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Financing Your New Home
Written by Administrator
Monday, 04 May 2009 11:28
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You have decided that you want to buy a new home. One of the first steps towards this goal is to take a realistic look at what you can afford. New homes are purchased with cash, or with a combination of cash (a downpayment) and a mortgage loan. If you are like most Canadians, you will probably have to finance your home purchase with a mortgage loan.WHAT IS A MORTGAGE?A mortgage is a consumer loan for the purpose of buying a home, using the home you are buying as security. This loan is registered as a legal document against the title of your property. Important aspects of a mortgage loan include:Principal: the amount of the loan, or the cash actually borrowed. Interest: the amount the lender charges for the use of the funds, or principal. Interest rates vary according to many factors, including the term and conditions (see below). The borrower is expected to pay back the principal together with interest. Mortgage payments are applied toward both principal and interest. Amortization period: the actual number of years that it will take to repay the entire mortgage loan in full. This normally ranges from 15 to 25 years. Term: the length of time for which a mortgage agreement exists between you and your lender. Typically, terms range between six months and seven years. Maturity date: the end of the term, when you can either repay the balance of the principal or renegotiate the mortgage at then current interest rates. Options: tailoring the mortgage to 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 options available to today's borrowers. Types of MortgagesThere are two basic types of mortgages available:Conventional mortgage: the loan amount does not exceed 75% of the property value, defined as the lesser of the purchase price or the appraised value. High-ratio mortgage, or National Housing Act mortgage: exceeds 75% of the property value (up to 95% for first-time homebuyers under Canada Mortgage and Housing Corporation's First Home Loan Insurance program). Making a low downpayment allows purchasers to buy a home sooner, shop for homes with a wider price range, or set cash aside for landscaping, home furnishing and other expenses.By law, high-ratio mortgages must be insured by Canada Mortgage and Housing Corporation. The borrower pays an insurance premium (usually up to 2.5% of the 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, legal fees and the fee for a property appraisal. HOW MUCH CAN YOU AFFORD?How much you can afford to spend for a new home is determined by two factors:The amount of down payment you have available. A larger down payment will decrease the amount you need to borrow. This can lower your mortgage payment or, even better, help you pay off the mortgage as quickly as possible, thereby saving thousands of dollars in interest payments. (Be careful, though, to set enough money aside to cover the other expenses of buying a home.) Your ability to carry the mortgage debt. A simple two-step method helps you to determine the mortgage amount that you can comfortably pay back on your income. Step One: Calculate the maximum monthly payment you can affordMost lenders recommend that you use no more than 32% of gross income on your monthly payments to cover principal, interest, property taxes and heating costs (PITH). This is called the Gross Debt Service ratio (GDS).Gross household income is the total salary, wages, commissions and other assured income, before deductions, by all household members who are co-applicants for the loan.
You should also be aware of the Total Debt Service ratio, which stipulates that no more than 40% of your gross income can go toward your total debt load, including your mortgage and all other loan payments. Step Two: Calculate the size of the mortgage loan your payment will handleOnce you have worked out how much you can afford in monthly payments, you can determine the maximum amount of the mortgage loan that you qualify for. Subtract the estimated property taxes and heating costs from the total maximum monthly payment (Step One). The remaining sum is what you have available for the principal and interest.
The amount of the mortgage loan that can be serviced with a $1,000 monthly payment depends on the interest rate at the timeÄÄthe lower the interest rate, the higher the amount you can borrow. Monthly payment factors represent the monthly payment required to repay a loan of $1,000 at a given rate over a period of 25 years. (For your convenience, most mortgage lenders will allow you to make your mortgage payments every week, every two weeks, or twice monthly if you wish.)
Check with your bank or other financial institution for the current interest rates. All financial institutions provide mortgage information and publications to consumers free-of-charge, including monthly payment factors and mortgage tables to help you calculate the amount you can borrow. Add your downpayment to the calculated mortgage amount and you will have a good idea of the price range of the homes that you should be looking at. Remember that a minimum of 10% of the purchase price is required for a downpayment (5% for qualified first-time buyers). Be Aware of the Total CostsWhen you calculate how much it will cost to buy a home and how much you can afford, don't forget to include the "extra" expenses that you may encounter. Ask your builder and the sales representative for detailed estimates, and consult with your bank manager and lawyer for further information.
FINDING THE MORTGAGE THAT IS RIGHT FOR YOUShop for a mortgage in the same way you shop for any other product. Take the time to do your research.Banks, trust companies and other financial institutions are offering more ways to finance a new home purchase than ever before, with a wide range of options, features and services. Check with several different institutions. Be prepared to ask questions, and compare the answers to find the financing options that are right for you. Ask your builder about mortgage choices. The builder or sales representative can often help you to obtain a mortgage. Some builders also offer pre-arranged mortgages with features that may not be readily obtainable by the individual purchaser, such as bridge financing, free mortgage consultation and pre-paid or reduced appraisal fees. One of the most useful features offered by some builders is cap-rate financing. This guarantees that your mortgage rate will not go up from the time your mortgage has been approved, even if the interest rates have increased at the time of closing; yet you will benefit from any decreases in rates. GET PRE-APPROVAL ON YOUR FINANCINGBeing approved for a mortgage before you begin looking for your home means that you can enter the marketplace with confidence. A pre-approved mortgage is preliminary approval by the lender for a mortgage up to a certain amount, usually with a guaranteed rate for a specified number of days.Pre-approved mortgage financing is simple to arrange and costs nothing. The final mortgage amount and terms will be determined once you have reached a final agreement with your builder. FINISHING THE FINANCIAL PICTUREYou understand the mortgage financing that is available to help you purchase your home, and you have a good idea of the price range that you can afford. In addition, you should consider the following points:Does your province or territory offer home purchase assistance plans? Check with the housing department of your provincial or territorial government. Using your RRSPs for a downpayment. Under the federal government's Home Buyer's Plan, consumers can borrow up to $20,000 tax-free ($40,000 for couples) from their RRSP funds for the downpayment and closing costs on a home. A 2.5% GST rebate applies to new homes with sale prices of up to $350,000. |
