Understanding Financing

Knowing what you can afford in a home will determine what houses could be considered in your search for your new home. And before you begin looking, you need to be qualified or pre-approved for financing. (Note – there is a big difference between pre-qualified and qualified. Qualification involves a much more in-depth credit analysis and provides the go ahead to enter a mortgage agreement.) Once pre-approved, you will be provided with a written confirmation of what you can afford, along with a fixed interest rate good for a specific period of time.

To obtain pre-approval, contact a mortgage broker. The advantage of using a mortgage broker is that the broker operates independently of the lender and will be more objective in the search for the best financial product. Mortgage broker services are usually offered at no cost to borrower. The Live in TO team can recommend a good mortgage broker if you need one.

Being pre-approved for a mortgage enables you to move quickly when you find the perfect place. When you make an offer, it won’t be conditional on obtaining financing, which can save you valuable time. This also lets the Seller know that your offer is serious – and could prevent you from losing out to another potential buyer who already has financing arranged.

If you’re having trouble qualifying for a mortgage, you can take some steps to help you work towards that goal:

• Pay off some loans first
• Save for a larger down payment
• Revise your target house price

Once your financial situation improves, your next application may very well be approved.

Down Payment Options

Your down payment can include funds from your own savings, investments, sale of property, or gifts from an immediate family member. The larger the down payment, the less interest you’ll pay over the life of your mortgage.

The 5% Down Payment

For as little as 5% down, it is possible to own a home. At least 5% of the purchase price needs to come from your accumulated savings or a gift from an immediate relative. You may also be eligible either to:

A) Receive ‘cash back’ from the lender, which can be used as the down payment or
B) Borrow the required funds

Using your RRSP to Purchase a Home

The Home Buyers’ Plan (HBP) allows a person to withdraw up to $25,000 from RRSPs for a home purchase, subject to certain repayment conditions. Couples with separate plans can borrow up to $25,000 each to a total of $50,000. The HBP option is open to:

• First time home buyers
• Individuals purchasing a home on behalf of a person with a disability
• Individuals who are disabled themselves.

To withdraw money from your RRSP savings, you first need a T1036 form: ‘Request to Withdraw Funds from an RRSP under the Home Buyer’s Plan’ (HBP). You can download this form from the Canada Revenue Agency at the link below:

http://www.cra-arc.gc.ca/E/pbg/tf/t1036/README.html

You will need to give the completed form to the RRSP issuer and meet the Canada Revenue Agency’s conditions, which include:

• You must take advantage of the HBP in the same year you are ready to purchase your home
• You must not have participated in the program previously, nor owned a home within the last five years
• You must be a resident of Canada
• You must enter into a written agreement to buy or build a qualifying home

A full list of terms and conditions can be found on the Canada Revenue Agency web site:

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/cndtns/menu-eng.html

To be eligible for the HBP, the RRSP contribution money must also be held in an account for at least 90 days prior to withdrawal.

Not every RRSP is eligible under this program. Check with your RRSP issuer to see if you qualify. Also, advise your lawyer well before closing that you will be using these funds.

Understanding Mortgages

When looking to buy your first home, the size of your down payment will help determine which mortgage option is best suited for you. For most people, especially first time home buyers, saving the required down payment may be challenging.

There are two basic options for mortgages – Conventional or High Ratio:

Conventional Mortgage

A mortgage that does not exceed 80% of the purchase price is known as a conventional mortgage. The amortization (the length of time it would take to repay a loan in full based on the payment amount at the selected payment frequency and current interest rate) is usually 25 years to a maximum of 35 years. The term of the mortgage is the number of months or years (6 months to 5 years), for which the rate of interest is set. A conventional mortgage generally does not need mortgage loan insurance. Other circumstances may however also require mortgage loan insurance.

High Ratio Mortgage

A high ratio mortgage exceeds 80% of the value of the property. Lenders can still offer competitive interest rates with a high ratio mortgage by means of mortgage loan insurance, a legal requirement for high ratio mortgages. You can put as little as 5% down on a home with mortgage loan insurance in place. Other circumstances may also require mortgage default insurance.

Understanding Mortgage Insurance

Mortgage Loan Insurance (or Mortgage Default Insurance) was developed to meet the needs of both home buyers and mortgage lenders. Mortgage Loan Insurance makes it possible for a home buyer to make a smaller down payment on their home while protecting the lender against loss in the event that the homeowner defaults on their mortgage.

Mortgage Loan Insurance is not to be confused with Mortgage Life Insurance which guarantees that your remaining mortgage at the time of your death will not be a burden to your estate. Mortgage Loan Insurance guarantees the mortgage loan by protecting the lender should the homeowner be unable to continue their payments for some unforeseen reason.

There are currently two main mortgage loan insurance providers in Canada – Genworth Financial Canada, the largest private insurer in Canada, and Canada Mortgage And Housing Corporation, a government agency. It is the lender’s choice as to which mortgage insurance company to use.

Mortgage loan insurance premiums are paid once, but can be added to the principle of the mortgage.

Understanding Mortgage Rates

Fixed Rate Mortgage

A Fixed Rate Mortgage has a locked rate for the entire term length, meaning your payments stay equal every month. For example, a 5 year fixed mortgage with 4.85% interest rate is locked in at 4.85% interest for 5 years, without changes.

Variable Rate Mortgage

A Variable Rate Mortgage has a variable or floating rate which fluctuates every month. The interest rate may go up or down, affecting monthly mortgage payments. The interest rate is affected by Canadian economy and monetary policies set by the Bank of Canada.

Speak to a mortgage broker for more information on your financing needs. The Live in TO team would be happy to refer you to a mortgage broker who will help you determine which product is best suited for you.