Frequantly Asked Questions
There are several factors that come into play when determining how much you can afford to borrow for a home.
Some of the key ones are…
– Qualifying Income
– Your personal debts and monthly obligations
– Your credit score and history
– The amount of Down Payment and Closing Cost funds you have available
– Factoring in the principal and interest payment
– Property taxes
– Strata fees
– And a heating cost component for the property you wish to purchase
There are standard qualifying ratios called the Gross Debt Service Ratio and the Total Debt Service Ratio, and the amount of these ratios are determined by your credit score and in some cases the percentage of down payment you are using. The ratios themselves factor in the debt proportionate to your income.
For example – on a high ratio mortgage with 5%-19.99% down payment, the Gross Debt Service Ratio is 35% of your income if your credit score is under 680, OR 39% if you credit score is 680 or higher. GDSR factors in only the percentage of costs associated with the housing (mortgage payment, property taxes, strata fees, heat).
TDSR – Total Debt Service Ratio, factors in all GDSR numbers and also your personal monthly obligations such as vehicle payments, credit card, line of credit and loan payments. On the same high ratio mortgage your TDSR can be up to 42% of your income if your credit score is below 680, OR 44% if your score is 680 or above.
Considering all the factors involved, the fastest and easiest way to know exactly what you are looking at is to speak to a mortgage professional. With access to many lenders and products and since this is their full time occupation, their expertise will guide you through the process quickly and confidently.
The minimum down payment required is 5% on home purchases $500,000 and under.
For homes over $500,000 the minimum is 5% on the first $500,000 and 10% on any amount over that up to $1,000,000 purchase price.
There are several options available for sourcing your down payment:
If you are a first time buyer: (You can use a combination of most of these)
– Your own savings, investments and RRSP. See: “How to use my RRSP for down payment?”
– Sale proceeds from a personal asset (for example – a car, boat, trailer, etc.) You will have to show legitimate sale documents and the deposit into your bank account.
– Gift from a closely related family member –We will supply you with a form gift letter to be signed by all parties
– Borrowed Down payment from an arm’s length source – line of credit, credit card, loan, etc. Please note that only a few lenders participate in the borrowed down payment program.
– The BC Home Partnership program, which is a 2.5% to 5% loan (based on the purchase price of the home) from the BC Government to match up to the amount of your own personal down payment or gift. The maximum total down payment allowed is 19.99% of the purchase price and the mortgage must be high ratio insured. There are strict rules for qualifying for this loan: length of citizenship and residency, maximum $750,000 purchase price, limit of $150,000 of total taxable family income and excellent credit history, etc. This loan is interest and payment free for the first 5 years, at which time payments kick in until it is paid off. For more info click on “BC Home Partnership Program”. With the assist of the BC Home Partnership Program your own ‘minimum’ down payment is only 2.5% as they are providing the other 2.5%
If you have owned before:
– All of the above except for the BC Home Partnership Program.
If you are Self- Employed:
– All of the above as noted, except, if we were using a “Stated Income Insured” product, your minimum down payment would then be 10%, with 5% having to come from your own resources. (Not borrowed or gifted)
-Otherwise 5% is sufficient if we are fully proving your income with traditional methods.
****A buyer with less than 20% down must be high ratio insured. See: “High Ratio Insurance”.****
A longer-term mortgage is worth considering if you have a busy life and don’t have time to watch mortgage rates. Our 3 to 10 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 you can explore a shorter-term mortgage. This allows you to take advantage of even lower rates.
The interest rate on a fixed-rate mortgage is set for a pre-determined term – usually between 1 to 10 years. This offers the security of knowing that your rate will be fixed for the entire term.
A varialbe rate mortgage follows short term interest rates. The Bank Of Canada holds eight meetings a year to discuss and adjust interest rates. Your varilable rate mortgage rates will be a reflection of their interest rate hikes or decreases. Variable rates are generally less than fixed rate mortgages however there have been exceptions.
It is not unusual for homeowners to access equity from the value of their property some time during the mortgage term.
Reasons vary: To do home improvements and repairs, to consolidate debt or get rid of high payments or higher interest loans, for further investments or property purchases, to assist with educations costs, to buyout an ex-spouse, etc.,– the reasons are endless.
In order to protect the Canadian banking system, bank regulators have been fighting to stop Canadians from using their home equity recklessly and have imposed restrictions on the percentage of equity that can be removed.
The general rule is that a minimum of 20% equity must remain in the property at the time of access.
If your home is worth $600,000 you can have up to a maximum of $480,000 total financing IF you are removing equity, leaving 20% – or $120,000 equity in the property at the time of refinancing.
With a current 1st mortgage of $400,000 you would be able to access a maximum of $80,000 provided it fits in your debt servicing.
You can do this by refinancing your entire mortgage to get the additional funds, or in some cases it may be better to add a second mortgage or line of credit and keep your first mortgage as it is. Qualification is necessary and also the terms of your current mortgage could pose some restrictions.
If you are concerned that you may not qualify under current regulations or you have a restricted mortgage, there may be short term solutions for you that can bridge the time gap until your mortgage term is up and other options become available.
With many things to consider it is in your best interest to get good advice from a mortgage broker with access to a lot of mortgage products.
The mortgage payment for most home owners is generally the largest monthly expense.
Other expenses are property taxes, home insurance, utilities including: heat, gas, electricity, water, phone, cable/internet etc., as well as repairs & maintanence. 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.
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. A home inspection helps remove a number of unknowns and increases the likelihood of a successful purchase.
Mortgage loan insurance is defalt insurance provided by CMHC, GENWORTH or Canada Guaranty. It is also referred to as high-ratio insurance. The premium is one time and generally added to the mortgage.
It is manditory when less than 20% of the purchase price is available for down payment. In the event of default or forclosure the bank is covered for loses which it may incure. This insurance is also sometimes required when there is an unusual property.
Not available for properties valued at over one million, or amortizations over 25 years, or for refinances.
A conventional mortgage is usually one where the down payment is equal to 20% or more of the purchase price.
Depending on the circumstances surrounding your bankruptcy, some lenders would consider providing mortgage financing. You will require two years of re-established new credit after your discharge date to qualify for a mortgage.
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.
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. The lender will also require to see the funds deposited into the buyers account. Other criteria may apply.
A pre-approved mortgage provides an interest rate guarantee from a lender for a specified period of time (usually 90 to 120 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. In summary, a pre-approved mortgage is one of the first steps a home buyer should take before beginning the buying process.
Lenders will often guarantee an interest rate to you as much as 120 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 your mortgage professional. If you don’t, you may end up paying a much higher interest rate on your renewing mortgage than you need to.
Very few home buyers have the cash available to buy a home outright. 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.
Lenders provide pre-payment privileges to allow home owners to pay off their mortgages sooner. Generally an additional 10 to 20% of the orignal mortgage amount can be prepaid every year either on the aniversary date or during the year depending on the lender. In addition you can increase your payments or accelerate them. Other options are available depending on the lender.
If you are a first time buyer or if you have not owned your own principal residence for a period of time (approximately 4-5 years), you may be able to withdraw a maximum of $25,000 of your RRSP, tax free, to help you purchase or build a home using the Home Buyers’ Plan (HBP).
If you are buying with a spouse or a partner they may be able to access their own RRSP, up to the $25,000 maximum, as well.
These funds can be directed to any aspect of your purchase – for down payment funds, for closing costs, to reduce current debt, to put towards home improvement, etc.
This is how it works:
Once you find a home you would fill out an application to withdraw from your RRSP. You will be required to repay these funds over a 15 year period.
This is done by reinvesting 1/15 of the amount you withdrew every year for 15 years.
If for some reason you were unable or unwilling to repay in a certain year, you would need to claim that 1/15th amount on your tax return that year as taxable income and then you would just continue with your 1/15th payment the following year. In this way your obligation is complete in 15 years.
More information for qualifying for the HBP see: www.Canada.ca Home Buyers Plan
When purchasing a home there are costs involved with both the purchase and with the financing – here are the common ones, due to individual circumstances there could be others.
For the purchase:
– Legal fees and disbursements including but not limited to: Registration of the home in your name; checking and clearing title
– Property Transfer Tax – if applicable
– GST – if applicable
– Your portion of prepaid property taxes and possibly utilities, etc.
– Building inspection
– Well and septic tests/ inspections; etc.
For the financing of the home:
– Legal fees and disbursements including but not limited to: Preparing and registering the new mortgage on the title
– Appraisal costs
– High ratio insurance costs
– Home-owners insurance (fire, liability, earthquake, etc.)
– Title insurance
****For an easy to use form to estimate your costs click: “Closing Costs”****