A mortgage is a loan to buy a home. A homebuyer can obtain mortgage either to purchase or secure against the property from a financial institution, such as a bank or credit union, either directly or indirectly through intermediaries. Mortgage is considered as one of the items when we think about house financial planning. Based on customer’s financial status, income, credit, and term of consideration, we deliver various kinds of mortgage products to the customer. When you think about purchasing your new home or refinance your mortgage, please feel free to contact Golden Compass Wealth Advisors for the right plan for you.



TERM VS. AMORTIZATION

One of the most common sources of confusion for prospective home buyers is the difference between a mortgage term and amortization period. A typical mortgage in Canada has a 5-year term with a 25-year amortization period.
  Mortgage Term Mortgage Amortization
Description The length of time you are committed to a mortgage rate, lender, and conditions set out by the lender. The length of time if takes you to pay off your entire mortgage.
Time Frame 6 months - 10 years CMHC-insured mortgage: Maximum 25 years Non CMHC-insured mortgage: 35-40 years (lender dependent)

MORTGAGE TERM

The mortgage term is the length of time you commit to the mortgage rate, lender, and associated mortgage terms and conditions. The term you choose will have a direct effect on your mortgage rate, with short terms historically proven to be lower than long-term mortgage rates. The term acts like a 'reset' button on a mortgage. When the term is up, you must renew your mortgage on the remaining principle, at a new rate available at the end of the term.


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MORTGAGE AMORTIZATION PERIOD

The mortgage amortization period, on the other hand, is the length of time it will take you to pay off your entire mortgage. The maximum amortization period in Canada is 35 years; however on July 9th 2012, the maximum amortization period on CMHC insured mortgages will be reduced to 25 years. Longer amortization periods reduce your monthly payments, as you are paying your mortgage off over a greater number of years. However, you will pay more interest over the life of the mortgage.


MAXIMUM AMORTIZATION REDUCED TO 25 YEARS ON JULY 9th, 2012

In June 2012, Minister Flaherty announced that the maximum amortization period on all CMHC insured homes would be reduced from 30 to 25 years. CMHC insurance is required on all home purchases with a down payment of 20% or less. Therefore, if you are putting more than 20% down on your purchase, some lenders may accept an amortization period of greater than 30 years.
Prior to this, on March 18th 2011, the maximum amortization on CMHC insured mortgages was reduced from 25 to 20 years.
Many home buyers choose shorter amortization periods resulting in higher monthly payments if they can afford to do so, knowing that it promotes positive saving behaviour and reduces the total interest payable. For example, let us consider a $300,000 mortgage, and compare a 25-year versus 30-year amortization period.


SHORT VS. LONG TERM AMORTIZATION PERIODS

Finally, follow-up and annual reviews by both yourself and your financial planner are critical to ensuring your success. Your financial situation should be reassessed at least once a year to account for any changes in your life cycle or economic conditions. Achieving your goals and objectives are the ultimate measure of success in the 6 steps to a personal financial plan.

 
 

Scenario A

Shorter Amortization (25 years)

Scenario B

Longer Amortization (30 years)

Difference (Scenario B-A)

Mortgage Amount $300,000 $300,000 -
Amortization Period 25 years 30 years -
Interest Rate 5.1% 5.1% -
Monthly Payment $1,762 $1,620 ($142)
Total Interest $228,580 $339,659 $111,079

The mortgage payments under scenario B are smaller each month, but the home owner will make monthly payments for 5 additional years. The total interest saved by going with a shorter amortization period exceeds $100,000.
For the savvy investor, these savings should be compared to the opportunity cost of other investments. Using the example above, the monthly savings of $142 under scenario B, could be invested elsewhere, and, depending on the rate of return, could come out ahead after 35 years.
Prepayment privileges set out by your lender will determine whether you can shorten your amortization period, by either increasing your regular monthly payments and/or putting lump sum payments towards the principal, without penalty. However, beyond these privileges, you will often incur costly penalties for making additional payments. According to the Canadian Association of Mortgage Professionals, 24% of Canadians took advantage of prepayment options in 2009.


POPULARITY OF MORTGAGE TERM AND AMORTIZATION PERIODS

 
  Age Group
  18-34 35-54 55+ All Ages
1 Year Term 5% 7% 6% 6%
2-4 Year Term 27% 18% 12% 20%
5 Year Term 66% 65% 69% 66%
6-10 Year Term 3% 9% 10% 7%
Longer than 10 Year Term     2% 1%

Source: Canadian Association of Accredited Mortgage Professionals (CAAMP) Fall 2010 Consumer Report

A 5-year mortgage term, at 66% of all mortgages, is by far the most common duration. A further breakdown shows that an additional 8% of mortgages have terms exceeding five years, while 26% of mortgages have shorter terms, including 6% with one year or less and 20% with terms from one year to less than four years.



  Types of Purchases
  New Purchase All Mortgage
Up to 25 Years 58% 78%
30 Years 12% 8%
30 Years 30% 8%
40 Years 0% 6%

Source: Canadian Association of Accredited Mortgage Professionals (CAAMP) Fall 2010 Consumer Report

The most common mortgage amortization period, on the other hand, is 25 years. However, 42% of new mortgages had amortization periods exceeding 25 years. This is an interesting observation considering amortization periods were only extended to 35 years in 2006.1 Beginning March 18th 2011, the maximum amortization period on all CMHC insured homes will be reduced from 35 to 30 years.




VARIABLE VS. FIXED MORTGAGE

One of the first decisions home buyers and mortgage shoppers face is whether to select a fixed or variable mortgage rate. With a fixed mortgage rate, the mortgage rate and payment you make each month will stay constant over your mortgage term. With a variable rate, however, the mortgage rate will fluctuate with the prime lending rate as set by the Bank of Canada. A variable rate will be quoted as Prime +/- a specified amount, such a Prime - 0.85%. Though the prime rate will fluctuate, the relationship to prime will stay constant over your term.


  Fixed Mortgage Rate Variable Mortgage Rate
Description Set for the duration of the mortgage term. Mortgage interest rate and payments are fixed. Fluctuates with the market interest rate, known as the 'prime rate.' Mortgage payments either fluctuate with fluctuations in the prime rate, or the interest portion of the payment varies.
Pros Can essentially 'set it and forget it', regardless of whether rates rise or fall. Eases budgeting anxiety and offers stability. Examined historically, variable rates have proven to be less expensive over time.
Cons

If the difference between the variable and fixed rate is significant, it may not be worth paying a premium for the stability protection of a fixed rate.

Consider the financial uncertainty: significant increases in the prime rate will increase your interest payable and, thus, financial burden.


POPULARITY OF FIXED VS. VARIABLE MORTGAGE RATES

Fixed mortgage rates, at 66% of total mortgages, are most common; however, 29% of mortgages, a significant minority, do have variable rates. Fixed rates are also slightly more popular with younger age groups, while older age groups are more likely to opt for variable rates.

  % of Mortgages
Fixed 66%
Pros 29%
Cons 4%

Source: Canadian Association of Accredited Mortgage Professionals (CAAMP) Fall 2010 Consumer Report


COMPARING FIXED AND VARIABLE MORTGAGE RATE

You can think of the difference, or spread, between variable and fixed mortgage rates as the price of insurance that lending rates will not increase, more or less. When interest rates are low and are not expected to fall further, it is generally advised to lock in a fixed rate, as variables rates will, at best, stay the same, or increase. On the other hand, if you expect interest rates to fall with some certainty, then a variable rate is preferred, as you will be able to absorb the benefit of paying lower interest. Similarly, if the difference between the variable rate and the fixed rate is significant, it may not be worth paying the premium for the stability protection of a fixed rate.


FIXED AND VARIABLE MORTGAGE RATE DRIVER

By and large, fixed mortgage rates follow the pattern of Canada Bond Yields, plus a spread, where bond yields are driven by economic factors such as unemployment, export and inflation.
Variable mortgage rates are driven by the same economic factors, except variable rates fluctuate with movements in the prime lending rate, the rate at which banks lend to their most credit-worthy customers. Variable mortgage rates are typically stated as prime plus/minus a percentage discount/premium. For example, a variable rate could be quoted as prime - 0.8%. So, when the prime rate is, say, 5%, you will pay 4.2% (5%-0.8%) interest.
The Bank of Canada adjusts the prime rate depending on the state of the economy, as determined by the economic factors introduced above. Together, combinations of unemployment, export, and manufacturing values shape the inflation rate. Generally speaking, when inflation is high, the Bank of Canada will increase the prime rate to make the act of borrowing money more expensive. Conversely, when inflation is low, the Bank of Canada will decrease the prime rate to stimulate the economy and improve the attractiveness of borrowing.
In terms of the discount/premium on the prime rate applied to variable rates, mortgage lenders set this based on their desired market share, competition, marketing strategy and general credit market conditions. These are the same factors that drive the spread between lenders' fixed mortgage rates and bond yields.



PREPAYMENT OPTIONS

Mortgage prepayment options outline the flexibility you have to increase your monthly mortgage payments or pay off your mortgage as a whole without penalty. The monthly prepayment provision is a percentage increase allowance on your original monthly mortgage payment, while the lump sum provision allows you to put money towards your mortgage principal. According to the Canadian Association of Accredited Mortgage Professionals (CAAMP), 28% of Canadians took advantage of prepayment privileges in 2010.


  Monthly Payment Lump Sum Prepayment
Description Percentage increase allowance on your monthly mortgage payment. Annual percentage limit you are permitted to make a lump sum payment towards your mortgage.?
Range 0 - 100% 0 - 25%
Example A 100% allowance permits you to double your monthly payment. A 25% lump sum prepayment privilege would allow you to pay off a mortgage completely in four years.

POPULARITY OF MORTGAGE PREPAYMENT OPTIONS

A lot can happen over a mortgage term that can affect your ability or desire to pay off your mortgage sooner than you had originally anticipated. You may gain access to cash flow you did not expect throughout the term of your mortgage, in the form of a salary increase, bonus or inheritance. Such cash flow influxes are not uncommon; therefore, you may want to consider putting this money towards your mortgage, as it will reduce the total amount of interest you will pay. Prepayment options allow you to pay off a mortgage at a faster rate than the original payment schedule outlined by your lender.
In fact, the vast majority of Canadians have the ability to afford higher mortgage payments. In a survey conducted by CAAMP, 84% of respondents said they could handle monthly increases of $300 or more on their monthly payments.
In effect, 28% of mortgage holders did make additional payments on their mortgages in 2010. This includes 16% who increased their monthly payments, 12% who made lump sum payments, and 7% who did both. Since many Canadians do take advantage of prepayment options, it is important to compare prepayment allowances across different lenders.


MORTGAGE PREPAYMENT TRADEOFFS

Making additional payments on your mortgage will reduce your amortization period and, thus, interest payable; however, it is important to consider the opportunity cost and alternative investment opportunities. For example, it may be possible to contribute to your RRSP and use the tax savings to then make a lesser contribution towards your mortgage, maximising your return overall.


ADDITIONAL MORTGAGE ACCELARATION MECHANISMS

Another way you can fast-track your mortgage is by switching your payments from monthly to weekly or accelerated bi-weekly. As the demand for such options has grown, more lending institutions are allowing them. Without penalty fees, more frequent payment options can take several years off your mortgage amortization.
For instance, say your monthly mortgage payment is $400. Your yearly outlay is $4,800 (400 X 12 months). By dividing the $400 by 4 weeks, you would have a weekly payment of $100, and, thus, now pay an annual amount of $5,200 (100 x 52 weeks). Similarly, by dividing the $400 by 2 you would have a bi-weekly payment of $200 and again pay an annual amount of $5,200 (200 x 26 bi-weekly pay periods). As illustrated, you can see that the more frequent payment methods result in an additional $400 ($5,200 - $4,800) applied to your mortgage each year, which directly reduces the principal. These accelerated payments can reduce a 25-year mortgage amortization to 21 years, reducing the interest period by four whole years.
For some, products that allow you to combine your mortgage debt with a current account, such as a chequing account, also present an attractive mortgage acceleration option. One such product is Manulife Bank's "Manulife One" account, which combines your mortgage debt and regular chequing account. Every deposit made to the account immediately reduces your mortgage debt while every withdrawal, naturally, increases it. The principle behind it is that by depositing your wage, you will receive the immediate benefit of reducing more of your mortgage interest expense than if you were to make a regular mortgage payment. This is an attractive after-tax alternative to leaving your wage in a low interest savings account where anything it earns is taxable. However, you must consider the large negative balance on your bank statement each month and the nearby temptation to draw money to the maximum of your available credit line. For those who have budgeting difficulties, this is not an appropriate mortgage product.



MORTGAGE DOWNPAYMENT


A mortgage down payment is the amount of money you pay upfront when purchasing a home. A down payment, typically expressed as a percentage, is calculated as the dollar value of the down payment divided by the home price.


WHAT IS THE MINIMUM DOWN PAYMENT REQUIRED IN CANADA?

The minimum down payment in Canada is 5%, with the typical down payment ranging from 5%-20% of the home price. According to a recent TD Canada Trust Home Buyers Report, 30% of home buyers plan to or have at least a 20% down payment, the point at which mortgage default insurance is no longer required.
Mortgage default insurance, commonly referred to as CMHC insurance, protects the lender in the case the borrower defaults on the mortgage. It is required on all mortgages with down payments of less than 20%, which are known as high ratio mortgages. A conventional mortgage, on the other hand, is one where the down payment is 20% or higher.
The size of your down payment influences three things. The amount you put down at the beginning of your mortgage shapes three important outputs over the life of the mortgage:


1. The home price you can afford
2. The size of your mortgage and monthly payment
3. The amount of CMHC insurance you pay


1. Your down payment influences the home price you can afford.

Because the minimum down payment in Canada is 5%, this benchmark is used to determine your maximum affordability. Ignoring your income and debt levels, your maximum mortgage would be [down payment $ / 5%]. For example, if you have saved $30,000 for your down payment, the maximum mortgage you could afford would be $30,000 / 5% = $600,000. Naturally, as your affordability is also a function of your income and debt levels, you should visit our mortgage affordability calculator for a more detailed analysis.


2. Your down payment shapes the size of your mortgage and monthly payment.

A larger down payment reduces the size of your mortgage, and, therefore, the monthly payment and interest you will pay over the life of your mortgage.
For example, let us say you are considering a home at a value of $300,000 and are deciding whether to put down $25,000 or $40,000. The other mortgage inputs are as follows:

- Home price: $300,000
- Mortgage rate: 5.00%
- Amortization: 25 years

 
  Scenario A Scenario B
Home Price $300,000 $300,000
Down Payment $25,000 $40,000
CMHC Insurance

$5,500

$4,550

Total Mortgage $280,500 $259,463
Monthly Mortgage Payment $1,631 $1,539
Total Payments over 25 Years $489,446 $461,616

Under Scenario B, the additional $15,000 put towards the mortgage down payment lowers CMHC insurance by approximately $1,000 and saves the homebuyer around $29,000 in interest over the life of the mortgage. However, it is also important to consider the opportunity cost, or alternative uses for the additional outlay under Scenario B. You must look at your expected returns associated with RRSP contributions, stock investments, and/or debt repayments, for example, to make an informed decision.


3. Your down payment determines the amount of CMHC insurance you pay

As shown in the example above, CMHC insurance is a function of the amount of your down payment. Your CMHC insurance premium, calculated as a percent of your mortgage amount, gets smaller as you increase your down payment. To learn more about CMHC insurance and how it is calculated, please visit our CMHC insurance page.


MORTGAGE DOWN PAYMENT SOURCES

There are number of ways you can source funds for a mortgage down payment. Traditional sources include saving a fixed amount from every pay-cheque, selling stocks, bonds or personal property, or reaching out to immediate family, for example. Another great option is the RRSP Home Buyers' Plan (HBP) which lets first-time home buyers withdraw up to $25,000 from Registered Retirement Savings Plans (RRSPs) for a home purchase, tax-free. Many first-time home buyers take advantage of this opportunity and set up RRSP accounts well in advance, with the intention to reap the rewards when it is time to purchase a house.
Non-traditional sources for a down payment include borrowed funds, and gifts from non-immediate family members. It is important to note, however, that when you employ non-traditional sources for your down payment, you will incur a CMHC insurance surcharge of 0.15% for down payments of 5% or less.1


LOAN TO VALUE RATIO

An alternative way to look at the down payment is to employ the Loan to Value ratio (LTV), which describes the mortgage value in relation to the home price (mortgage value / home price). A function of the down payment percentage, it can also be calculated as [1 ? down payment %]. For example, if your property is priced at $100,000 and your down payment is $25,000, your required mortgage amount is $75,000 ($100,000 - $25,000). Your down payment percentage would be 25% ($25,000 / $100,000), and your LTV would be 75% ($75,000 / $100,000 or 100% - 25%). The maximum LTV in Canada is 95%, as the minimum down payment is 5%.

[1] Canada Mortgage and Housing Corporation (CMHC)



MORTGAGE DEFAULT INSURANCE

Mortgage default insurance, commonly referred to as CMHC insurance, is mandatory in Canada for down payments between 5%, the minimum in Canada, and 19.99%. Mortgage default insurance, protects lenders if a home owner defaults on their mortgage.
Though mortgage default insurance costs home buyers 1.75% - 2.95% of their mortgage amount, it is actually beneficial to the buyer market. Without it, mortgage rates would be higher for low down payment percentages, as the risk of default increases. Lenders are able to offer lower mortgage rates when mortgages are supplemented with mortgage default insurance as the risk is spread across multiple home buyers through mandatory insurance.


Who offers mortgage default insurance?

In Canada, mortgage default insurance is provided by CMHC (Canada Mortgage and Housing Corporation), Genworth Financial and Canada Guaranty Mortgage Insurance.


Mortgage default insurance rates (CMHC insurance rates)

The mortgage default insurance premium is calculated as a percentage of the total mortgage amount. The percentage applied varies based on the size of your down payment and the length of your amortization period as follows:

 
Amortization Period Downpayment (% of home price)
5% - 9.99% 10% - 14.99% 15% - 19.99% 20% or Higher
31 - 35 Years N/A N/A N/A 0.00%
26 - 30 Years

2.95%

2.20%

1.95% 0.00%
25 Years or Less 2.75% 2.00% 1.75% 0.00%

Source: Canada Housing and Mortgage Corporation (CMHC)


How do you calculate mortgage default insurance?

Let's say have just purchased a $300,000 home and have saved $40,000 for a down payment. You have decided to pay off your mortgage over the course of 29 years. Your insurance would be calculated as follows:

STEP 1:

Calculate your down payment as a % of your home price

 

$40,000 / $300,000 = 13.33%

STEP 2:

Factor in your amortization period

 

Amortization period is between 26 and 30 years

STEP 3:

Find your insurance premium percentage in the chart

 

Insurance premium percentage is 2.20%

STEP 4:

Calculate your mortgage amount

 

$300,000 - $40,000 = $260,000

STEP 5:

Calculate your mortgage insurance premium

 

$260,000 x 2.20% = $5,720


HOW DO YOU PAY MORTGAGE DEFAULT INSURANCE?

Mortgage default insurance is financed through your mortgage. Unlike closing costs such as lawyer fees and land transfer tax, it does not require a lump sum cash outlay at the time you purchase your home. Your insurance premium is added to the value of your mortgage, and your monthly payment increases accordingly. Continuing with the above example, the revised mortgage amount would be $260,000 + $5,725, = $265,725.


HOW TO MINIMIZE CMHC INSURANCE

There are essentially two ways to minimize mortgage default insurance:

1. Increase your down payment (as a percentage of your home price) or
2. Decrease your amortization period


Increase your down payment (as a percentage of your home)

If you want to increase your down payment as a percentage of your home value, you will either have to increase the amount you put down or purchase a less expensive home. Examining the first option, you may want to consider additional sources for your down payment, such as a gift from a family member or, if you are a first-time home buyer, a tax-free loan from your RRSP.

Decrease your amortization period

As your amortization period also affects your mortgage default insurance premium, you may want to consider shortening the period if you can afford to do so. This of course will increase your monthly mortgage payments, but decrease the total interest paid over the life of the mortgage as well. For amortization periods between 26-30 years you will pay a 0.2% insurance premium and for periods of 31-35 years you will pay a 0.4% insurance premium, compared to an amortization period of 25 years or less.


MORTGAGE DEFAULT INSURANCE RATES WITH A NON-TRADITIONAL DOWN PAYMENT

For home buyers using non-traditional sources for their down payment, their insurance premiums will increase if their down payments are between 5 and 9.99%, as shown in the chart below.

 
Amortization Period Downpayment (% of home price)
5% - 9.99% 10% - 14.99% 15% - 19.99% 20% or Higher
31 - 35 Years N/A N/A N/A 0.00%
26 - 30 Years

N/A

4.95%

3.10% 0.00%
25 Years or Less N/A 4.75% 2.90% 0.00%

Source: Canada Housing and Mortgage Corporation (CMHC)


MORTGAGE DEFAULT INSURANCE RATES FOR SELF-EMPLOYED,NON-VERIFIED INCOME

Self-employed individuals without 3rd-party income validation also face higher insurance premiums. The minimum down payment required to even obtain insurance is 10%, and premiums on down payments between 10%-19.99% are higher compared to standard applicants.

 
Amortization Period Downpayment (% of home price)
5% - 9.99% 10% = 14.99% 15% - 19.99% 20% or Higher
31 - 35 Years N/A N/A N/A 0.00%
26 - 30 Years

2.95%

2.20%

1.95% 0.00%
25 Years or Less 2.75% 2.00% 1.75% 0.00%

Source: Canada Housing and Mortgage Corporation (CMHC)


 


RRSP FOR DOWN PAYMENT

One great source of funding for your mortgage down payment is a Registered Retirement Savings Plan (RRSP). The Canadian government's Home Buyers' Plan allows you to borrow from your RRSP up to $25,000 for a down payment, tax-free. Since this is a loan, it must be repaid, and the repayment term is 15 years.1


FIRST-TIME HOME BUYER ELIGIBILITY

In order to be eligible as a first-time home buyer, however, you must meet the following criteria:

  • Not owned a home within the previous four years
  • Sign a written agreement to buy a home
  • Intend to live in the home within one year of purchase
  • If you have used the Home Buyers' Plan before, you can not have any outstanding balance due
  • You must make the withdrawl from your RRSP within 30 days of taking title of the home
  • You must buy the home before October 1st of the year after you made the withdrawal

  • Each spouse is also considered separately for eligibility as a first-time home buyer. For example, if you have owned a home in the previous four years, but your spouse has not, then your spouse would be able to withdraw money from their RRSP under the Home Buyers' Plan. If you too decide to make a withdrawal from your RRSP and have not met the first-time home buyer eligibility requirements, this withdrawal will be taxed and you must include it in your income tax statement as taxable income. If both you and your spouse meet the first-time home buyer eligibility requirements, each of you can withdraw up to $25,000 from your RRSPs, for a total of $50,000.

    In order to participate in the Home Buyers' Plan, you must print off a copy of Form T1036. This form is available from Canada Revenue Agency's website (www.cra-arc.gc.ca). You must fill out Section 1, and give the form to the financial institution that holds your RRSP so they can fill out Section 2. Your financial institution will send you a T4RSP form, which will confirm how much you withdrew from your RRSP as a part of the Home Buyers' Plan. You must reference this form in your income tax return for the year you made the withdrawal.

    REPAYING THE HOME BUYER'S PLAN LOAN

    Since the Home Buyers' initiative is considered a loan, you must repay the amount you withdrew from your RRSP within 15 years, with the first payment due two years after you first withdrew the money. Canada Revenue Agency will send you a Notice of Assessment, which will indicate the amount of the loan you have repaid, the balance left to be repaid, and the amount of your next payment. To start repaying the loan, you must make a contribution to your RRSP in the year the repayment is due or in the first 60 days of the following year.


    HOLDING YOUR MORTGAGE IN YOUR RRSP

    Though not commonly done, you do have the option to hold your mortgage within your RRSP. This is only possible however, if you have built enough cash, or cash equivalents in your RRSP to cover the entire mortgage amount. Your RRSP essentialy becomes the bank or lender, loaning you the funds required to purchase your home in exchange for regular interest and principal payments?

    To understand how this works, we will look at an example where Mitch is purchasing a $400,000 home, with a down payment of 20%:

    STEP 1:

    Down payment comes from personal savings

     

    $400,000 x 20% = $80,000

    STEP 2:

    Remaining balance is borrowed from RRSP

     

    $400,000 - $80,000 = $320,000

    STEP 3:

    Amounts are combined and given to seller

     

    $400,000 is given to seller

    STEP 4:

    Mitch sets his interest rate to the market rate

     

    For this example we'll use 4%

    STEP 5:

    Mitch sets his amortization period

     

    For this example we'll use 25 years

    STEP 6:

    Calculate the monthly payment

     

    Monthly payment = $1,683.27

    STEP 7:

    Monthly payment paid into RRSP over the next 25 years

     

    $1,683.27 x 12 months x 25 years = $504,981

    Over the next 25 years, Mitch will pay $1,683.27 into his RRSP each month. At the end of the 25 years he will have paid a total of $504,981 with $320,000 to cover the mortgage principal and $184,981 in interest payments.

    The interest portion of this amount is tax free because it is held within his RRSP, and the rate of return on the $320,000 from Mitch's RRSP will be 4% over the 25 year period.


    ADVANTAGES OF HOLDING YOUR MORTGAGE IN YOUR RRSP

    The advantage of holding your mortgage in your RRSP is that it has a safe and reliable rate of return. It is essential to compare this rate of return against the opportunity cost of investing your RRSP into other assets. Some individuals also like the fact that they are paying themselves interest instead of the bank.


    DISADVANTAGES OF HOLDING YOUR MORTGAGE IN YOUR RRSP

    It is also important to consider the disadvantages associated with this strategy. First of all, you must be prepared to pay the administration fees, such as setup fees, trustee/mortgage administration fees, RRSP fees and legal fees, which can reach upwards of $1,000.

    Secondly, you must obtain mortgage default insurance from CMHC regardless of the size of your down payment. With traditional mortgages, home buyers are only required to take out mortgage default insurance if their down payment is less than 20%. If you hold your mortgage in your RRSP however, you must purchase CMHC insurance even if your down payment is 20% or higher. CMHC insurance is calculated as a percent of your mortgage amount as follows:

    Amortization Period Downpayment (% of home price)
    5% - 9.99% 10% -14.99% 15% - 19.99% 20% - 24.99% 25% - 34.99% 35% or higher
    31 - 35 Years 3.15% 2.40% 2.15% 1.40% 1.15% 0.90%
    26 - 30 Years

    2.95%

    2.20%

    1.95% 1.20% 0.95% 0.70%
    25 Years or Less 2.75% 2.00% 1.75% 1.00% 0.65% 0.50%

    Finally, if your entire RRSP amount has been used to hold your mortgage, you are committing your entire portfolio to a fixed income rate of return.

    [1] Canada Revenue Agency Agency. "Home Buyer's Plan (HBP)". Govt. of Canada, 05 January 2010. Web. 18 November 2010.
    [2] Banerjee, Preet. RRSPs: 41 Strategies Canadians Need To Know About Our Country's Single Greatest Tax Planning Tool. Lulu.com, 2008. Print.

     


    CLOSING COSTS

    Closing costs, ranging from 1.5 to 4%1 of selling price, are the legal and administrative costs you will need to pay when your house closes. In addition to closing costs, there are other expenses and/or events that may require a cash outlay before, on or after your house closes. We will outline these in detail to ensure these often unexpected costs do not sneak up on you.

    CASH OUTLAYS REQUIRED BEFORE YOUR MORTGAGE CLOSES

    Home Inspection Fee. It is highly recommended that you contract a home inspection as a condition of your Offer to Purchase. A home inspector will assemble a report on the condition of the home for a fee of around $500, depending on the complexities of the inspection.
    Deposit. A deposit that counts towards your down payment is required when you make an Offer to Purchase. The deposit may amount to 5% of the purchase price, which is the minimum down payment percentage in Canada.


    COSTS FINANCED IN YOUR MORTGAGE

    Mortgage default insurance, or CMHC insurance, is not normally considered a traditional closing cost as it is added to the total mortgage you require and amortized over the life of your mortgage. We have chosen to include it here to point out the major difference between it and traditional closing costs: it does not require a cash outlay upon closing.

  • Mortgage default insurance. If you purchase a house with less than a 20% down payment, you will be required to buy mortgage default insurance, commonly referred to as CMHC insurance. This protects the lender in the case the borrower, defaults on the loan.

  • MANDATORY CLOSING COSTS COVERED BY THE HOME BUYER

    The following is a list of closing costs that are incurred by the home buyer

  • Land Transfer Tax. Calculated as a percentage of the purchase price of your home, all provinces have a Land Transfer Tax (LTT) payable on closing, with the amount varying in each province. Some cities, such as Toronto, also have a municipal LTT
  • Legal Fees and Disbursements. You can expect to incur a minimum of $500 (plus GST/HST) on legal fees, which account for the preparation and recording of official documents. Find a residential real estate lawyer with MyLawBid.com.
  • Title Insurance. Today, most lenders require title insurance to protect against losses in the event of a property ownership dispute. This is purchased through your lawyer/notary and costs $100 - $300.
  • PST on CMHC insurance. Though CMHC insurance itself is financed through the mortgage, PST on the insurance must be paid in cash at the time of close.
    The following is a list of closing costs that are incurred by some home buyers as they are only applicable to certain properties
  • Septic tank. If the house has a septic tank, it should also be tested to ensure it is in good working order. Once again, you can negotiate the cost with the previous owner and list it in your Offer to Purchase.
  • Water Tests. If the home has a well, you will want to test the quality of the water and ensure there is an adequate supply, as well if the water is potable. You can negotiate these costs with the previous owner and list them in your Offer to Purchase.
  • Estoppel Certificate Fee(does not apply in Quebec). A certificate fee may be payable if you are buying a condominium or strata unit, and could cost up to $100.
  •  

    MANDATORY CLOSING COSTS OFTEN COVERED BY THE LENDER

  • Appraisal Fee. An appraisal, which is an estimate on the value of your home, is often covered by your mortgage lender. An appraisal is performed to certify the lender of the resale value of the home in the case you default on the mortgage. The cost is usually between $250 and $350.

  • OTHER COSTS TO CONSIDER

  • Property Insurance. Property insurance, which covers the cost of replacing your home and its contents, must be in place on closing day. This insurance is often paid in monthly or annual premiums.
  • Prepaid Utility Bills. You may need to reimburse the previous owner of your property for prepaid costs such as property taxes, utilities and so forth.
  • Property taxes. Property tax is calculated as a percentage of your home value, varies by municipality and must be paid each year. The residential property tax rate in Toronto for example is 0.83%, and on a $400,000 home, would be equal to $3,320 per year.
    You may need to reimburse the previous property owner if he/she has already paid property taxes for the full year. You are also given the option to set-up an automatic payment plan with you lender. Your lender will set up an account for you, collect an additional $277 per month? ($3,320 / 12 months) and then pay property taxes on your behalf. Though by no means necessary, some homeowners find this service extremely valuable for budgeting purposes.

  • CLOSING DAY

    Closing Day is the day you finally take legal possession of your home. It's important the the bulk of your administration is completed by this point including transferring your down payment to your lawyer. Transferring down payment funds, especially from your RRSP can take time, and should be done several days before close.
    On closing date, the following events will take place:

  • Your lender will provide the mortgage funds to your lawyer/notary.
  • You must provide, your down payment less the deposit, to your lawyer/notary along with the closing costs.
  • Your lawyer/notary pays the previous owner, registers the home in your name, and gives you the deed and keys to your new home.

  • Congratulations! You are now ready to move in.

     


    LAND TRANSFER TAX

    Land transfer tax (LTT) is often overlooked when considering the total cost of purchasing a home. All provinces have a land transfer tax, except Alberta and Saskatchewan, who instead levy a much smaller transfer fee. In most provinces the tax is calculated as a % of property value, using asking price as a close estimate. Home buyers in Toronto, unfortunately, also incur an additional municipal tax. However, Ontario, British Columbia, Prince Edward Island and the city of Toronto offer land transfer tax rebates for first-time home buyers to offset the unwelcome cost.


    ONTARIO LAND TRANSFER TAX

    Purchase Price of Home

    Marginal Tax Rate

    First $55,000

    0.5%

    On %55,000 to $250,000

    1.0%

    On $250,000 to $400,000

    1.5%

    Over $400,000

    2.0%

    Source: Ontario Ministry of Revenue, "Land Transfer Tax"


    ONTARIO FIRST-TIME HOME BUYER LAND TRANSFER TAX REBATE

    The Ontario land transfer tax rebate is equal to the full value of the land transfer tax up to a maximum of $2,000.

    Eligibility

  • The buyer must be older than 18 years
  • The buyer must occupy the home within nine months of purchase
  • The buyer cannot have owned a home anywhere in the world
  • The buyer's spouse cannot have owned a home while being your spouse
  • If you are purchasing a new home, it must be eligible for home warranty
  • Based on Ontario land transfer tax rates, the rebate will cover the fully taxed amount on houses up to $227,500. For houses over $227,500, home buyers will receive the maximum $2,000 rebate. To obtain this refund, you need to apply within 18 months after the purchase of the home.

    Souce:Ontario Ministry of Revenue, "Land Transfer Tax Refund for First-time Homebuyers"


    TORONTO LAND TRANSFER TAX

    If purchasing a home in Toronto, there is an additional municipal land transfer tax. Toronto's land transfer tax applies within the following boundaries: Steeles Avenue as the North border, Etobicoke as the West border, Scarborough as the East border, and Lake Ontario as the South border.

    Purchase Price of Home

    Marginal Tax Rate

    First $55,000

    0.5%

    On %55,000 to $400,000

    1.0%

    Over $400,000

    2.0%

    Souce:City of Toronto, "Municipal Land Transfer Tax"

    TORONTO FIRST-TIME HOME BUYER LAND TRANSFER TAX REBATE

    First-time home buyers in Toronto of new and resale homes are eligible to receive a refund up to a maximum of $3,725. Eligibility

  • The buyer must be older than 18 years
  • The buyer must occupy the home within nine months of purchase
  • The buyer cannot have owned a home anywhere in the world
  • The buyer's spouse cannot have owned a home while being your spouse
  • If you are purchasing a new home, it must be eligible for home warranty
  • Based on Toronto land transfer tax rates, first-time home buyers with homes of $400,000 or less will avoid the tax altogether.

    Souce:City of Toronto, "Municipal Land Transfer Tax"

    BRITICH COLUMBIA LAND TRANSFER TAX

    Purchase Price of Home

    Marginal Tax Rate

    First $200,000

    1.0%

    Over $200,000

    2.0%

    Souce:Government of British Columbia, "Property Transfer Tax"

    BRITISH COLUMBIA FIRST-TIME HOME BUYER LAND TRANSFER TAX REBATE

    First time homebuyers are eligible to receive a full land transfer tax refund on homes purchased for $425,000 or less. On homes purchased between $426,000 - $450,000, the first-time home buyer will be eligible for a partial refund equal to [ ($450K - fair market value) / 25K ] * LTT amount. Eligibility You can qualify for the first time home buyer land transfer tax rebate if:

  • You are Canadian citizens or permanent residents as determined by Immigration Canada
  • You have lived in British Columbia for 12 consecutive months prior to the date the property is registered or have filed 2 income taxes in British Columbia in the 6 years before the property is registered
  • You have never owned an interest in a principal residence anywhere in the world at anytime
  • You have never received a first time home buyers' exemption or refund
  • Your property qualifies for the first-time home buyer land transfer tax rebate if:
  • The fair market value of the property is not more than $425,000
  • The land is (0.5) hectares or smaller
  • The property will only be used as your primary residence
  • For more information, see the Government of British Columbia Website

    ALBERTA LAND TITLE TRANSFER FEES

    Though Alberta does not have a land transfer tax, it does charge title transfer fees. There are two fees: one levied on the property value, and the second on the mortgage amount as follows:

  • $35 + $1 for every $5,000 or part therof of property value
  • $15 + $1 for every $5,000 or part therof of mortgage amount
  • Service Alberta, "Land Titles Act - Tarrif of fees regulation"

    SASKATCHEWAN LAND TITLE TRANSFER FEES

    Though Saskatchewan does not have a land transfer tax, they do have a land title fee. This fee is often paid by your lawyer when they are filling out the land title form on your behalf.

    Purchase Price of Home

    Title Transfe Fee

    $1 - $500

    $0

    $501 - $8,400

    $25

    Over $8,401

    0.30% of property value

    Souce:Information Services Corporation(ISC), "Land Titles Fees"

    MANITOBA LAND TRANSFER TAX

    Purchase Price of Home

    Title Transfe Fee

    $1 - $500

    $0

    $501 - $8,400

    $25

    Over $8,401

    0.30% of property value

    Souce:Information Services Corporation(ISC), "Land Titles Fees"

    QUEBEC LAND TRANSFER TAX

    Purchase Price of Home

    Title Transfe Fee

    $1 - $500

    $0

    $501 - $8,400

    $25

    Over $8,401

    0.30% of property value

    Source: "Land Transfer Tax", Century 21 Elite Estates Limited, 1 January 2006, Web 23 November 2010


    NEW BRUNSWICK REAL PROPERTY TRANSFER TAX ACT

    In New Brunswick, the land transfer tax is currently 0.25% of the assessed value of the property. For example, on a purchase of a house assessed to be worth $100,000, the tax payable is $250.

    Souce:Public Legal Education end Information Service of New Brunswick

    PRINCE EDWARD ISLAND LAND TRANSFER TAX

    In Prince Edward Island (PEI), land transfer tax is calculated as follows:

  • 1% of the greater of purchase price or property value
  • In cases where the property value is less than $30,000, no transfer tax is charged
  • Souce:Government of PEI, "Real Property Transfer Tax"

    PRINCE EDWARD ISLAND FIRST-TIME HOME BUYER LAND TRANSFER TAX REBATE

    First-time home buyers who are purchasing in PEI are exempt from paying land transfer tax under the following circumstances:

  • Property value and purchase prices are below $200,000
  • Individuals are occupying home as primary residence
  • Also, if there is more than one purchaser, both purchasers must qualify as a first time home buyer.

    Souce:Governement of PEI, "First Time Home Buyer Requirements"

    NOVA SCOTIA LAND TRANSFER TAX

    For homes in the Halifax area, the land transfer tax is 1.5% of the purchase price of the home. For land transfer tax rates outside of the Halifax area, please see the Nova Scotia land transfer tax tables.

    Souce:Government of Nova Scota, "Deed Transfer Tax"

    NORTHWEST TERRITORIES LAND TRANSFER TAX

    In the North West Territories, land transfer tax is calculated as a percentage of the property value and mortgage amount as follows:

  • $1.50 for every $1,000 or part therof of property value (subject to a minimum charge of $100)
  • $1 for every $1,000 or part therof of property value (for part of property value greater than $1,000,000)
  • $1 for every $5,000 or part therof of mortgage amount (subject to a minimum charge of $80)
  • Souce:Government of North West Territories, "Land Titles Fees"


    NEWFOUNDLAND REGISTRATION OF DEEDS ACT

    In Newfoundland and Labrador, the land tranfer tax is levied on the property value and mortgage amount as follows:

  • For properties and mortgage under $500, a flat fee of $100 is charged
  • For properties over $500, $100 + 0.4% of the mortgage amount is charged
  • Souce:Government of Newfoundland and Labrador


    YUKON TERRITORY LAND TITLES ACT

    Property Value

    Marginal Tax Rate

    First $1,000

    $6.00

    On $1,000 - $3,000

    $7.50

    On $3,000 - $5,000

    $10.50

    For each $1,000 or fraction thereof over $5,000 and up to $10,000 $1.50
    For each $1,000 or fraction thereof over $10,000 and up to $25,000 $0.75
    For each $1,000 or fraction thereof over $25,000 $0.25

    Additional fees may apply.

     


    FIRST-TIME HOME BUYER TAX CREDIT

    The First-time Home Buyers' Tax Credit was introduced as part of 'Canada's Economic Action Plan' to assist Canadians in purchasing their first home. It is designed to help recover closing costs, such as legal expenses, inspections, and land transfer taxes, so you can save more for money for a down payment.
    The Home Buyers' Tax Credit, at current taxation rates, works out to a rebate of $750 for all first-time buyers. After you buy your first home, the credit must be claimed within the year of purchase and it is non-refundable. In addition, the home you purchase must be a 'qualified' home, described in more detail below. If you are purchasing a home with a spouse, partner or friend, the combined claim cannot exceed $750.

    FILING YOUR FIRST-TIME HOME BUYER'S TAX CREDIT

    To receive your $750 claim, you must include it with your personal tax return under line 369.3

    HOW DO YOU QUALIFY FOR THE FIRST-TIME HOME BUYERS' TAX CREDIT?

    In order to be eligible for the First-time Home Buyers' Tax Credit, your home must meet the following requirements:

  • Be within Canada
  • Be an existing or new home
  • Be a single, semi, townhouse, mobile home, condo, or apartment
  • Can include a share in a co-operative housing corporation that gives you possession of the home
  • You must intend to occupy the home within one year of purchase
  • To personally be eligible for the First-time Home Buyers' Tax Credit, you must also meet the following requirements:
  • You or your spouse must purchase a qualifying home
  • The home must be registered in either your name or your spouse's name
  • You cannot have owned a home in the previous four years
  • You cannot have lived in a home owned by your spouse in the previous four years
  • You must present documents supporting the purchase of the home

  • HOME BUYERS' TAX CREDIT FOR PEOPLE WITH DISABILITIES

    If you have a disability and are purchasing a home, you do not need to be a first-time home buyer to claim the Home Buyers' Tax Cedit, where a person with a disability is defined as a person who can claim a disability amount on their tax return in the year the home is purchased. The Home Buyers' Tax Credit can be claimed if the home purchased is suitable for the disabled person's needs, and the disabled person occupies the home within one year from the date of purchase.


    [1]"Canada's Economic Action Plan". Government of Canada. Government of Canada. Web. 26 November 2010. [2]"2009 First Time Home buyer's Tax Credit". Homelegalcost.com. Stephen H. Shub Professional Corporation. 1 January 2008. Web. 26 November 2010.[3] "Fact Sheet: First Time Home buyer's Tax Credit". Canada Revenue Agency. Canada Revenue Agency. 25 February 2010. Web. 26 November 2010.[4] "The First-Time Home buyer's Tax Credit". Meredith Norton. Remax Shuawap Realty. 26 February 2009. Web. 26 November 2010.

     


    MORTGAGE BROKER VS. BANK


    In the past, prospective home buyers turned exclusively to their banks for their mortgage needs, but you now have more options at your disposal with the growing presence of mortgage brokers. Independent mortgage brokers are licensed mortgage specialists who have access to multiple lenders and mortgage rates. They essentially negotiate the lowest rate for you, and because they acquire high quantities of mortgage products, mortgage brokers can pass volume discounts directly on to you.

     

    Bank

    Mortgage Broker

    Market Share

    60%

    40%

    Description

    Chartered banking institution with personal banking, credit card, loan and mortgage services.

    Licensed mortgage specialist with access to multiple lenders and mortgage rates. An intermediary whose commission is paid by the lender providing the mortgage product.

    Lender

    Yes

    No
    Puts Application Together Yes Yes
    Examples TD, RBC, BMO, CIBC, Scotia, ING The Mortgage Centre, Dominion Lending, Safebridge Financial, True North Mortgage
    Pros Banks allow you to consolidate your services with a provider you have an ongoing relationship with and have deemed trustworthy. Mortgage brokers essentially 'shop' around, negotiate for you, and present the lowest rate on the market. Volume discounts achieved by mortgage brokers are passed directly to you.
    Cons Banks can only access and offer you their own rates and products. Banks will regularly give discounts on their posted mortgage rates; however, you are responsible for this negotiation. Mortgage brokers are a less familiar avenue, and first-time home buyers would not have pre-existing relationships with them.

    POPULARITY OF BANKS VS. MORTGAGE BROKERS

    According to the Canadian Association of Accredited Mortgage Professionals (CAAMP), mortgage brokers represented 40% of total mortgage originations in 2009, up from 26% in 2003, with an even higher usage among first-time buyers (45%). This on the heels that mortgage holders reported that, on average, they obtained 1.96 quotes when they obtained their current mortgages.
    So, the increased number of quotes acquired reflects prospective home buyers' inclination to 'shop' around, a role essentially taken on by a mortgage broker.

    COMPARING BANKS VS. MORTGAGE BROKERS

    In addition to the points introduced in the comparison chart above, there are other factors to consider when deciding between a bank and mortgage broker.
    Although banks can offer some discounting for consolidating your services with them, there are many advantages to using a mortgage broker that many Canadians are unaware.
    One of the main benefits of using a mortgage brokers is that they have access to, and knowledge of, the entire mortgage market. They can advise which lenders will consider your case and which will not based on your individual circumstances. This is particularly useful for people with poor credit ratings. Mortgage brokers have access to lenders who specialize in servicing people with adverse credit, and can leverage relationships with mainstream banks.
    Mortgage brokers can also access exclusive deals not available on the open market, or negotiate a better interest rate or lower application fees from the lender in some cases.

    OTHER LENDERS

    In addition to banks, other financial institutions such as trust companies and credit unions also service mortgages. You can access these rates directly or through a mortgage broker.


    HOW MORTGAGE BROKERS FINANCE MORTGAGES

    Mortgage brokers will assist you in the application process, from pre-approval to home appraisal; however, it is important to note they are an origination service. A financial institution, not a mortgage broker, will provide and service your loan. The bank or lender will collect payments and provide customer service after the closing; however you can also reach out to your mortgage broker to help you throughout the life of your mortgage.
    Many of the major Canadian banks sell through mortgage brokers including TD Bank, Scotiabank, CIBC and ING. In a recent survey conducted on our website, we asked our participating mortgage brokers which three lenders they work with the most. The most popular lenders were as follows:

    1. TD Bank
    2. Scotia Bank
    3. Home Trust
    4. MCAP
    5. ING
    6. CIBC Firstline
    7. Merix Financial
    8. Macquarie

    [1] Canadian Association of Accredited Mortgage Professionals (CAAMP) Fall 2010 Consumer Report
    [2] Canada Mortgage and Housing Corporation (CMHC) 2010 Consumer Survey

     


    MORTGAGE APPROVAL PROCESS


    MORTGAGE PRE-APPROVAL

    A mortgage pre-approval shows you, the home buyer, what value of home you can afford, and the mortgage payments associated with various purchase prices. It also guarantees a mortgage rate for a period of time; therefore, protecting you against potential rate increases. You are not obligated to the bank or mortgage broker to whom you received your mortgage pre-approval, and there is no cost. So, there is limited downside to obtaining a pre-approval.


    HOME BUYING PROCESS

    Once you have found a home that you would like to put an offer on, you will put this offer in writing in a document called an 'offer to purchase.' Your real estate agent will help you put the offer together. This offer should include the following details:

  • Your name, the name of the vendor and the address of the property The purchase price offered
  • The chattels that will be included in the purchase price (for example, window coverings, appliances, etc.)
  • Whatever items in or around the home that you think are included in the sale should be stated in your offer
  • The deposit amount
  • The closing day (the date you take possession of the home), which is usually 30 to 60 days from the date of agreement. As of the closing date, the purchaser is responsible for taxes, utilities, repairs and maintenance
  • Request for a current land survey of the property
  • Date when the offer becomes null and void ? that is, when it expires
  • Financing Condition: a condition which allows the home buyer to secure financing (i.e. mortgage approval) before the sale is final. If you cannot secure financing, then you can still walk away from the deal and recover your full deposit. Typically, you should ask for 7 days to secure financing
  • Home inspection: a condition which allows the home buyer to have the house looked at by a professional inspector prior to making the sale final. If the inspection uncovers something you do not like, then you can still walk away from the deal and recover your full deposit

  • This process may occur several times over: it is not uncommon to make an offer, receive a counter-offer, and then make revisions.

    MORTGAGE APPROVAL

    A Mortgage approval is similar to a pre-approval, but it contains all of the specific details of the house you want to purchase. The mortgage approval will have the full address, exact purchase price, closing date, property taxes, etc. These are details which are not in the mortgage pre-approval. Once your mortgage provider has all of these details, they will give a mortgage approval as long as they are comfortable with the property you are purchasing and your qualifying criteria are in line. Once you have a mortgage approval that you are satisfied with, you can waive your financing condition and finalize the sale.

    How much life insurance is enough?
    The amount of coverage you require will depend on your estate objectives and current financial status. As you age, you may find that the level of coverage you require declines or perhaps changes from short-term to permanent coverage. Determining exactly how much and what type of insurance is most suitable for your situation can be best assessed through the preparation of a financial plan and the aid of a life-licensed advisor.