Financing

Understanding Lenders and Mortgage Brokers

It is ideal to get your financing in place before shopping for a new home. It helps to negotiate arrangements with a builder or the vendor selling in full confidence without delay. A pre-approved mortgage is preliminary approval by the lender for a mortgage up to an amount, usually with a guaranteed rate for a specified number of days (60 days and sometimes 90 days). If interest rates go down during that period, you will be able to benefit of the lower rate. If they go up, your rate stays locked.

There is a wealth of information online and print about the borrowing process and financing options..  Make sure you visit a few sites, ads and get a general idea of what you need and want.

Lenders and Brokers follow strict rules and regulations governed by Canada to protect you and themselves.  So make sure you have all areas covered and decide on what kind mortgage is best for you.

What is a Mortgage?

A mortgage is a loan which uses the home as security.  The loan is legal registered loan against the title of the property.

• The principal is the amount of the loan, or the cash actually borrowed.
• The interest is the amount the lender charges for the use of the funds, or principal. Interest rates vary according to many factors, including terms and conditions of the mortgage. Mortgage payments are applied towards both the principal and the interest.
• The amortization period is the actual number of years that it will take to repay the entire mortgage loan in full. This normally ranges from 15-30 years.
• The term is the length of time for which a mortgage agreement exists between you and your lender. Typical, terms range between six months and  five years.
• The maturity date marks the end of the term, when you can either repay the balance of the principal or renegotiate the mortgage at the current interest rates.
• Options let you tailor the mortgage to fit your personal needs and circumstances. Open or closed mortgages, pre-payment options, fixed or variable rates or portable mortgages are just a few of the available options.
• Some banks have special programs individual to the institution as well.

Types of Mortgages

There are two typical types of mortgages:

Conventional mortgage: The loan amount does not exceed 80% of the property value, defined as the lesser of the purchase price or the appraised value.

High ratio mortgage, or the National Housing Act mortgage: The amount is more than 80% of the property value (up to 95%). By law, a high ratio mortgage must be insured against borrower default. The borrower pays a mortgage insurance premium (a percentage of the total loan amount) which can be added to the mortgage loan or paid in a lump sum in advance. the borrower must also pay an insurance application fee. The Canada Housing and Mortgage Coproration, Genworth or Canada Guaranty would be the insurers.

Non- Residents

As a non-resident  purchasing property in Canada  is allowed.  Some mortgage qualifications are different.  Most institutions will require a minimum of 35% down and supporting documents to get approval. However, there are additional costs when selling.

How Much Can You Afford to Spend on a New Home?

The amount of money you can afford to spend on a new home is determined by two factors:

Your downpayment. This is the amount of money you have available from your own assets. You need a minimum of 5% of the total purchase price as a down payment.

A larger downpayment means lower mortgage payments or, even better, that you can pay off the mortgage faster, thereby saving thousands of dollars in interest payments. Or you may be able to buy in a higher price range, if you qualify. (Be careful, though, not to stretch your budget to the limit, and to set aside money to cover other expenses of buying a home).

Your ability to carry mortgage debt. Lenders use a simple two step method to determine the mortgage amount that you can comfortably pay back on your income.  A rule you can use no more than 32% of gross income on monthly payments to cover principal, interest, property taxes and heating (PITH) and possibly condominium strata fees, or 40% of gross income on all financial obligations. The latter could include car payments, credit card installments and other payments in addition to the "Living" costs listed earlier.

Once your maximum monthly payment towards "living costs" has been determined, it is easier to establish the size of loan, depending on interest and amortization periods.

RRSPs

First time home buyers can use their RRSP's towards a downpayment and closing costs. Under the federal government's Home Buyer's Plan, first time buyers can borrow up to $25,000 tax free ($50,000 for couples) from their RRSP savings. The funds must be repaid within 15 years, but you don't have to begin repayments for two years.

For more info please go to http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html

Mortgage insurance 

If your downpayment is less than 20%, you will need mortgage insurance.  Below is a sample of CMHC’s 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:

Source: Canada Housing and Mortgage Corporation (CMHC)
 

Let's say have just purchased a $500,000 home and have saved $65,000 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:

Mortgage insurance is financed through your mortgage and is not an upfront lump sum.

For more info please go to http://www.cmhc-schl.gc.ca/en/co/moloin/index.cfm

Property Transfer tax - First Time Home Buyers Program 

If you are purchasing your first home, you may qualify for an exemption from property transfer tax. To qualify, you must be a first time home buyer and your property must meet certain requirements:

First Time Home Buyer Qualifications

You qualify as a first time home buyer if:

• you are a Canadian citizen, or a permanent resident as determined by Immigration Canada,
• you have lived in British Columbia for 12 consecutive months immediately before the date
• you register the property, or you have filed 2 income tax returns as a British Columbia
• resident during the 6 years before the date you register the property,
• you have never owned an interest in a principal residence anywhere in the world at anytime, and
• you have never received a first time home buyers’ exemption or refund.

Please note: You cannot re-qualify as a first time home buyer. This rule may be different for other federal programs for first time home buyers (e.g. the Canada Revenue Agency Home Buyers’ Plan).

Property Requirements

The property you purchase qualifies if:

• the fair market value of the property is not more than the qualifying value of $425,000 (only if
• purchasing an existing home),  the land is 0.5 hectares (1.24 acres) or smaller, and
• the property will only be used as your principal residence.

Penalty for False Declaration

If you are claiming an exemption or refund, you may be charged an amount equal to double the tax (the tax you owe plus a penalty equal to the exemption or refund you claimed) if you falsely declare:

• that you have never owned an interest in a principal residence anywhere in the world at any time, or
• that you have never received a BC first time home buyers’ tax exemption or refund. 

How do I apply for the exemption?
You apply for the exemption when you register the property at the land title office. Generally, a lawyer or notary public registers the property and applies for the exemption on your behalf.

The land title office sends your application to the ministry to verify your eligibility. If you do not apply for the exemption when you register the property at the land title office, you can apply for a refund of the property transfer tax you pay within 18 months of the date you register the property.

What are the requirements to keep the exemption?

If you purchase an existing home, you must move into the home within 92 days of the date you register title to the property.

If you purchase vacant land, you must build and move into your new home within 1 year of the date you register title to the land. The fair market value of the land (as of the date you register the property), plus the cost to build the home, cannot exceed $450,000.

After you move into your home, you must continue to use the property as your principal residence for the remainder of the first year.  You may retain part of the exemption if you move before the end of the first year. The ministry will send you a letter at the end of the first year you own the property to confirm that you meet the requirements as explained above.

Source: http://www.sbr.gov.bc.ca/documents_library/brochures/FirstTimeHomeBuyer.pdf

If you do not qualify for the First Time Home Buyers Program the calculation is as follows:

Property Transfer Tax

You pay Property Transfer Tax when you purchase or acquire an interest in a property. The tax must be paid when you register changes to a certificate of title with the Land Title Office. For example, a change may include adding or deleting a name from the title.

Property Transfer Tax is different from property tax. You pay property tax on an annual basis for services you receive from your local government, even if no money changes hands.

Source: http://www.sbr.gov.bc.ca/business/property_taxes/property_transfer_tax/ptt.htm

Property Transfer Tax Rates

The amount of tax due depends on the fair market value of the property that is transferred:

• If the fair market value is $200,000 or less, the tax is 1% of the fair market value.
• If the fair market value is greater than $200,000, the tax is 1% of the fair market value up to $200,000, plus 2% on the portion of the fair market value that is greater than $200,000.

For example:

• if fair market value of property is $150,000
• tax payable is: 1% of $150,000 = $1,500
• if fair market value of property is $250,000
• tax payable is: 1% of $200,000 = $2,000
• plus 2% of $50,000 = $1,000
• for total tax payable of $3,000  

Source: http://www.sbr.gov.bc.ca/business/property_taxes/property_transfer_tax/tax_rates.htm