Arranging a Mortgage
Arranging a Mortgage and Pre-Approval
You will need a down payment on your purchase. This can be as low as 5% of the purchase price. Add 2 % to allow for closing costs (legal fees, disbursements, taxes).
You will also require adequate income to support the mortgage repayment schedule, plus other monthly expenses including insurance, taxes and utilities.
Financial Qualification Criteria
There are two basic factors in determining the maximum amount you can spend on housing. The first is your down payment. Conventional mortgages require a minimum of 20% down (80% being loaned by the bank). If you have less than 20% of the purchase price down, the lender will allow the smaller down payment if the mortgage is insured with CMHC or GE Capital. These insuring companies protect the lenders from loss if mortgages go into default. This type of financing is called high-ratio financing.
Note: Buying an investment / non-primary residence the minimum down payment is 20% down.
The second factor is the total of your combined incomes. Most lenders use similar guidelines of 32% GDS and 40% TDS. This means that 32% of your gross income, without any debt is the maximum you can spend on shelter payments. The maximum total financial obligations you can have must not exceed 40% of your gross income.
To Calculate GDS (Gross Debt Service):
(PRINCIPLE & INTEREST PAYMENT x 12) + TAXES +(HEATING BILLx12)
GROSS ANNUAL INCOME
To Calculate TDS (Total Debt Service):
(PRINCIPLE & INTEREST PAYMENT x 12) + TAXES + (HEATING BILL x12) + (LOAN PAYMENT x12)
GROSS ANNUAL INCOME
***note that condo purchases must include 50% of the condo fee x 12 in the calculations
Buyers can amortize their mortgage over 25 years to qualify. The higher you amortize, the lower your monthly payments (also the more interest you pay).
Interest rates differ, depending on the term you choose. The term you choose would depend on your overall goals of your purchase.
All buyers must qualify for the mortgage at the Bank of Canada benchmark Qualifying Rate, the 5 year posted rate or their offered Discount rate plus 2%. This is the stress test implimented in 2017. This gives some comfort to the lender and the Buyer, that should the rates go up, the buyer will still be able to afford the payments.
Borrow from RRSP
Effective March, 2019 1st time Buyers can borrow up to $35,000 from their RRSP for down payment on a 1st time purchase and this now includes separated/divorced partners.
Also Effective March 2019 as an additonal First Time Buyer incentive, Buyers with 5% may qualify for an shared equity mortgage with CMHC for a maximum of 10% .
Please consult with your lender/mortage broker for futher details on these programs
Insurance Premiums for CMHC High Ratio Mortgages
A mortgage must be insured if your down payment is less than 20%. Mortgage loan insurance ensures homebuyers are provided with competitive interest rates – comparable to those with a 20% down payment, and helps protect lenders against mortgage default.
The premium for the mortgage insurance is added to the mortgage loan; however, you do have to factor this into your qualifying process. It is a onetime fee…if you move again and have less than 20% down again, you only have to pay the difference in the purchase price. Insurance is subject to PROVINCIAL SALES TAX. Therefore, 8% is calculated on the premium amount. Tax is NOT added to mortgage payments. This has to be paid on closing, so factor this into your closing costs.
My Recommendation to You:
The best advice I can give you regarding your financing is this: Go to your Bank or Mortgage Broker and obtain a written pre-approval for a mortgage with a specified time frame (the longer, the better).
- You will then know exactly what you are qualified to purchase.
- You can then make an offer on a property with confidence that financing will not be a problem and have better negotiating power.
- You will not be disappointed to loose a property because of financing (this happens too frequently when people are not prepared)
- Your written pre-approval guarantees you the rate negotiated at the time of the approval for at least 90 days (varies from lender to lender) and protects you from any interest rate increase during that period.
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