments. You should have a mortgage specialist review
your situation and make a recommendation.
Refinance a First & Second Mortgage into a new First: If you have two
mortgages on the same property, you can combine them into a new first mortgage, as long as the total amount does not exceed 90% of the
value of the property. If the new mortgage is over 75% of the value of the property, normal CMHC/GE Capital premiums and guidelines
apply, and one thing to remember here is that only outstanding amounts can be combined - any discharge penalties and costs must be paid
separately at closing (please note that there are have cash-back programs to help with these penalties).
Financing a Renovation:
If you are doing major renovations (spending over $15,000), it could be less painful monthly with a mortgage as opposed to a loan or
line of credit.
Financing the purchase of other investments: You can use
the equity in your home to finance the purchase of investments, and also benefit from the lower carrying costs of a secured line of credit
or mortgage and also write-off the interest costs against the taxable incomes.
Financing the purchase of investment property:
If you have the equity and have a desire to be a landlord, you could take equity out of your property by refinancing the mortgage to use
towards the purchase of an investment property. This is also called leveraging of your assets.
Financing children's education:
The best thing we can do for our children is be good role models to them, teach them to be responsible citizens, and give them a good
base with a good education. With the high cost of many things nowadays, as well as education, it is sometimes difficult to have that
kind of money in the bank, but you many have it in the form of equity in your home. Education is something they will never lose on.
related to Refinancing: The regular costs related to the
refinancing process are: appraisal ($150-$214), legal fees & disbursements ($700-$1000), title insurance if survey not available ($225),
CMHC/GE Capital Premium if mortgage is high-ratio (this cost can be added to mortgage), PST when CMHC/GE Capital premium is required,
and any discharge penalties.
You should review your mortgage on a regular basis and keep up with new products and offers that are available -
they may save you a bundle. When you break your mortgage contract to renew your mortgage at a new rate and a new term, you are faced with
a prepayment charge to reimburse your financial institution for the lost interest income. Typically, this prepayment charge is based on the
greater amount of either 3 months interest or the interest rate differential (IRD).
Early Renewal: Whether or not you should early-renew your
mortgage depends on several factors. If the current rates are lower than the rate you have, compare the prepayment charge against the
savings by having the lower rate, and this will point the way. Or, if you believe that interest rates will be higher at your existing
renewal date, you can renew early to protect yourself from higher rates.
One thing to remember if you decide to early renew, is the
prepayment charge will have to be paid up front. If there is room, you can add it to your mortgage, but you will have to go through
a lawyer to redo the mortgage, and this cost will have to be taken into consideration when deciding which way to go. Some financial
institutions will blend both rates for the new term.
Some of the lenders have the CASH-BACK programs that could pay for your prepayment
charge. The savings in some situations run into the thousands of dollars.
Re-examine your mortgage from time to time, and at least
once a year. There are thousands of dollars that could be saved in many situations, but they go unnoticed.
Switching / Renewing
When the mortgage is about to mature, most lenders will mail out their renewal
agreements around 30 days before the mortgage matures. Often, this causes a lot of grief for many people, especially if rates start
to climb just before the mortgage comes due.
A lot of finantial institutions can guarantee your rates up to 120 days (4 months) before your mortgage comes due,
and this service is free and with no obligations.
When your mortgage is due for renewal, it's a great opportunity to make sure that you've got
the right mortgage for your present needs. Since the mortgage is fully open at this time, this is the perfect opportunity to pay
down your mortgage. Whatever you can afford, even a small amount, will have a significant impact in terms of interest you will
save over the life of the mortgage. It is also a great opportunity at this time to consider a more frequent payment method, such
as bi-weekly or weekly, if you are not already doing it. And of course, choosing the new term is important.
Another step you can take to save thousands of dollars in interest is if at renewal
the rates are lower than the rate you just had, and you are comfortable with making those payments, keep the payments the same at
the lower rate and start planning for the mortgage-burning party.
6- What is a Rental Comparison? We have
assembled some tables to allow you to gauge the possibility of purchasing instead of renting.The information is to be
used as a guideline only, please send us a message for more specific information.
If it is at all possible to purchase, you will see that it pays to put the money in your pocket instead of your landlords.
Please have a look at the tables below:
|How Much Rent Do You Pay?
||After 3 Years
||After 4 Years
|| After 5 Years
||After 6 Years
|Comparison of Rental Income vs. Mortgage Payments
||Down Payment Required
|| Purchase Price
|This Illustration Is Based on a Five Year Interest
The annual taxes are assumed to be 1.25% of the purchase price.
7- How do I find the Right Home? You have a pretty good idea
of the price range you can afford, and now it's time to fine tune and have everything come together.
Step 1: Pre-approved Mortgage - Obtaining a pre-approval tells you
exactly how much you can afford and guarantees your rate for up to 120 days. Now, you can buy a home with the confidence of knowing
you qualify. It also shows the vendor you are serious about buying the home and keeps you several steps ahead of others in the
Step 2: Preparation - Now that you know your price range, you can begin the search. First, make a Checklist of
your needs the home will fulfill, such as: type of home, type of ownership, location, inside and outside features, condition,
and other matters such as property tax levels, etc. At this time, you should decide on a lawyer so that he/she will be ready to check
all legal documents to ensure your interests are protected.
Step 3: The Search, for house and agent - With your
pre-approval, personalized needs checklist, and lawyer at hand, you are ready to start looking at properties. At this time, it is
important to have Shoreh Forjani or a top agent from her team by your side to help you with your search. Shoreh Forjani's team has a lot of information readily
available for sale and the current selling prices. They can help you fine tune your personalized needs checklist; explaining the types
of property and ownership, recommending neighborhoods, pointing out inside and outside features, and condition of a particular property.
We are also skilled at preparing the paperwork involved in making an offer to purchase and closing the sale (your lawyer will be
handy here to review any offers). Make sure that you communicate your needs clearly, as you are responsible for all decisions. Choosing
the right agent - as Shoreh Forjani and her team - is important for you to help you with your purchase.
Step 4: Making An Offer - If you have decided that this
is the right home for you, we as your real estate team will prepare the Offer for you (Agreement of Purchase And Sale). With us - your top agent -
list everything you want included (i.e., conditions on financing and inspection, survey clause, appliances, light fixtures, etc.).
At this time, you may want your lawyer to check it out, and certainly prior to waiving any conditions to make the offer firm.
A firm offer: means that you will buy the property as outlined in the offer of purchase and that there are no conditions attached.
Once the vendor accepts the offer, you are both bound to the agreement.
A conditional offer: means that you will buy the
property if those certain conditions are met. We recommend that a condition on financing is included, especially for high-ratio insured mortgages.
Just keep this in mind that we - as your real estate top agents - are always there to find you the right Mortgage Specialist should you not have one already.
Once determined which Financial Institution you would like to go with, you will need the following information:
Once all conditions have been satisfied (the offer has been accepted), a deposit is
required as a symbol of commitment
to the offer of purchase, and it is made payable to the listing Real Estate Firm "In Trust". Interest on the deposit can be requested,
and this deposit will be applied towards your down payment on closing.
- Copy of the accepted Offer To Purchase
- Copy of MLS listing (if listed on MLS service)
- Completed and signed application (if one is not on file yet, so that they can run
a credit check).
- Confirmation of your earnings: if you are salaried, a signed letter of employment,
3 years tax returns and assessments if commissioned, and 3 years tax returns and financial statements if self-employed.
- Confirmation of your down payment: it may be from your savings, RRSP, equity from
sale of another home (copy of sales agreement), a gift letter for any money gift.
- If purchasing a condominium, a copy of the financial statements for the condominium corporation
Step 5: Closing the deal and taking possession - After
the mortgage has been approved and all conditions waived, you must deliver the following documents to your lawyer:
On closing day, the lender will provide your lawyer with the agreed mortgage funds to
close the transaction. Your lawyer will register the property and the mortgage in your name, and obtain the keys and the deed for you.
- Copy of the complete accepted offer to purchase (all schedules, waivers, etc)
- Certificate of Fire Insurance - The insurance company will need to know the details
of property and Mortgage Company to prepare this. Lenders usually require you to arrange for full replacement value of the
- A copy of a Survey, signed by a qualified land surveyor. In lieu of a survey,
title insurance is acceptable with most lenders.
- Advise your mortgage specialist of the name, address, and phone number of your lawyer so that the mortgage
instructions can be sent to him/her.
- You should arrange for utilities (such as electricity, water, fuel, and telephone) to
begin service in your name.
- A few days before the closing date, you will meet with your lawyer to go over all
details. At this time, you will also be provided with a dollar figure so that you can prepare your certified cheque, made in trust
to the lawyer. This amount will cover for the balance of the down payment, closing costs and adjustments (please refer to section:
"Closing Costs and Adjustments" for details and estimated costs).
8- What are the different kinds of Mortgages?
A Pre-Approved mortgage is a Free and No-Obligation deal that lets you know before you go looking for your home or signing an offer to purchase,
how much you can afford to borrow based on your qualification and personal credit rating. Nowadays, financial institutions
offer most competitive rates with longest rate guarantee period that goes up to 120 days - if rates go higher, your rate will not be affected, and if rates
go lower, you get the lower rate. This protection is solely responsible for savings thousands of dollars for many people who obtained
a pre-approval and the rates increased afterwards.
Too often in the past, the mortgage was left to the very end, but with today's Online Pre-Approvals or by simply e-mailing the financial
institutions , they can take care of this important process within hours. Once you are Pre-Approved, you can confidently negotiate an offer on a home. A
seller also prefers to negotiate an offer of a purchaser who has been pre-approved.
A conventional mortgage is a loan that does
not exceed 75% of the purchase price or appraised value of the home, whichever is less. This type of mortgage does not have to be
insured against default.
mortgage is a loan that is above 75% and up to 95% of the purchase price or appraised value of the home, whichever is less. These
mortgages must be insured against loss. The premiums can be added to the mortgage amount or paid at closing, and are as follows:
|For Mortgages Up To:75%
||No Insurance Required
|For Mortgages From:
||Premium is 1.00%
||Premium is 1.75%
||Premium is 2.00%
||Premium is 3.25%
If you obtained an insured mortgage after April 1'st, 1996, the premium you paid on the
mortgage is now portable to another property (if you closed before this date, it is not portable, meaning that if you bought another
home and your mortgage needed to be insured, you must pay the applicable premium again.) NOTE: This insurance is for the benefit of
the lender against default. It is very costly and there is another way can be arranged a mortgage for you with a low down payment by
That is with a 1'st mortgage and a 2'nd mortgage. For your unique situation, it may be less costly to consider this option. Banks,
on the other hand, cannot offer you this option as they cannot provide secondary financing over 75% of the purchase price or value
of the property.
A First mortgage is the first debt registered against
a property that is secured by a first "charge" on the property. If a default on the mortgage occurs, the first lender has first right
on the property to recover the outstanding principal and interest costs, and any other costs incurred during the process.
A second mortgage is a debt registered after a first mortgage has been registered. In most cases, the interest charged
on the second is higher than the first, reflecting the higher risk to the lender, but over a short term, still more cost effective
than paying the high cost of the CMHC/GE Capital insurance premium. They can be used to finance up to 90% of the purchase price or
value of the home.
An open mortgage allows you the flexibility to repay
the mortgage at any time without penalty. Open mortgages are available in shorter terms, and the interest
rate could be higher than closed mortgages as much as 1%, or more. They are normally chosen if you are thinking of selling your home, or
if you are expecting to pay off the whole mortgage from the sale of another property, or an inheritance (that would be nice).
A closed mortgage offers the security of fixed
payments for terms from 6 months to 10 years. The interest rates are considerably lower than open, and if you are not planning on
any one of the above reasons, then choose a closed mortgage. Nowadays, they offer as much as 20% prepayment of the original principal,
and that is more than most of us can hope to prepay on a yearly basis. If one wanted to pay off the full mortgage prior to the maturity,
a penalty would be charged to break that mortgage. The penalty is usually 3 months interest, or interest rate differential
(I.R.D. - please refer to glossary for detailed explanation).
With a fixed-rate mortgage, the interest rate
is set for the term of the mortgage so that the monthly payment of principal and interest remains the same throughout the term.
Regardless of whether rates move up or down, you know exactly how much your payments will be and this simplifies your personal budgeting.
In a low rate climate, it is a good idea to take a longer term, fixed-rate mortgage for protection from upward fluctuations in interest
The Adjustable Rate Mortgage (A.R.M.)
The Adjustable Rate Mortgage
(A.R.M.) provides a lot of flexibility, especially when interest rates are on their way down. The rate is based on prime minus 0.375%
and can be adjusted monthly to reflect current rates, and for the first 3 months of the mortgage, a large discount on the rate is
given as a welcoming offer. Typically, the mortgage payments remain constant, but the ratio between principal and interest fluctuates.
When interest rates are falling, you pay less interest and more principal. If rates are rising, you pay more interest and less
principal, and if they rise substantially, the original payment may not cover both the interest and principal. Any portion not paid is
still owed, or you may be asked to increase your monthly payment. This mortgage is fully convertible at any time without any cost to you,
if you choose a 3 year term or greater, and offers a 20% prepayment privilege at any times throughout the year. While traditionally,
banks offer variable mortgages up to 75% of the purchase price or the value of the home, private lenders can go up to 90% with this product.
Secured Lines of Credit
A word of caution:
Although these lines are very flexible and versatile products, great caution and care should be taken.
It is very easy and very tempting to use it for everything whereas normal restraint would have been exercised, and suddenly, there
are thousands of dollars more that have to be repaid.
Use the equity in your home that you have
built up to purchase investments (where interest costs would be deductible against the earned income), finance home renovations, buy a
car, or any other reasonable needs, with rates as low as prime. They can be arranged up to 75% of the purchase price or value of the
home, and should you need more, lenders can arrange another secured line of credit as a Second mortgage up to 90%. Accessing the available
credit is as simple as writing a cheque, or using the issued credit and/or debit card. You do not have to draw the money until you need
it, and once you make a withdrawal, you can pay off your balance at any time or make monthly payments as low as interest only. As you
pay down the balance, you have that much more available credit (revolving credit).
Being a secured product, there are the normal legal and appraisal fees that are applicable. From time to time, there are promotions
where a lender will cover for part or all of these costs.
These are mortgages that are assessed on the equity
of the home (market value minus the mortgage amount). They can be as high as 75% of the purchase price or value of the property and if
more is required, lenders can look at a small Second mortgage. These are generally offered to applicants that do not meet the normal income
and/or credit qualifying guidelines. You may have little or no income verification, self-employed, and/or your credit may be
Multiple Term Mortgages
If you wanted the lower rates of a short
term mortgage but wanted the security of a long term, why not choose both. Yes, "build your own mortgage" product. You can split your
mortgage in to as many as 5 parts, all having different terms, rates, and amortizations, but one total monthly payment. This way, you
are spreading the risk. But, be prepared to be "hands-on" and watch the market very carefully here. This is not for everyone, as the
time and stress levels are quite high.
The 6 Month Convertible Mortgage
When rates are on their way down,
or you may feel that they will in the near future, a 6 month convertible mortgage offers you the short term commitment at fixed payments,
with an added advantage that while within the term, the mortgage is fully convertible to a longer term from 1 year to 10 years. At the
end of the 6 month period, the mortgage becomes fully open, where one can renew with the existing lender or transfer to another lender.
Even though it is offered at many financial institutions, there are differences from one to the next.
The AIM mortgage takes care of
everything automatically. For Purchases, it includes: Solicitor's legal fees and standard disbursements to close
the purchase and mortgage; Title transfer; Title Insurance for the clients; Appraisal fee;
1% Cash-Back to cover Land Transfer Tax; Registration of Deed and Mortgage. For Refinances, it includes: Legal fees
and standard disbursements to prepare and close the mortgage; Title Insurance; appraisal fee;
1% Cash-Back; Registration of new first mortgage; Registration of discharge of existing first and second mortgage. The minimum term
available is a 5 year term.
Bridge financing refers to a special, short-term
loan needed to cover the time gap when two properties, both firm sales, are involved and the closing dates don't match. The property
being purchased closes before the one that was sold. There is a small set-up fee charged by the lender to have the bridge loan arranged,
plus the cost of the interest as now you are carrying both properties for a short time. The rate charged on the bridge loan is about
2-3% above the bank's prime.
9-How do I calculate a Mortgage Payment?
To dynamically calculate your mortgage repayments click here!