M O N E Y
M A T T E R S
SHOPPING FOR YOUR NEW HOME
The purchase of a new home may be the largest investment you make in your lifetime.
CHOOSING THE RIGHT PRICE Four areas to consider in determining the right price for you are: • Down Payment Available • Monthly Mortgage Payment • Other Debts • Price Range of Suitable Homes DOWN PAYMENT A minimum of 5% of the purchase price of the home is required. When a home is purchased with a down payment between 5% and 20% of the purchase price, this is referred to as a NHA Insured Mortgage or a “high ratio” mortgage. Mortgage loan insurance is required for this type of mortgage. A down payment of 20% or more, along with an appraisal, is usually required to qualify for what is called a Conventional Mortgage. Mortgage loan insurance is usually not required with 20% down. Examples of non-traditional sources of a down payment are: Personal loans, lines of credit, credit; any source that is arm’s length to and not tied to the purchase or sale of the property. MONTHLY MORTGAGE PAYMENT The general rule of thumb is to allow approximately 32% of your gross household monthly income (before deductions) to cover your monthly mortgage payment (including reduction of property taxes, heating costs and 50% of condominium fees). The 32% guideline is known as the Gross Debt Service (GDS) ratio. (Allowable GDS/TDS may vary based on mortgage type and reviewed on a case by case basis). This calculation will assist you in determining what you can afford. Example (using monthly amounts): Gross Monthly Income Spouse’s Gross Monthly Income Other Income Total Income
$ $ $ $ x
Total Income
$
Less: Property taxes, heating costs and 50% of condominium fees
$
32%
Equals: Maximum principal and interest payment $ OTHER DEBTS Another rule of thumb is to allow approximately 40% of your gross monthly income (before deductions) to cover your monthly mortgage payment (including property taxes, heating costs and 50% of condominium fees) plus any payments you may be making on other debts, such as loans from financial institutions, credit cards, or other regular monthly debt commitments. This 40% guideline is referred to as the Total Debt Service (TDS) ratio. PRICE RANGE By knowing the amount of your down payment and your maximum payment (taking into account your other monthly payments and the amount of the property taxes), you can determine the maximum price range of homes that you can look at.
WRITING THE OFFER When you make an offer, you should have the full amount of the down payment available as well as a percentage of the purchase price to cover your land transfer tax (typically between 0.5% and 2%). In addition, you will need funds available for legal fees and adjustments for prepaid property taxes, utility bills, etc.
It’s a good idea to apply for a pre-approved mortgage at Access Credit Union. This will determine the amount you can borrow, the interest rate, your level of payments and your payment schedule before you buy. visit: accesscu.ca/homes
MORTGAGE OPTIONS Open - Gives the borrower the option to repay any amount of the balance owing, at any time, without penalty Fixed - Gives the borrower peace of mind because their mortgage payment and interest rate will remain unchanged for the term chosen. It allows the borrower to repay portions of the mortgage amount through extra payments called “prepayment privileges” without an interest penalty. Closed - Does not allow extra payments or early repayment. Interest rates are usually lower on closed mortgages. Variable - Potential for significant savings of interest costs and improved flexibility. The interest rate varies during term of mortgage. A capped variable rate mortgage means the payment is fixed based on an agreed rate and term. The interest rate is based on the prime rate and fluctuates with rate changes, however, your payment remains unchanged. The rate cannot exceed a maximum rate which has been agreed upon (the capped rate). The borrower has the advantage of the lower interest rate and the mortgage is paid down sooner as their payment does not reduce. An adjustable or uncapped variable rate mortgage means that the payment amounts fluctuate in direct correlation with changing interest rates. In both of these products, the borrower, generally, has the option to lock-in to a fixed mortgage at any time. Home Equity Line of Credit - is a collateral mortgage whereby a line of credit is secured with a property, unlike a conventional mortgage. This is not popular with first time home purchases, but is often used for borrowers who want to use the equity in their home. For additional information about various alternatives, see a lender at Access Credit Union. MORTGAGE PAYMENT OPTIONS Access Credit Union offers a variety of different mortgage payment options: weekly, bi-weekly or lump sum payments. Making additional or weekly payments can substantially reduce the cost and life of your mortgage.
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