How much can I afford to pay for a home
When considering how much to spend on a home make sure you calculate how much you think you can afford and not the maximum you can qualify for. If the payment amount you are comfortable with is less than the maximum you can qualify for you may want to settle for a lower amount rather than stretch yourself financially. Make your payments such so that you can still afford the simple luxuries in life!
To determine the maximum you will qualify for banks will first need to know your taxable income along with the amount of any debt outstanding and the monthly payments. If you are purchasing your principal residence, which would differ slightly from a rental property, calculate 32% of your income for use towards a mortgage payment, property taxes and heating costs. This is called your Gross Debt Servicing ratio or GDS. If applicable, half of the estimated monthly condominium maintenance fees will also be included in this calculation. In cases where applicants demonstrate a higher than average debt repayment history, shown by a very high credit score, lenders will allow you to use as much as 39% of your gross income towards your mortgage payment, property taxes, heating costs and strata fees if appllicable.
Second, calculate 42% of your taxable income and deduct all of your monthly debt payments, including car loans, credit cards, lines of credit payments. This is called your Toal Debt Servicing ratio or TDS. 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. Again lenders will give special allowances to those with exceptional credit.
What is a home inspection and should I have one done
A home inspection is a visual examination of the property to determine the overall condition of the home. In the process, the inspector should be checking all major components: roofs, ceilings, walls, floors, foundations, crawl spaces, attics, retaining walls, etc... and systems: electrical, heating, plumbing, drainage, exterior weather proofing, etc...
A pre-purchase home inspection can add peace of mind and make a difficult decision much easier. It may indicate that the home needs major structural repairs which can be factored into your buying decision. A home inspection helps remove a number of unknowns and increases the likelihood of a successful purchase.
What is the minimum down payment needed for a home
A minimum down payment of 5% is required to purchase a home, subject to certain restrictions. Several lenders offer programs to match applicants' 2.5% down payment to make it the 5% necessary by Canadian legislation. In addition to the down payment, you must also be able to show that you can cover the applicable closing costs (i.e. legal fees and disbursements, appraisal fees and a survey certificate, where applicable). Those costs in British Columbia are generally estimated to be 1.5% of the purchase price of the home.
Regardless of the amount of your down payment, at least 5% of it must be from your own cash resources or a gift from a family member. If it comes from your own funds you must produce bank statements that show the money in your account for 90 days.
Lenders will generally accept a gift from a family member as an acceptable down payment provided a letter stating it is a true gift, not a loan, is signed by the donor. Where the mortgage loan insurance is provided by Canada Mortgage and Housing Corporation (CMHC), the gift money must be in your possession before the application is sent in to CMHC for approval.
What is mortgage loan insurance
Mortgage loan insurance is insurance provided by Canada Mortgage and Housing Corporation (CMHC), a crown corporation, Genworth Financial Canada or Canada Guaranty, approved private corporations. Mortgages with less than 20% down must have mortgage loan insurance provided by CMHC, Genworth Financial Canada or Canada Guaranty. Mortgage insurance premiums range from 1.80% to 3.60% of the home's value depending on the amount of down payment. The premium is 3.60% for down payments between 5 - 9.99%. For down payments from 10 - 14.99% the mortgage premium is 2.40% and 1.80% for down payments of 15 - 19.99%.
Mandatory mortgage insurance benefits the consumer by reducing the risk of default to the lender. They can in turn offer lower mortgage rates.
What is a conventional mortgage
A conventional mortgage is usually one 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. If your down payment is less than 20% of the purchase price, you will generally require a high-ratio mortgage with mortgage loan insurance.
How does bankruptcy affect qualification for a mortgage
Depending on the circumstances surrounding your bankruptcy, generally some lenders would consider providing mortgage financing. When applicants have a bankruptcy in their credit history they must show a year of solid debt repayment, at a minimum, before lenders will consider a new mortgage. There is more leeway with mortgage renewals. Most lenders will insist upon 2 years between bankruptcy discharge and application and will also require that the down payment and closing costs come from an applicant's own funds.
How will child support affect mortgage qualification
Where child support and alimony are paid by you to another person, generally the amount paid out is deducted from your total income before determining the size of mortgage you will qualify for.
Where child support and alimony are received by you 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.
Can I use gift funds as a down payment
Most lenders will accept down payment funds that are a gift from family as an acceptable down payment. A gift letter signed by the donor is usually required to confirm that the funds are a true gift and not a loan. Where the mortgage requires mortgage loan insurance, CMHC requires the gift money to be in the purchaser’s possession before the application is sent in to them for approval. Where mortgage loan insurance is provided by CapitalGenworth Financial Canada or Canada Guaranty this may not be a requirement.
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.
Should I wait for my mortgage to mature
Lenders will often guarantee an interest rate to you as much as 90 days before your mortgage matures. And, as long as you are not increasing your mortgage, they will cover the costs of transferring your mortgage too. This means a rate promised well in advance of your maturity date, thus eliminating any worries of higher rates. And if rates drop before the actual maturity rate, the new lender will usually adjust your interest rate lower as well.
Most lenders send out their mortgage renewal notices offering existing clients their posted interest rates. The rate you are being offered is usually not the best one. Always investigate the possibility of a lower interest rate with the lender or another lender. If you don’t you may end up paying a much higher interest rate on your renewing mortgage than you need to.
What is a down payment
Very few home buyers have the cash available to buy a home outright. Most of us will turn to a financial institution for a mortgage the first step in a potentially long-standing relationship. But 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 long run. With a smaller mortgage, interest costs will be lower and over time this will add up to significant savings.
How can you pay off your mortgage sooner
There are ways to reduce the number of years to pay down 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
- Selecting a shorter amortization at renewal
How can you use your RRSP to help you buy your first home
Today, about 50% of first-time home buyers use their RRSP savings to help finance a down payment. With the federal government’s Home Buyers’ Plan, you can use up to $20,000 in RRSP savings ($40,000 for a couple) to help pay for your down payment on your first home. You then have 15 years to repay your RRSP.
To qualify, the RRSP funds you’re using must be on deposit for at least 90 days. You’ll also need a signed agreement to buy a qualifying home.
Even if you have already saved for your down payment, it may make good financial sense to access your savings through the Home Buyers’ Plan. For example, if you had already saved $20,000 for a down payment - and assuming you still had enough “contribution room” in your RRSP for a contribution of that amount you could move your savings into a registered investment at least 90 days before your closing date. Then, simply withdraw the money through the Home Buyers’ Plan.
The advantage Your $20,000 RRSP contribution will count as a tax deduction this year. Use any tax refund you receive to repay the RRSP or other expenses related to buying your home.
While using your RRSP for a down payment may help you buy a home sooner, it can also mean missing out on some tax-sheltered growth. So be sure to ask your financial planner whether this strategy makes sense for you, given your personal financial situation.
What are the costs associated with buying a home
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 (up to 2.5% of the basic purchase price).
If you want to have the home inspected by a professional building inspector - which we highly recommend - you will need to pay an inspection fee. The inspection may bring to light areas where repairs or maintenance are required and will 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 or notary acting for you in the purchase of your home. We suggest you shop around before making your decision on who you are going to use, because fees for these services may vary significantly.
There are closing and adjustment costs, interest adjustment costs between buyer and seller and (depending on where you live) land transfer tax - a one-time tax based on a percentage of the purchase price of the property and/or mortgage amount.
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.
What should the length of my mortgage term be
The length of mortgage terms varies widely - from six months right up to 25 years. As a rule of thumb, the shorter the term, the lower the interest rate the longer the term, the higher the rate.
While four or five 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 right now.
Before selecting your mortgage term, we suggest you answer the following questions:
- Do you plan to sell your house in the short-term without buying another If so, a short mortgage term may be the best option.
- Do you believe that interest rates have bottomed out and are not likely to drop more If that’s the case, a long mortgage term may be the right choice for you. Similarly, if you think rates are currently high, you may want to opt for a short to medium length mortgage term hoping that rates drop by the time your term expires.
- Are you looking for security as a first-time home buyer Then you may prefer a longer mortgage term, so that you can budget for and manage your monthly expenses.
- Are you willing to follow interest rates closely and risk their being increased mortgage payments following a renewal If that’s the case, a short mortgage term may best suit your needs.
What are the monthly costs of owning a home
Needless to say, you’ll have financial responsibilities as a home owner. 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 home buyers, 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 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.
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.
As a home owner, you’ll 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.
Should you go with a short or long-term mortgage
A longer-term mortgage is worth considering if you have a busy life and don’t have time to watch mortgage rates. Our 4, 5 and 7-year mortgages let you take advantage of today’s rates, while enjoying long-term security knowing the rate you sign up for is a sure thing.
If you want to keep your mortgage flexible right now, you can explore a shorter-term mortgage that usually allows you to take advantage of lower rates and save.
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 for a period of one to two years although interest rates may fluctuate from month to month 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 monthly payment goes towards covering the interest. Most open variable rate mortgages allow prepayment of any amount (with certain minimums) on any payment date, up to a maximum total amount per year.