Bi-weekly and weekly payments
Most mortgages have the option to allow payments to be made on a weekly or bi-weekly basis. This option may be desirable for two reasons. The first is it can save you money as you can expect to pay off your mortgage about 4 years sooner. This can save you dramatically over the life of your mortgage. The other reason why these options are so popular is that if your employer pays you on a weekly or bi-weekly basis, you can simplify your budgeting by making the payment line up with the way you paid.
Making Extra payments
Paying extra amounts on your mortgage can make a big interest saving over time. When we select a mortgage company, privilege payments options are something that we look for. A 20% privilege payment will allow you to pay off up to $20,000 per year on a $100 000 mortgage. It is important that the privilege payment also be flexible to allow you to pay smaller payments on the mortgage and as often as you wish. An extra $1000 periodically paid on a mortgage can help you become mortgage free faster.
Reducing the CMHC fees on your purchase
When you require a mortgage for more than 75% of the purchase price of a property, that mortgage must be insured by Canada Mortgage and Housing (CMHC) or GE Mortgage insurance. The premium charged by these company`s decreases as the down payment increases. When you finance your property at 95%, a premium of 2.75% is added to the mortgage. By increasing the down payment to 10% of the purchase price the premium can be reduced to 2.5%. If you can put down 25%, you can avoid any additional insurance fee. Depending on your situation there are ways that you can structure this financing to avoid the CMHC or GE insurance premium.
Advantages of Bigger Down Payments
As mentioned above, when you put a 25% down payment on your purchase you can avoid the CMHC premium. More importantly the larger the down payment, the lower the amount of interest you will pay over the life of your mortgage. It is important to note that it may not be wise to stretch yourself to increase your down payment and end up borrowing on credit cards or a line of credit at a higher rate.
Short Term Rates vs. Long Term Rates
The options for mortgages available can be very confusing for most mortgage shoppers. Terms for mortgages vary between variable and fixed rate, 6-month terms to 10 year terms. Taking a variable or floating rate mortgage can have savings. Typically the shorter the term or guarantee of the rate, the lower the rate will be. This does not always happen, depending on the market place and the economy, but history has shown that short-term rates tend to be lower than long-term rates. The up side of variable rate is the strong potential for interest rate savings. The down side is the fact that you are accepting the interest rate risk without a guarantee. If you are considering a variable rate mortgage you need to look at your own risk tolerance, and your cash flow available to deal with potential increased payment. Considering projections of rates and where we see interest rates heading can also be important in this decision. Make sure you talk to an expert when you are making this decision.
FREQUENTLY ASKED QUESTIONS
How do I know what can I afford?
First you will have to calculate your net worth. This is the difference between your total assets (what you own) and total liabilities (what you owe). Your mortgage lender will certainly want this information and it will give a quick insight into how much down payment you can afford. Along with your net worth, you’ll also need to add up your non-discretionary monthly expenditures. This will help you see how much you can manage for mortgage payments.
Mortgage lenders follow two simple rules to determine what you can afford in monthly housing costs: The first is that your monthly mortgage payments shouldn’t be more than 32% of your gross household monthly income. This is called the Gross Debt Service Ratio. The second is that your total monthly debt load shouldn’t be more than 40% of your gross monthly income. This is your Total Debt Service ratio.
What kind of mortgage should I get?
There are different types of mortgages available to suit individual needs, resources and preferences. You can choose fixed rate or variable rate, short term or long term, closed or open. Here are some general rules of thumb to help you decide on the mortgage structure that’s right for you.
When considering a fixed rate versus a variable rate mortgage, the current interest rate and whether you believe it will rise or fall in the future is a key determining factor. If rates are low, it may be best to lock into a fixed rate mortgage. If rates are likely to decrease, however, a variable rate mortgage would be advantageous. In this case, your monthly payments would stay the same but the amount of principle you pay would increase. An adjustable rate mortgage will change the amount of your monthly payments based on market conditions.
Short-term mortgages are preferable if you think interest rates are likely to remain low or fall in a few years. Long-term mortgages are the better bet if you foresee interest rates rising over the long term. Long term mortgages are typically 3 or more years and often have higher interest rates than shorter term mortgages.
Your third option is an open or closed mortgage. Open mortgages allow you the freedom to make prepayments and lump sum payments without penalties. Closed mortgages offer lower interest rates but have the disadvantage of not allowing you to contribute extra money over and above your regular monthly payments.
We recommend that you contact a mortgage specialist for more details and to find out what mortgage option best suits your needs.
What are some of the extra costs?
Once you have decided on the price range of your home and calculated your mortgage payments, you’ll still need to assess all the associated costs of home buying to ensure you can manage the financial load.
The first possible extra is mortgage insurance. If you pay less than 25% of the property’s value for your down payment, you’ll have to get insurance from CHMC. It usually costs between 1% & 2.9% of the mortgage amount depending on the amount of your down payment.
Next is the appraisal fee. Your mortgage lender may require that the property be appraised at your expense. A Home Inspection Fee may also be a condition of your Offer to Purchase. These fees could add up to $400 to $600 on the purchase price.
Property insurance is another additional cost. The mortgage lender requires the home to be insured because it is security for the mortgage. Also your Legal Fees and Disbursements must be paid upon closing and they’ll cost a minimum of $500. Other up-front costs may include Property Tax and pre-paid vendor costs such as fuel and utility bills.
If you’re buying new, the builder may offer optional upgrade packages. This will increase the price of the home but can be rolled into the mortgage and be amortized over the life of the mortgage. After final completion, you’ll be facing ongoing payments such as annual property taxes.
Do I have to pay the Property Transfer Tax and how much will it be?
It depends. First time homebuyers may be exempt from paying this tax or may qualify for a partial rebate
Onatario’s Land Transfer Tax Rates (effective from June 1, 1989)
0.5% of the value of consideration for the transfer up to and including $55,000,
1% of the value of the consideration which exceeds $55,000 up to and including $250,000, and
1.5% of the value of the consideration which exceeds $250,000, and
2% of the amount by which the value of the consideration exceeds $400,000 for land that contains at least one and not more than two single family residences.
In the City of Toronto we have the additional Municipal Land Transfer Tax
The MLTT will be charged on a graduated basis depending on the value of consideration paid for the property.
For property containing at least one, and not more than two, single family residences with a consideration value of:
Value of Consideration MLTT Rate
Up to and including $55,000.00 0.5% plus
$55,000.01 to $400,000.00 1.0% plus
Over $400,000.00 2.0%
For all other property with a consideration value:
Value of Consideration MLTT Rate
Up to and including $55,000.00 0.5% plus
$55,000.01 to $400,000.00 1.0% plus
$400,000.01 to $40,000,000.00 1.5% plus
Over $40,000,000.00 1.0%
Here is a link to a good Land Tranfer Tax Calculator:
http://www.torontorealestateboard.com/LTT_splash/ltt_calculator.htm
Can I use my RRSP’s for my down payment?
One way to add to your down payment amount is to tap into your RRSPs. While it’s true that normally you’d probably pay penalties and income tax on any RRSP withdrawal, there is an exception to the rule. As a first time homebuyer you may withdraw up to $20,000 ($40,000 per couple) from your RRSP’s under the Home Buyers’ Plan. These funds can be used to increase your down payment and are not counted as income and subject to income tax. But there are some conditions attached that you should be aware of:
The amount withdrawn must be repaid within 15 years from the date of withdrawal.
You must purchase your home by October 1st in the year following your withdrawal.
You must start repaying your withdrawal in the second year after your withdrawal.
Repayments are not tax deductible.
When do I make my first mortgage payment?
Because of high demand, you may want to put a deposit on a home in the pre-construction or pre-completion stage. Mortgage payments, however, only commence on the completion of the home – you don’t have to make payments immediately after you pay the deposit. A good thing too as it could be some months before you can move in.
What does ‘closing in escrow’ mean?
Unfamiliar legal and financial phrases are very much part of buying a home. You may encounter the term ‘closing in escrow’ if one or more of the stipulated conditions for the completion of the contract have not been met. This could be as simple as unforeseen delays at the land title office or in the transfer of funds. Until the situation is resolved, a third party holds the money or documents in escrow. Escrow closes when all of the conditions of the transactions have been met and the title of the property is transferred to the buyer.