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USING YOUR RRSP FOR HOME PURCHASE  HOW MUCH CAN I BORROW? 
CAN THE BORROWER AFFORD THE HOME?  CLOSING COSTS 
HIGH RATIO (LOW DOWN PAYMENT) MORTGAGES  HOME INSPECTIONS 
PREPAYMENT PENALTIES  CREDIT PROBLEMS? 
THE CASH BACK MORTGAGE - WHO IS THE WINNER, YOU OR THE LENDER?  new
NEVER BUY MORTGAGE LIFE INSURANCE FROM THE MORTGAGE LENDER! 

The Cash Back Mortgage- Who is the real winner, you or the lender?

For more than a year, a number of major Canadian institutional mortgage lenders have been offering "cash back" incentives to mortgage borrowers. The usual scenario is 3% of the mortgage back, in cash, upon the closing of the mortgage. The hook is you must take a mortgage for a 5 year term or longer, and you must pay "posted" mortgage rates.

Posted mortgage rates for terms of 5 years or more are usually 1 percentage point higher than the best rates available for an equal term.

In the following example you will see who is the real winner in the Cash Back Mortgage.

Assume the following:

  1. $100,000.00 is the original amount borrowed
  2. The posted mortgage rate is 7.15 %
  3. The best discount mortgage rate is 6.15%
  4. 5 year term and 25 year amortization

If you have amortization software you can do these calculations yourself, using today's current rates.

Examples:

Option #1

A home buyer borrows $100,000.00 at 7.15% and takes the $3,000 cash back and immediately uses the cash back to pay down the mortgage to $97,000.00. After 5 years the borrower would have made payments totaling $41,304.60, paid a total of $32,829.16 in interest and reduced the principal owing on the mortgage to $88,524.56

Option #2

If on the other hand the borrower dealt with MortgageLand and arranged a mortgage of $100,000.00 at 6.15%, did not get the $3,000.00 cash back and DID NOT PAY DOWN the mortgage, the borrower, after 5 years would have made payments totaling $38,925.00. Paid a total of $28,989.43 and reduced the balance owing on the mortgage to $90,064.43.

Option #3

Many people take Option #1, but take the $3,000.00 cash back and use it to pay closing costs and other expenses and do not use it to pay down the mortgage. They borrow $100,000.00 at 7.15%, after five years they have made payments totaling $42,582.00 and paid a total of $33,844.51 in interest, and reduced the balance owing to only $91,262.51.

Clearly, Option #2 is the winner. Your payments are $2,379.60 less than Option #1, which more than compensates for the $1,539.87 differences between the principal amounts owing.

The real loser is Option #3. They pay $3,657.00 more in payments and owe $1,198.08 more in principal than Option #2. The $3,000 cash back will cost them $1,855.08 over five years.

The situations presented above are only for the first five years of the mortgage. If you want to see the real damage look at the difference in the total amount of interest you would pay over the 25-year amortization for each of the options:

Option #1 $109,809.75

Option #2 $94,833.00

Option #3 $113,208.42

Which option would your banker choose for you? At MortgageLand we tell you the whole truth.

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Credit Problems?
1) How you have your credit in the past and the reasons for your past difficulty are two factors that impart on your ability to get a mortgage loan.
2) Most lenders will consider you a higher credit risk only if your credit bureau report shows you to have accounts which have been more than
In any category, all late payments must be explained.

[ GOOD CREDIT DOES NOT NECESSARILY MEAN PERFECT CREDIT ]

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Never,Never,Ever Buy Mortgage Life Insurance From the Mortgage Lender!

Why Not?
1) The only option available to the beneficiary, upon the insured's death, is to pay off the mortgage with the proceeds of the insurance policy. The beneficiary may be better off investing the money or using it to pay for a child's education. The beneficiary may be left in a "house rich-cash poor" position.
 
2) Should you develop health problems that leave you "uninsurable", you are stuck with that specific lender and their insurance policy. The lender would not have to offer you the best interest rate at the time of renewal. You lose the option of "shopping" for a mortgage.
 
3) Every time you use the prepayment privilege (weekly, biweekly, or lump sum prepayments) you reduce the amount of insurance coverage.
 
4) Younger home buyers may be wise to buy more life insurance than "just enough" to cover the mortgage. Generally, insurance costs for start to climb dramatically, for both men and women, at about age 33-35. If you are contemplating a future move-up, you may be wise to buy more insurance when you are less than 33.
 
5) Lender's will sell you "decreasing term" insurance, the coverage goes as you pay the mortgage down. This is cheaper and may suit your needs. However you may be wiser, especially if you are less than 35 years old, to buy "level term" insurance. This type of insurance keeps the same amount of insurance coverage throughout the life of the mortgage even though the amount owing on your mortgage decreases.

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USING YOUR RRSP FOR HOME PURCHASE

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HOW MUCH CAN I BORROW?

A lender's decision to lend is based on several issues. Can the borrower afford to pay the mortgage payment, taxes and operating costs of a home, plus pay any other debt payments? Does the borrower have a good, long established credit history? Is the borrower's total income adequate and regular? Is there sufficient equity in the property? These are the prime areas of concern to any institutional lender.

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CAN THE BORROWER AFFORD THE HOME?

Lenders use a GDS (Gross Debt Service) ratio to determine the home affordability. In essence it is the maximum percentage of the family income that may be used for "shelter payments". GDS is defined as follows:

Total Annual Mortgage Payments +Annual Real Estate Taxes +Annual Heating Costs + (If a condo) Half-Annual Condo Fees. This number is then divided by Total Household Income.

EXAMPLE:
Bob and Mary have a $1,000.00 a month mortgage payment. Annual real estate taxes are $3,000.00 and heating costs are $850.00 per year. Bob is a mechanic making $51,500.00 a year.

$1,000 x 12 + $3,000.00 + $850.00
= $15,500 = GDSR = 30.78%
$51,500
 $51,500

Institutional lender's usually allow a maximum percentage of 28% to 32% for the GDSR.

Hand-in-hand with the GDSR is the Total Debt Service Ratio, is the percentage of the total annual family income which can be used for shelter payments plus total annual debt payments.

EXAMPLE:
Bob and Mary (as above) have total annual shelter payments of $15,500.00 a year. They also have a monthly car payment of $220.00, and a charge card payment of $75.00 a month. As we said originally Bob's income was $51,000.00. The total annual debt payments are ($220.00 x12 plus $65.00 x 12 ) equal $3540.00.
Bob and Mary's TDSR=
$15,500.00 + $3,540.00 = 37.33%
$51,000.00
Most lenders use a maximum TDSR of 40%

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CLOSING COSTS

Many home buyers are not fully aware of the "hidden costs" of buying and closing the purchase of a home. Below is a list of, and an approximation of many (not all) the costs you could be required to pay on or before your closing date.

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HIGH RATIO (LOW DOWN PAYMENT) MORTGAGES

By law, in Canada, no Bank, Trust Company, Credit Union, or Insurance Company can lend more than 75% of the value of a property, unless that mortgage is insured with mortgage default insurance.

Default insurance is a cost to the borrower and it protects the lender. Should you default on the mortgage at some point in the future and the lender lose money on the sale of the property, Because of a low down payment amount you are deemed to be a higher lending risk. To reduce the risk the lender uses a mortgage default insurance policy issued by one of two companies, Canada Mortgage and Housing Corporation (CMHC) an agency of the Federal Government, and GE Capital, an international profit oriented organization. Both companies charge the same rates. They differ only in one matter that impacts the average consumer. See Prepayment Penalties in this section.

Here is an example of how it works:

Bob and Mary purchase a home for $150,000.00 They have $7,500.00 (5% of the purchase price) available for the down payment. That means they need $142,500.00 more to complete the transaction. By using the chart below, you will see that the cost of mortgage default insurance for someone who has a 5% down payment is 3.75% of the mortgage amount, in this case $5,343.75.

The mortgage lender then adds this amount $5,343.75 to the $142,500.00 for a total mortgage of $147,843.75. This is the amount that will be used to calculate your mortgage payments. On the closing day, the lender will send a cheque to your lawyer for the $142,500.00(less any adjustments), and a cheque for $5,343.75 to the mortgage default insurance company.

Down Payment as % ..............Cost of Default Insurance as %

Of Purchase Price ...................of amount Borrowed (Premium)

Less than 10%...................3.75%
10% to 15%......................2.50%
15.1% to 20%....................2.0%
20.1 to 24.9%....................1.50%

If the mortgage is to be advanced in multiple draws e.g. to fund construction of a house or "purchase plus improvements", then add 0.75% to the cost of default insurance.

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HOME INSPECTIONS

Just as an appraiser gives an independent opinion as to the market value of your home, a qualified home inspector gives the home buyer an unemotional, independent rating of the physical building.

A good home inspector will encourage you to join them in the inspection, from basement to the roof, inside and outside.

You should receive a written evaluation report stating the age, condition and estimated remaining life of the various systems that make up a house. Estimates of costs to replace or repair defects should be included in the report.

The home inspector can not make old items new. If the furnace in your 20-year-old house is the original furnace, then he will likely tell you that it has a remaining "life expectancy" of 5 years or even suggest replacing it sooner.

There are a variety of professionally designated home inspectors. Ask friends who have recently purchased a home, local lawyers and mortgage companies, for a referral. Ask for the inspector's educational and professional background. Most importantly ask for proof of professional liability insurance and a list of at least five references.

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PREPAYMENT PENALTIES

All mortgages are legal contracts binding the lender and the borrower to specific terms for a specific length of time. A lender is not obligated to "open" a mortgage; there are some legislated exceptions. If the borrower wishes to "break" the mortgage contract before the contact expires, and the lender allows the "breakage", then most lenders will charge some form of prepayment penalty.

There is no "standard" mortgage penalty. Each lender draws their specific contract which lays out the duties of both the borrower and the lender, if and when the mortgage is open, and costs of any prepayment privilege. This contract is called the "standard charge terms". Unfortunately most borrowers do not see this document until they go to their lawyer's office to sign the documents.

Most major lenders (not all) have a prepayment penalty "equal to, the greater of a) three months interest or b) the interest differential".

As mortgage interest on most Canadian mortgages is calculated "semi-annually, not in advance", you would require a set of tables of mortgage interest factors or a financial calculator to determine the correct amount.

If your mortgage was originally a CMHC insured mortgage, and it is more than three years old, the maximum penalty is three months interest. If your mortgage was originally a GE Capital insured mortgage the penalty is whatever is indicated in the standard charge terms.

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