FAQs/Consumer Info

1: What is the minimum down payment required to buy a home?

All financial institutions in Canada will require at least a minimum down payment of five percent of the purchase price of the home. In some circumstances, (e.g. unstable income or job history), the lender may ask for a larger down payment. The amount of this down payment may come from savings, equity from an existing home, a gift from an immediate family member, & in the case of a first time homebuyer, from RRSP’s.

2: What is a High Ratio Mortgage?

If you have a down payment of less than 20% of the purchase price of your home institutional lenders are required by law to have “high ratio insurance”. This is default insurance paid for by the home-buyer (usually added to the mortgage amount) to protect the lender against loss should the borrower default on the mortgage. A mortgage that is default insured is referred to as a high ratio mortgage. Insurance premiums vary depending on the amount of down payment, amortization & program. Generally the lower the down payment &/or the longer the amortization, the higher the insurance costs will be.

Currently in Canada there are three companies offering this form of insurance, Canada Mortgage & Housing Corporation (CMHC) an agency of the federal government & Genworth & Guaranty Canada, both private, profit oriented entities. All three companies have a variety of programs to suit most borrowers’ needs. Ask you MortgageLand Advisor for details.

3: What is a Conventional Mortgage?

Any residential mortgage where the borrower has at least 20% equity in the property & the mortgage is not default insured is referred to s a conventional mortgage.

4: How large a mortgage can we afford? GDSR & TDSR

As a rule a lender will qualify you under two ratios, your gross debt service ratio (GDSR) & your total debt service ratio (TDSR). These ratios measure a) your shelter costs as a percentage of total family income (GDSR) & b) your shelter costs plus your annual consumer debt payments as a percentage of total family income (TDSR).

These calculations must be done with all monthly amounts or all annual amounts. Either way is correct but you must be consistent. The generally accepted maximum ratios are GDSR of 32% & TDSR of 40%

Example:

Matt & Alexis are first time buyers purchasing a condominium for $350,000.00. Property taxes on the condominium are $3050.00/year and the condo maintenance fees are $395.00/month. The monthly heating bill for the condo will average $100.00/month. They have combined savings & RRSPs totaling $27,000.00. Matt’s salaried income is $55,000.00 per year, and Alexis’ salary as an employee of an insurance company is $40,000.00/year. Total gross (before tax) family income is $110,000.00/year. They also pay $250.00/month for student loans & $400.00 month for a car loan.
Assume interest rates for a five year term of 4.25%, with a 30 year amortization, and high ratio (default insurance) premium of 2.50% of the mortgage amount.

GDSR= Total annual mortgage payments + annual property taxes + annual heating
costs + half of the annual condo maintenance fees
all divided by the annual total family income

So using the Matt & Alexis’ information from above lets work out their GDSR.

Purchase Price $350,000.00
Less 5% down payment of $17,500.00 = $332,500.00
Plus High Ratio Insurance premium (2.5% of the amount required) $8312.50 = Total Mortgage Amount = $340,812.50
Based on 4.5% interest rate & a 30 year amortization, their monthly mortgage payments will be $1,718.43/month; x 12 months = $ 20,621.16/year

Annual mortgage payments: $20,621.16

Annual property taxes: 3,050.00

Half annual Condo Fees: 2370.00

Annual heating costs: 1,200.00 =Total annual shelter payments = $27241.16

Divided by their total gross annual incomes: $55,000 +40,000.00 = $95,000.00 = 28.67% GDSR

Now their TDSR, which is their total annual shelter payments plus their total annual consumer debt payments, all divided by their total gross annual incomes.

Total annual shelter costs (from above) $27,241.16 plus

Student Loan of $250.00/month; x 12= $3,000.00
Car Loan of $400.00/month; x 12= $4,800.00

Totals = $35,041.16 Divided by the Total Annual Family Income of $95,000.00 = 36.89% TDSR

5: What documentation do I need to obtain a mortgage?

The mortgage process is all about providing information & verifying information so the more you can document the easier & faster it is to get your mortgage commitment.

The basic package for Pre-Approval would contain the following:

Personal Application: many mortgage brokers & lenders like to take an application & personally interview the potential borrower as opposed to faxing an application to a client to complete.
Proof of Income & Employment: this can take many forms & often multiple forms. Job letter, T-4 & pay stub for a salaried or hourly employee to a CRA Notice of Assessment, Corporate Financial statements or bank statements for contract or self-employed individuals.
If you are buying a property you will need to provide documentation for your down payment. Three months banks statements showing the money in your account; RRSP statement; gift letter showing that it is a non-repayable gift; agreement of purchase & sale of an existing property if your equity is coming from your current property.
Approximate purchase price, property taxes & condo maintenance fees ( if you are purchasing a condo) of properties you are considering buying

If you have already made your purchase, as well as items a, b & c from above, the mortgage broker will want a copy of your agreement of purchase & sale, including all schedules, amendments & waivers, and the MLS listing for the purchase property. If the property was not on MLS, details of the property will be need. If you are refinancing the property details will be dealt with by an appraiser.

6: Closing Costs

When considering “how much money down do I need?” also consider all your closing costs. Here are some to consider:

Legal fees: anywhere from $1,000.00 to $1,500.00. Have your lawyer “define” what are “legal fees” & what are “disbursements”.
Title Insurance. This insurance is to protect you against flaws, not discovered by your lawyer, in the title to your property. $300.00-$500.00
Land Transfer Tax (Ontario): see calculations in section called Land Transfer Tax rebate of up to $2,000.00 for first time buyers. Land Transfer Tax (Toronto) if you buy in the City of Toronto you will have a second land transfer tax to pay. Again there is a rebate for first time buyers.
Adjustments for property taxes, condo fees, utilities, interest, rental income, etc, from the closing date until the due date.
Holdbacks. If your lender is collecting the property taxes with the mortgage payments, they will usually approximate one year of your property taxes and divide it by 11 & add 1/11th to your mortgage payment. However they always want to be “ahead of the game” & usually will deduct 3/11ths of the annual taxes from the mortgage money to be advanced at closing.
Security deposits. If you are new to an area or have never paid utility bills in your name, the local gas, electric & water utilities may want up to $500.00 each as a security deposit. Check in advance with you local utility to determine exact amounts.
If you are buying a newly constructed home from the builder you will have a number of additional costs: HST, Tree Planting fees( the tree on the boulevard), Terion (the new home warranty), water meter fee, utility connection fee.
Moving Expenses: Can be anything from a corporate move where you simply hand your keys to the movers & they take it from there, to renting a truck with a couple of friends & you buy the pizza & beer.

7: Can I still get a mortgage if I have poor credit, been bankrupt or cannot prove all my income?

Some people are unable to verify all of their income or their income & credit history have had some “peaks & valleys”. Lenders who do these types of loans typically charge higher interest rates as well as fees. To qualify for these types of loans you will usually have to have at least 15-20% equity in the property. Every potential mortgage is evaluated individually.

8: Fixed Rate vs. Variable Rate

Fixed Rate mortgages guarantee you a specific rate of interest for the term you chose. Knowing what your mortgage payment will be for a specific term makes it easier for you to budget. A first time buyer with minimal equity should strongly consider the budget security of a fixed rate mortgage.

Interest rates on a Variable Rate mortgage, fluctuates with the Prime Rate which means they are more volatile than fixed rate mortgages. You have an opportunity to “win” or “lose” with every change in the Prime Rate. While historically they have been “winners”, you mortgage will be paid with “future”, not historical, dollars. A Variable Rate mortgage is probably better suited to a borrower with more equity & cash flow, to allow for the potential payment volatility. Lender’s will insist that Variable Rate borrower’s qualify by being able to carry a mortgage at a higher (3 to 5 year) mortgage rate.

9: Ontario Land Transfer Tax

Land transfer tax (LTT) is calculated on the purchase price of a property rates vary for raw land, commercial & residential properties. The rates given below are the current rate for residential properties including condos.

If the purchase price is less than $250,000.00 the LTT is 1% of the sale price minus $275.00.
If the purchase price is equal to or more than $250,000.00 and less than $400,000.00 the LTT is 1.5% of the sale price minus $1525.00
If the purchase price is equal to or greater than $400,000.00 the LTT is 2.0% of the purchase price minus $3525.00
For information on the City of Toronto Land Transfer Tax go to: http://www.toronto.ca/taxes/mltt.htm

10: Prequalification vs. Pre-Approval

In a pre-qualification a lender or mortgage broker usually takes information at face value from a potential borrower without substantiating or documenting the information. How much do you have as a down payment? How is your credit? What do you do & how much do you make? What amount of purchase price are you considering? No documentation is asked for & often a credit bureau is not completed.

A pre-approval is always superior to a pre-qualification. For a pre-approval the lender or broker will want documentation to verify the declare down payment/equity, income & employment & will do a credit bureau report. Everything relating to the borrower, their equity, income & credit history has been substantiated. However what has not been evaluated is the property. If the property does not meet the lender or default insurer’s guidelines, then the deal may not close.

Always get a pre-approval certificate or document from the lender or mortgage broker.
Always allow in any agreement of purchase & sale a condition of 3 to 5 days for property inspection by the lender or their appraiser.