Home Financing Guide
1 Basics about Your Mortgage Options 2 Conventional or High Ratio Mortgage 3 Options for a Down Payment 3 Understanding Amortization 4 Real Home Financing Costs Checklist 6 Make the Most of Investing in a House 8 Is Home Ownership Right for You?
Refinancing vs. Home Equity Line of Credit for Renovations Mortgage Document Checklist
Is Home Ownership
Right for You?
Buying a home is one of the most important and emotional decisions you will make in your lifetime. Before you get started you must answer an important question: is home ownership right for me? To help you answer whether home ownership is right for you, there are a few questions you can ask yourself: •
Can I afford to own a home? o Affordability rule #1: your monthly housing costs should not be more than 32% of your gross monthly income. Housing costs include your monthly mortgage payments, mortgage insurance, property taxes and heating expenses. o Affordability rule #2: your entire monthly debt load should not be more than 40%
of your gross monthly income. Your entire monthly debt load includes your housing costs plus all your other debt payments (car loans or leases, credit card payments, lines of credit payments, etc.).
What are the pros and cons of renting vs. buying? o Example: Renting pro: housing costs are typically included in monthly rental payments. Renting con: unable to renovate the property to your personal taste or
Buying pro: building your own equity rather than paying into someone else’s. Buying con: housing costs and added maintenance responsibilities will be
higher when you own your home.
Am I financially stable for the foreseeable future? o Are you in a stable career?
o Are you at risk for layoffs, strikes, or relocation?
Am I ready to take on the responsibility of all the costs involved in homeownership including mortgage payments, repairs, and maintenance? o Not to mention the costs involved with purchasing a home: the down payment, closing costs, up-front costs, and more. See The Real Home Financing Cost Checklist article for more information on added costs you need to be aware of before applying for a mortgage.
Learn the Basics about
Your Mortgage Options
The chart below outlines the features and benefits of your mortgage options. A credit union Mortgage Specialist can help you determine which options are best suited for your needs based on a full assessment of your financial situation, goals, and realities.
Type Fixed Rate Mortgage
Variable Rate Mortgage
Interest rate locked in for the term of the mortgage.
Security and peace of mind.
Interest rate changes with the market.
Low interest rate. Potential interest savings.
The interest rate will not increase over the term of the mortgage. Monthly payments do not change. If interest rates go down you risk paying more interest over the term of your mortgage.
If interest rates go down you could pay off your mortgage faster. If interest rates go up you risk paying more interest over the term of the mortgage. Monthly payments would fluctuate with an “uncapped” or “adjustable variable mortgage. Payments will remain constant if the mortgage is “capped.” Open Mortgage
Pay off your mortgage in part, or in full, at any time without penalties.
Flexibility. Short-term option.
Cannot pay off your mortgage in part or in full without penalty.
Lower interest rate. Long-term option.
Mortgage Secured Line of Credit / Home Equity Line of Credit
Use the equity in your home to secure up to 80% of the purchase price or value of your home.
Low interest rate. Flexibility.
Collateral Mortgage / Collateral Charge Mortgage
Register your mortgage for up to 125% of the value of your home at closing.
Access to more funds after closing without extra costs.
An open mortgage offers flexibility to pay off your mortgage in part, or in full, at any time without penalty. It also allows you to renegotiate at any time. This option comes at a higher interest rate and therefore is likely only considered for the short-term. This could be a great option if you plan to sell again in the short-term.
A closed mortgage does not offer the flexibility to pay off or renegotiate your mortgage at anytime. However, you do receive a lower interest rate reducing the overall interest cost of your mortgage over the term.
This is a great option for anyone who is confident in their ability to manage the line of credit responsibly. And, anyone who can ensure that a payment schedule will be put in place to manage the funds. Funds can be used for any reasonable purchase, such as home renovations, a new car, etc.
A collateral charge mortgage generally doesn’t allow a lender to change a fixed rate or the discount on a variable-rate mortgage. However, it does allow the lender to change the rate if you ask for more money later or if you have a line of credit portion with a floating rate. It makes it easier to refinance by avoiding legal costs.
Conventional or High Ratio Mortgage? A Conventional Mortgage does not exceed 80% of the purchase price, or the appraised value of the home, whichever is less. This option doesn’t require you to have it insured against default.
BENEFIT: If you can save at least 20% for your down payment you’ll save the additional expense of mortgage insurance required with a High Ratio Mortgage. A High Ratio Mortgage is a loan above 80% up to 95% of the purchase price, or appraised value of the home, whichever is less. This mortgage option requires the value of the mortgage to be insured by an approved mortgage insurer like the Canada Mortgage and Housing Corporation, a Federal Government Corporation, or Genworth Financial Canada, a private insurer. There will be a premium paid for this insurance, which can be paid up front or included in the principal portion of your mortgage.
BENEFIT: If you are unable to secure a 20% down payment this option allows you to purchase a home sooner.
What Are Your Options
for a Down Payment?
To assess the best mortgage option for you when purchasing a home, you should consider how much funds you have for a down payment.
20% Down Payment: Qualifies you for a conventional mortgage, which is a mortgage that does not require mortgage insurance.
Less than 20% Down Payment: If you do not have the 20% down payment you could qualify for a High Ratio mortgage. This mortgage is a loan above 80% up to 95% of the purchase price, or appraised value of the home, whichever is less. CMHC, a Federal Government Corporation, or Genworth Financial Canada, a private insurer, would insure these loans. With an insured loan, the down payment could be as low as 5%.
Home Buyers Plan: If you are a first time homebuyer,
you (and your spouse) can use your RRSP investments to finance your down payment through the Federal Government’s Home Buyers’ Plan. You and your spouse can each contribute up to $25,000. These funds are paid back over a period of 15 years.
Tip: The more you can afford for the down payment the greater your interest savings will be over the life of your mortgage.
Amortization & Other Strategies to Save You Money Amortization refers to the length of time, in years, that you choose to pay off your mortgage completely. Mortgages typically come in 25 or 30-year amortization periods. However, they can be as short as 15 years. Choosing the amortization period is an important step as it will ultimately determine how much interest you pay over the life of your mortgage. Typically the longer the amortization the smaller the monthly payments will be. This may be a good strategy if your priority is making payments more manageable. However the longer the amortization the higher the total interest costs will be over the life of the amortization. By choosing a shorter amortization, say 15 years, typically you will have a higher monthly payment. You will however have a significant savings in interest payments over the life of your mortgage compared to other amortization options of 25 or 30 years, and will own your home years sooner. There are other strategies that can help you pay off your mortgage faster:
• Payment schedule – one of the most popular options is using an accelerated weekly or bi-weekly payment schedule. This option can help you pay off your mortgage years sooner, ultimately saving you interest over the life of your mortgage, and increasing the frequency of your payments is also a great strategy to help pay off your mortgage faster. • Lump sum payments – depending on your mortgage type, you could make lump sum payments when additional funds become available to you.
Talk to a credit union Mortgage Specialist today. We can help you understand which mortgage options will give you the right balance of flexibility and manageability for your needs.
Use the Mortgage Comparison to determine the best amortization for your mortgage. Shorter amortizations save you interest while longer amortizations allow you a lower monthly payment. Which one works better with your budget?
Home Financing Cost Checklist There are a number of costs associated with home financing that should be considered when thinking about purchasing a home. It’s more than the purchase price and monthly mortgage payment. Download the checklist below to calculate the real costs of financing a home. •
Description of Expenses
Home purchase price
HST (if applicable)
Deposit (paid when you sign the Offer)
Appraisal fee (if applicable)
Estoppel certificate fee (for condominium/strata unit)
Home inspection fee
Land registration fee
Legal fees and disbursements
Mortgage loan insurance premium (required if your down payment is less than 20% and can be included in your mortgage)
Prepaid property taxes and/or utility bill adjustments
Survey or certificate of location cost
Deed transfer tax
Interest adjustment costs
Bridge financing (if applicable: used if your home purchase closes $ before the sale of your current home or to finance a land purchase if you are building) Other expenses:
Appliances Gardening equipment Snow-clearing equipment Window treatments Decorating materials Hand tools Dehumidifier Moving expenses Renovations or repairs Service hook-up fees Condominium fees
Don’t forget to consider your monthly expenses! Description of expense
Utilities (heat, power, water, telephone, cable, internet, etc.)
Maintenance and upkeep
Tip: Meet with a credit union Mortgage Specialist to get a mortgage preapproval. A pre-approval is a sure way to know exactly what you can afford, what your interest rate will be, and puts you in a great position when making an offer. All this and no obligation to buy!
Programs to Help You Make the
Most of Investing in a Home
There are a number of programs available offering incentives to make buying or renovating a home easier.
Buying a home Home Buyers’ Plan: A program that allows you to withdraw available funds from your RRSP plan to purchase or build your first home, up to $25,000. If you and your spouse are first-time home buyers you can both withdraw up to $25,000 from your individual RRSP savings without paying tax at the time of withdrawal. Amounts withdrawn are repayable and subject to certain conditions.
First-Time Home Buyers’ Tax Credit: A program that allows first-time home buyers’ to claim an amount of $5,000 for the purchase of a qualifying home made in 2011 if the following applies: • You or your spouse or common-law partner acquired a qualifying home. • You did not live in another home owned by you or your spouse or common-law partner in the year of acquisition or in any of the four preceding years (first-time home buyer).
GST/HST New Housing Rebate: A program that may qualify home buyers for a rebate of part of the GST/HST paid on: •
The purchase price or cost of building a new house.
The cost of substantially renovating.
Building a major addition onto an existing house.
Converting a non-residential property into a house.
Renovating a Home Medical Expense Tax Credit: A program that will allow a non-refundable tax credit to be claimed for certain amounts paid for renovations or alterations to give a person who has a mobility impairment access to (or greater mobility within) the dwelling.
Energy Efficiency Rebate Program: Both Canada Mortgage and Housing Corporation (CMHC) and Genworth Financial Canada offer an energy efficiency rebate ( 10% refund on the Mortgage Loan Insurance Premium) if you qualify for the program. The rebate applies when your mortgage uses their insured financing to buy an energy-efficient home, purchase a house and make energy-saving renovations, or renovate your existing home to make it more energy-efficient. You could also have the added flexibility of an extended amortization (up to a maximum of 30 years) without a premium surcharge. For more information on the Federal programs visit www.cra.gc.ca/myhome. For more information on the energy efficiency rebate programs please visit CMHC at www.cmhc-schl.gc.ca and Genworth Financial Canada at www.genworth.ca.
Selling a Home Moving Expense Tax Credit: You could be eligible to deduct moving expenses if you move and establish a new home to be employed or carry on a business at a new work location.
Refinancing vs. Home Equity Line Of Credit for Your Home Renovations Are you considering home renovations? It is an exciting time when you consider the improvements you wish to make, but also stressful when considering the best option for financing the renovations. Your credit union Mortgage Specialist can help you determine the best option for you. They will discuss which of the following options may be best for your unique situation.
Refinancing Depending on your mortgage terms and conditions you may be in a position to refinance your mortgage and acquire additional principal to fund your home renovations. It is best to compare this option against all financing options to see the full cost/benefit of refinancing your mortgage based on your needs now and in the future.
Home Equity Line of Credit Depending on how much equity you have acquired on your current home you could be eligible for a Home Equity Line of Credit, also known as a Mortgage Secured Line of Credit. This lending option can secure up to 80% of the value of your home, using the equity youâ€™ve acquired as security against the credit amount borrowed. A Home Equity Line of Credit is a great option for those who are disciplined with their finances. The option offers a great benefit of knowing you have funds available if and when you need them throughout your home renovation.
Personal Loan If refinancing is not the best option to finance your home renovations, a Personal Loan may be a great alternative. A Personal Loan offers you the security of a fixed term and payment schedule and offers the funds required to complete your planned home renovations or home improvements.
Personal Line of Credit
If you are not eligible for a Home Equity Line of Credit, a Personal Line of Credit may be the best alternative. A Personal Line of Credit offers you the same flexibility of having access to the funds you require for your home renovations or home improvements when you need them. The Personal Line of Credit also offers you the flexibility to determine and manage the payment schedule to repay the credit amount used.
Mortgage Document Checklist Know what documents you need ahead of your appointment with your credit union Mortgage Specialist. The checklist to the right outlines what you’ll need to complete a no-obligation mortgage pre-approval or to finalize your mortgage application. Call ahead with any questions you may have regarding the requirements listed.
Buying a Home Personal Information • Identification • Proof of current address (if less than 2 years, previous address required) • Social insurance number • Occupation • Number of dependants • Email address
Employment Verification • Current employer’s name, address, contact information • Length of employment (if less than 2 years, previous employment information required) • Sources to verify your income such as: • two recent pay stubs • an employment letter • If self-employed, T1 General Notice of Assessment (NOA)
Asset Information • Balances of all your accounts • Value of your RRSPs • Value of your investments • Value of your current vehicle
Liability Information • Credit cards (balance and credit limits) • Lines of credit (balance and credit limits) • Loans and leases (balance and credit limits) • Other expenses
Description of the Home: • Purchase and sale agreement • MLS listing with photo • Name, address, contact number of your solicitor/ notary
Confirmation of Down Payment • A bank statement confirming direct deposit • An investment statement
Refinancing Your Mortgage Description of Your Home: • Recent mortgage statement • Current homeowner insurance policy • Most recent property tax statement
• Legal description of your property (from original purchase agreement or property tax statement)