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Mortgage
The purchase of a home is one of the biggest decisions and significant financial investments a consumer makes. It is extremely important that you do your research and educate yourself on key mortgage terms in order to make an informed decision about what mortgage product is best for you.
Different consumers are at different stages in their lives. They have different mortgage needs and there are many mortgage products to choose from. The best result will occur when you work with a mortgage professional who can offer sound, professional advice and a mortgage solution that matches your needs and circumstances. Above all, you need to be comfortable with your mortgage choice.
PRE-APPROVAL
It is important to obtain a pre-approval for the amount of money you can borrow from a lender and avoid looking at homes that may be out of your price range. The pre-approval process is usually guaranteed for a period of 90 days. For additional security for the lender, you may want to have a co-signer – a party who signs the mortgage documents along with the borrower, but who does not have any interest in the ownership of the property.
WHAT IS A MORTGAGE?
A mortgage is a loan of the money most people require to finance the purchase their home. A mortgage allows individuals to buy property without paying the full value all at once. The mortgagor is the person borrowing money, the mortgagee is the lender of the money.
When negotiating the amount of your mortgage, you should be aware that you will most likely be required to provide a down payment which is the money you put towards the purchase price of your home. The amount of your mortgage is determined by the purchase price of the home less the amount of your down payment. As with all loans, a mortgage must be repaid to the borrower with interest. There are different types of repayment methods which make up the different kinds of mortgages available.
Like all loans, regular payments made over time go towards paying down the mortgage. These payments are made up of two parts – one part goes towards paying the principal (the amount of money borrowed) and other part goes towards paying the interest (the fee charged for borrowing the money.)
The more money you can put down, the less you will have to borrow, and the less interest you will have to pay over the length of the mortgage.
If you have a down payment equivalent to 25% or more of the purchase price, you will have what is called a conventional mortgage.
If your down payment is less than 25% of the purchase price, you will have what is called a high ratio mortgage. A high ratio mortgage must be insured to protect the lender. This insurance is called mortgage default insurance. It protects the lender in case the borrower isn’t able to repay the loan.
The Canadian Mortgage and Housing Corporation (CMHC) and Genworth Financial offer assistance to first-time home buyers who do not have a lot of disposable funds for a down payment. Ask your mortgage professional for more details.
TERM OF MORTGAGE
The term of a mortgage is the length of time a lender will loan mortgage funds to a borrower. This duration can be from six months to ten years, two to five years being the most common. Generally, the shorter the duration of a mortgage term, the lower the interest rate, and the less it costs to borrow the money. At the end of each term, you will either pay off the balance owing or renegotiate the mortgage for another term until the entire mortgage is paid back.
Short Term
Short term agreements or mortgage contracts are usually for two years or less. Short term mortgages offer a lower cost of borrowing (interest rate) than a longer term. People who believe that interest rates are currently higher than they will be in the future generally choose a short term mortgage. They anticipate that interest rates will be lower at the time of renewal.
Long Term
Long term agreements are generally for three years or more. Long term mortgages cost a bit more than short term mortgages, so the interest rate will be higher. A higher interest rate appeals to borrowers who value the stability and predictability of fixed expenses over a set period of time. A stable mortgage payment is easier to budget and offers peace of mind.
It can take a long time to completely pay off your mortgage – usually from 15 to 25 years. The process of fully paying off your loan by installments of principal and interest over a definite period of time is called Amortization.
There are many ways of repaying your mortgage. Some people find comfort in a pre-determined fixed rate – it helps them budget and plan for other things in their life. Some people desire more flexibility in their repayment – their circumstances might include fluctuations in their cash flow, and they may want to make larger payments whenever possible. Different kinds of mortgages appeal to the different types of borrowers. Your mortgage professional can help you decide what is best for you.
MORTGAGE TYPES
Open Mortgages
If you want to make large payments on your mortgage or pay off the entire mortgage without penalty, then an open mortgage is for you. An open mortgage offers maximum flexibility. These homeowners are willing to accept some fluctuation in the interest rate for the flexibility of paying off the entire mortgage before the term is complete.
It is important to keep in mind that most regular mortgages will allow homeowners to make lump sum payments of up to 20% of the entire mortgage once a year without penalty. That payment goes directly towards paying down the principal of the amount borrowed. You may therefore not need an open mortgage, with higher interest rates, to make additional payments.
Closed Mortgages
A closed mortgage is a commitment with a pre-determined interest rate, over a pre-determined period of time. A buyer who uses a closed mortgage will likely have to pay the lender a penalty if the loan is fully paid before the end of the closed term.
With a closed mortgage, the interest rate will not change over the length of the term and the length of the term will not change. Payment amounts are predictable and the principal amount owing at the end of the term is predictable.
Closed mortgages generally have lower interest rates than open mortgages. Most closed mortgages will allow the homeowner to make a payment up to 15% of the entire mortgage once a year without penalty. This payment goes directly toward paying down the principal of the amount owing.
Convertible Mortgages
A convertible mortgage is an agreement made at the beginning of a term that allows homeowners to change the type of mortgage they hold during its term. If a homeowner wants to start with an open mortgage and then lock into a closed mortgage, a convertible mortgage is the right choice. It offers lower rates than an open mortgage, and has the option of switching to a closed term.
RATES
An interest rate is the amount of interest charged on a monthly loan payment, expressed as a percentage. It is based either on the rate the Bank of Canada charges to lend money to money lenders or on bond yields. Interest rates are generally lower if you borrow money for a short period of time and higher if you borrow the money for a longer period of time.
Fixed Rate Mortgage
When you agree to a fixed rate mortgage, your interest rate will never change throughout the term of your mortgage. There are no surprises as you’ll always know exactly how much your payments will be and how much of your mortgage will be paid off at the end of your term.
Variable Rate Mortgage
When you agree to a fluctuating interest rate for the length of the term, then you have a variable rate mortgage. Interest rates fluctuate with the bank’s prime lending rate, and may vary from month to month. When interest rates change, your payment amount remains the same, however the amount that is applied to the principal will change. For example, if interest rates drop, more or your mortgage payment is applied to the principal balance owing. The variable rate mortgage is a good option for homeowners who believe that interest rates are currently high and will drop.
HOME CLOSING TERMS
When you and the seller come to an agreement on the price to be paid for the house, you must provide a deposit. A deposit is an advance payment of part of your down payment and is paid at the time of signing the Agreement of Purchase of Sale.
The Agreement of Sale is a legal document the buyer and seller approve detailing the price & terms of the transaction.
When negotiating the cost of the house you want to purchase, it is important to keep in mind that you will also be required to pay property tax. Property tax is paid on privately owned property and is usually paid semi-annually or monthly. The amount is based on local tax rates and assessed property value.
Other than the deposit and down payment, you should keep in mind that you will likely also be paying for a home inspection – an examination of the structure and mechanical systems to determine a home’s safety and makes the potential homebuyer aware of any repairs that may be needed.
Considering insurance on your mortgage
Talk to your mortgage professional about insurance protection against your mortgage in case of death, accident or illness. There are many insurance options to choose from. Insurance is available to protect you and your family should you be unable to work.
TYPES OF HOUSES
 Condominium – a form of ownership in which the homeowner purchases and owns a unit of housing and shares financial responsibility for common areas. (In British Columbia, these are also called “stratus”.)
 Detached/Freehold – A property where you own both the property and the land on which it is built.
 Semi-detached designs offer two single family homes attached by a common wall.
Townhouse – an attached home. Some are Freehold,some are Condo.
LAST DETAILS YOU’LL NEED TO CHECK
You will be required to provide the following list of information to your mortgage professional to finalize the mortgage:
Confirmation of income or employment earnings
Current bank information
Evidence of your down payment
List of assets
List of liabilities
Contact information for your lawyer
Copy of the Purchase Agreement
Copy of the MLS listing
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First time Home Buyers' Plan (HBP)
The Home Buyers' Plan (HBP) is a program that allows the first time home buyers to withdraw up to $25,000 from their registered retirement savings plan (RRSPs) to buy house. Married or common-law partner couple can withdraw upto $ 25,000 each, provided that both the buyers meet the first time HBP conditions.
The Home buyers will have to buy the registered retirement savings plan (RRSPs) 90 days prior to the closing date of their home.
The home buyers have up to 15 years to repay the money withdrawn under HBP.
For more information visit Revenue Canada HBP
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How to pay off your mortgage early !
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Bi-weekly and weekly payments
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Most mortgages have the option to allow payments to be made on a weekly or bi-weekly basis. This option may be desirable for two reasons. The first is it can save you money as you can expect to pay off your mortgage about 4 years sooner. This can save you dramatically over the life of your mortgage. The other reason why these options are so popular is that if your employer pays you on a weekly or bi-weekly basis, you can simplify your budgeting by making the payment line up with the way you paid.
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Making Extra payments
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Paying extra amounts on your mortgage can make a big interest saving over time. When we select a mortgage company, privilege payments options are something that we look for. A 20% privilege payment will allow you to pay off up to $20,000 per year on a $100 000 mortgage. It is important that the privilege payment also be flexible to allow you to pay smaller payments on the mortgage and as often as you wish. An extra $1000 periodically paid on a mortgage can help you become mortgage free faster
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Reducing the CMHC fees on your purchase
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When you require a mortgage for more than 75% of the purchase price of a property, that mortgage must be insured by Canada Mortgage and Housing (CMHC) or GE Mortgage insurance. The premium charged by these company`s decreases as the down payment increases. When you finance your property at 95%, a premium of 2.75% is added to the mortgage. By increasing the down payment to 10% of the purchase price the premium can be reduced to 2.5%. If you can put down 25%, you can avoid any additional insurance fee. Depending on your situation there are ways that you can structure this financing to avoid the CMHC or GE insurance premium.
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Advantages of Bigger Down Payments
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As mentioned above, when you put a 25% down payment on your purchase you can avoid the CMHC premium. More importantly the larger the down payment, the lower the amount of interest you will pay over the life of your mortgage. It is important to note that it may not be wise to stretch yourself to increase your down payment and end up borrowing on credit cards or a line of credit at a higher rate.
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Short Term Rates vs. Long Term Rates
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The options for mortgages available can be very confusing for most mortgage shoppers. Terms for mortgages vary between variable and fixed rate, 6-month terms to 10 year terms. Taking a variable or floating rate mortgage can have savings. Typically the shorter the term or guarantee of the rate, the lower the rate will be. This does not always happen, depending on the market place and the economy, but history has shown that short-term rates tend to be lower than long-term rates. The up side of variable rate is the strong potential for interest rate savings. The down side is the fact that you are accepting the interest rate risk without a guarantee. If you are considering a variable rate mortgage you need to look at your own risk tolerance, and your cash flow available to deal with potential increased payment. Considering projections of rates and where we see interest rates heading can also be important in this decision. Make sure you talk to an expert when you are making this decision.
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Save Energy - Save Money - Save the Environment
Heating + Cooling
Heating and cooling your home accounts for about 60% of your energy costs.
Warm to these cool tips to make a big impact on your energy bill.
TIP:
Install ceiling fans and use them to supplement or even as an alternative to air conditioning – ceiling fans generally use very little electricity. Make sure your fan is blowing air downwards in summer.
Tips
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To save money on heating costs, reduce the temperature of your home a few degrees at night and when you’re away.
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Keep blinds, shades and drapes closed during the hottest part of the day in the summer. (And open south-facing blinds on sunny winter days!)
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Use area rugs on cold floors – if your feet are cold, your body will feel cold.
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If you feel cool, put on a sweater rather than simply turning up the thermostat.
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Clean or replace the air filter on your furnace every month to improve efficiency.
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To save more on central AC costs, try cooling your home to only 24 or 25 ÞC instead of the low 20’s. Each degree below 26 ÞC will noticeably increase your electricity use!
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Turn off unnecessary lights in the house (they produce a lot of heat which works against the AC.)
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Conservation can be as easy as planting a tree. Plant leafy (deciduous) trees on the sunny side of your house. During the summer they provide shade, and in the winter they will shed their leaves to let the warming sunshine through. Pine or fir trees on the north side provide an energy-saving windbreak.
SPEND A LITTLE, SAVE MORE
Install a programmable thermostat with a built-in timer. You can set it to lower the heat by a few degrees at night and when you’re away, or turn off the AC when you leave for the day. Contrary to popular belief, this method uses less electricity than having the AC constantly maintain a cool temperature! Your savings can easily pay for the cost of the thermostat (as little as $50) in the first year by varying the temperature just a few degrees at night or when you’re away. Just think of the savings over 5 or 10 years.
TIP:
Showers save hot water – a typical bath uses approximately 75 litres of hot water, while a 5-minute shower with an efficient showerhead will use about half of that.
Tips
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Be sure to use the vacation setting or turn off the water heater when you are out of town.
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Fix leaky faucets – that little drip can add up to 95 litres of water per faucet per month, and cost you 7 kWh per month.
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Installing low flow aeraters on faucets can save water and energy.
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Drain a pail of water from your natural gas hot water tank every 3 months, or as recommended by the manufacturer, to remove sediment that prevents heat transfer, lowering the unit’s efficiency.
Energy Facts
On average, water heaters use the most energy in the home after heating. A 175-litre tank can use up to 5000 kWh per year, a cost of almost $500 at today’s prices.
SPEND A LITTLE, SAVE A LOT !
Wrapping your electric water heater in a special tank blanket can reduce its electricity use.
Refrigerator
Your refrigerator is always on, but there are several no-cost ways to put energy costs on ice!
TIP:
Don’t let freezers build up more than 6 mm of frost. Defrost regularly to keep freezers working their best.
Tips
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Set the temperature for only as cold as you need; check manufacturer’s recommendations.
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Don’t keep that old, inefficient refrigerator running in the basement for occasional refreshments. It could cost you $150 or more per year in electricity.
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Don’t overfill the refrigerator, as this blocks air circulation. Conversely, a full freezer will perform better than an empty one.
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Check your refrigerator’s door seal by closing the door on a $5 bill. If it’s held tightly in place, the seal’s OK; if not, the door should be adjusted or the seal replaced.
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Clean your refrigerator’s coils (back) and air intake grill (below the doors) every 3 months.
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Keep refrigerators and freezers out of direct sunlight, and allow at least 5 centimetres all around (or as recommended by the manufacturer) to allow heat to escape from the compressor and condensing coil.
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Allow hot foods to cool before putting them in the refrigerator.
Energy Facts
The refrigerator is one of the biggest electricity guzzlers in most homes. While efficiency has improved a lot in recent years, even top-of-the-line models can use more electricity than ENERGY STAR-qualified refrigerators.
Stove + Oven
TIP:
When using the stove, be sure to put lids on pots in order to keep the heat in the pot, which enables you to use lower heat settings!
Tips
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Use an electric kettle to boil water – not the stove, which is less efficient.
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Generally, thaw frozen foods in the refrigerator before cooking, unless the label says otherwise.
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If you put aluminum foil on the bottom of the oven to catch drippings, make sure the foil does not block any of the oven’s circulation holes and don’t put foil on the oven racks.
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Turn off the oven just before finishing – the oven will remain hot long enough to complete the job.
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Don’t use a bigger pot than you need, and match it to the right size element.
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A general rule: for smaller cooking jobs, use smaller appliances (i.e., instead of your range or cooktop, use the electric kettle, toaster oven or microwave.)
Energy Facts
Microwave ovens use up to 75% less energy, so whenever possible, use a microwave instead of your stove or oven.
Clothes Washer + Dryer
TIP:
Always use cold water for the RINSE cycle. Using warm or hot water for the RINSE cycle does not get your clothes any cleaner.
Tips
WASHER
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Run full loads whenever possible but don’t overload the machines.
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Wash your clothes in cold or warm water. A whopping 85-90% of the energy used by washing machines is for heating the water! You can save a lot of energy by lowering the water temperature.
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Try using cold or warm water for the WASH cycle, instead of hot water. Hot water shrinks and fades your clothes, and wears them out more quickly.
DRYER
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Make sure clothes are effectively wrung before putting them in the dryer. (Front-loading washers are the best at squeezing the water out!)
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Separate loads into heavy, medium and lightweight items – lighter loads will take less drying time than a mixture of items.
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Dry consecutive loads to utilize otherwise wasted heat from the dryer.
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Clean the lint filter after every load. (A clogged lint filter can increase energy use up to 30%, and may be a fire hazard!)
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Get some fresh air! Consider using a clothesline to dry your laundry.
Source: Ontario Ministry of Energy
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