- Why use a Mortgage Broker?
- How much can I afford to pay for a home?
- What is Mortgage Loan Insurance?
- Is getting a Mortgage Pre-approval the first step in the home buying process?
- What is a Mortgage Pre-approval?
- Why should I get Pre-approved for a Mortgage?
- How do I get Pre-approved for a Mortgage?
- What factors into receiving a mortgage pre-approval?
- What happens after I receive a Mortgage Pre-approval?
- Are there any limitations with a Mortgage Pre-approval?
- How important is my Credit Score?
- What factors influence my Credit Score?
- How does my Credit Score affect my mortgage?
- How can I improve my Credit Score?
- What is a Conventional Mortgage?
- What is a High-Ratio Mortgage?
- What is the difference between a fixed rate mortgage and a variable rate mortgage?
- What is a Home Inspection? Should I have it done?
- How will child support and alimony affect my mortgage qualification?
- Can I qualify for a mortgage if I have been declared bankrupt?
- What is involved with the Mortgage and Purchase Approval Process?
- What happens if my Mortgage Application is rejected?
- Should I be concerned about Mortgage Penalties?
- Do Mortgage Penalties matter?
- What is a “Fair-Penalty Lender”?
- So why doesn’t everyone get a mortgage with a fair penalty lender?
- How does the First-Time Home Buyers' Tax Credit work?
- How do you qualify for the First-time Home Buyers' Tax Credit?
- How does the Home Buyers' Tax Credit differ for people with disabilities?
- How does the Land Transfer Tax Rebate for First-Time Homebuyers work?
- How does the GST/HST New Housing Rebate work?
- How does the RRSP Home Buyers' Plan work?
- What are the eligibility requirements for the RRSP Home Buyers’ Plan?
- How does the RRSP Home Buyers Plan process work?
- How does the Early Mortgage Renewal work?
- What is the qualification criteria for a Commercial Mortgage?
- What is Commercial Mortgage Insurance?
- How Does a Reverse Mortgage Work?
- How do you receive Reverse Mortgage funds?
- What are the eligibility requirements for a Reverse Mortgage?
- How to qualify for a Reverse Mortgage?
Let me count the ways…
1. The biggest reason: The broker works for you. The bank doesn’t.
2. The right mortgage is a critical factor in determining long-term savings. The value of a professional mortgage broker comes from having someone who objectively works for you and is not limited to mortgage product offerings from one source, like a bank.
3. Mortgage brokers can give great advice on choosing the right mortgage option taking into consideration interest rate, payment privileges, payment penalties, long-term savings, and much more.
4. Mortgage brokers provide expertise and choice at no cost to you as we are paid by the financial institution that funds your mortgage.
5. BONUS: You never have to worry about a better mortgage on the market – you will have it.
There are a number of factors (such as your income, credit score, your down payment, your debt, etc.) that can change what you can spend and how large of a mortgage you can afford to take on.
Mortgage affordability and your down payment
There is a minimum down payment rules in place. The amount of money you have saved for a down payment can limit your maximum mortgage affordability. The minimum down payments in Canada are:
- 5% of the purchase price up to $500,000, plus
- 10% of any part of the price between $500,000 and $1 million, or
- 20% of the total purchase price for homes valued at over $1 million.
In addition to the down payment, you must also be able to show that you have the capacity to cover other closing costs such as the legal fees and disbursements, appraisal fees, and a survey certificate.
As a rule, at least 5% of the down payment must be from your own cash resources or a gift from a family member. Some lenders will accept gift money from a family member as a down payment however, this requires a signed letter from the donor stating that it is a gift and not a loan.
For any down payment that is less than 20% of the total value of the home, mortgage loan insurance from either the Canada Mortgage Housing Corporation (CMHC), Sagen (Genworth Canada), or Canada Guaranty is required.
Debt Service Ratios and mortgage affordability
Your debt service ratios – including your gross debt service ratio and your total debt service ratio – are used to calculate the maximum mortgage the lender can offer. This maximum mortgage is then combined with your available down payment to determine the maximum home price you can purchase.
Gross Debt Service Ratio is calculated as follows:
Mortgage payments + Property taxes + Heating Costs + 50% of condo fees divided by Annual Income
The ratio should be < 32%
Total Debt Service Ratio is calculated as follows:
Housing expenses (per GDS) + Credit Card payments + Loan payments + Line of Credit payments divided by Annual Income
The ratio should be < 40%
Lenders use these ratios to ensure that you can consistently make your monthly payment, as they place a limit on the amount of your income that can go towards your housing expenses and monthly debt obligations. The industry standard guideline for GDS is no more than 32% and the guideline for TDS is no more than 40%. However, you may be allowed to exceed these limits if you have a stable source of income and good credit. If the mortgage you want to take on forces your GDS or TDS above 39% and 44% respectively, you will not be approved for that amount through traditional lending guidelines.
How to Increase Your Maximum Mortgage Affordability
If you have used our mortgage affordability calculator, and you are unhappy with your results, there are several steps you can take to increase your mortgage affordability:
- Increase your down payment: This will give you the ability to increase your affordability and purchase a more expensive home.
- Pay off your debts: This will lower your TDS ratio and free up more of your income for your mortgage payment, ultimately giving you the ability to carry a larger mortgage and therefore more expensive home.
- Increase your income: This is the tougher option, but it will allow you to afford a larger monthly mortgage payment, which will increase the overall size of the mortgage you can afford to borrow and repay. Alternatively, you can apply for your mortgage with your partner, or get a co-signer, such as your parents, to guarantee your mortgage.
Maximum affordability vs. what you should actually spend
Your GDS and TDS ratios are just guidelines, and you do not have to borrow the maximum amount possible.
When deciding what your maximum purchase price is going to be, it’s important to make sure that you have enough room leftover in your budget to pay down debt, save for the future, manage interest rate increases and job loss.
Mortgage Loan Insurance is insurance coverage provided to a lender against default on mortgage installments when the down payment amount is less than 20% of the value of the home. Like any other insurance, mortgage loan insurance requires a premium. The premium amount can vary depending on how much of the purchase price is financed by the mortgage; the greater the down payment, the lesser will be the premium.
Mortgage Loan Insurance is distinct from Mortgage Life Insurance as the latter guarantees that your remaining mortgage at the time of your death will not be a burden to your estate.
Before you start the house-hunting process, there is an important step you can take that will both save you time and make the process easier: getting pre-approved for a mortgage. A pre-approval helps you understand the home price you can afford, allowing you to budget for your home purchase and focus your home search. Also, with a pre-approval you will be able to secure a great mortgage rate offer ahead of time and protect yourself from a rate increase during your home search.
A pre-approval is a commitment from a mortgage provider to lend you a certain size mortgage at a particular rate subject to the approval of the property. When you get pre-approved for a mortgage, you’ll find out the maximum amount you can afford to spend on a home, the monthly mortgage payment associated with your maximum purchase price, and what your mortgage rate will be for your first mortgage term.
Applying for a mortgage pre-approval is free and does not commit you to a lender. However, getting pre-approved does hold the mortgage rate you are offered for 60 to 90 days. This means you are protected if interest rates rise while you are shopping for a home. If interest rates go down during this time, your lender will honor the lower rate. That said, a pre-approval is not a full guarantee you will receive that rate. That relies on your finances staying the same when you finally apply for your mortgage.
Getting pre-approved for a mortgage helps you in several ways. It saves time in your home search because you will only look at homes in your price range. Getting pre-approved is also a signal to your real estate agent that you are serious about buying, and you will receive faster more targeted service. Finally, when it comes time to make an offer on a home, the fact that you are pre-approved signals to the seller that you should have no problem financing the purchase, which will improve your chances in a competitive offer situation. Do not forget that if interest rates fall while you are locked in, your lender will honor the lower rate.
To get pre-approved, you must meet with either a mortgage broker or a lender. To determine how much you can afford to borrow to purchase a home, they will ask you a series of questions, and you will need to provide some supporting documentation.
The following four factors play a role in determining how large a mortgage, and at what rate, you will be pre-approved.
1. Credit Score
Your credit score is a measure of your financial health and shows lenders how risky it may be to lend you money. If your credit score is between 680 and 900, you will qualify for a mortgage with an “A” level lender, such as a major bank or other financial institution.
If your credit score is below 680 and above 600, lenders will look at the other details of your finances to determine if you can qualify with an “A” level lender or not. If you do not qualify, you will need to go through a “B” level lender to get a mortgage pre-approval.
If your credit score is below 600, you will only qualify for a mortgage with a “B” level lender and you will not get today’s best mortgage rates.
2. Down Payment
Your down payment is the lump sum of money you will put towards the purchase of your home. In Canada, the minimum down payment you must make is between 5% and 20% of the home’s purchase price (depending on the price). If you put down less than 20%, you will have to buy mortgage default insurance (also called CMHC insurance) to protect your lender in case you default on your loan.
The size of your down payment affects how much you can borrow.
For example, if you wanted to buy a house worth $300,000, you would need at least a $15,000 down payment. $300,000 x 5% = $15,000
Minimum down payments in Canada:
The minimum down payment in Canada is 5% for homes costing less than $500,000.
For homes priced between $500,000 and $1 million, you need to put down 5% of the first $500,000, then 10% of any amount over $500,000.
For example, a house worth $600,000 would require a down payment of at least $35,000.
($500,000 x 5% = $25,000) + ($100,000 x 10% = $10,000) = $35,000
For houses priced over $1 million, a 20% down payment is required.
3. Debt Service Ratios
Your debt service ratios are two calculations that lenders use to determine the largest monthly mortgage payment you can afford, based on your current monthly income, expenses, and debt. Lenders use these ratios to make sure you can afford to make your monthly mortgage payments, even with all of your other financial commitments, so there is a smaller risk that you could default on your mortgage payments.
4. Supporting Documentation
Depending on the mortgage broker or lender you sit down with, the documentation you will need to submit for your pre-approval may vary. For example, some mortgage brokers require proof of income for a pre-approval. Others will not require proof until your offer has been accepted and you need to finalize your mortgage application.
Here is a list of documentation you may need to provide for your mortgage pre-approval:
- Identification (driver’s license and a passport)
- Proof of income (pay stubs, a letter from your employer, or a notice of assessment if you are self-employed)
- Length of time with an employer
- Proof of down payment (recent financial statements of bank accounts and investments)
- Proof of source of funds for the closing costs (usually about 1.5% of purchase price)
- Proof of any other assets like a car, cottage, or boat
- Information about other debts including:
- Credit cards or lines of credit
- Spousal or child support payments
- Student loans
- Car leases or loans
- Personal loans
Once you have been pre-approved, you will know the maximum amount you can afford to borrow, as well as the mortgage rate lenders are willing to offer you. Your pre-approval keeps you protected from future interest rate increases for the next 60 to 90 days while you search for a home. You can then take the maximum mortgage amount and use it as a guide during your house-hunt, so you only view homes you know you can afford to buy.
One thing to keep in mind is that getting pre-approved for a mortgage does not guarantee that your final mortgage application will be approved. When you apply for a mortgage after your Offer to Purchase has been accepted, your lender will look at the details of the property to make sure it is suitable. If the property does not meet their qualification criteria, you will not qualify for a mortgage. For example, if the home has asbestos, knob and tube wiring, is a heritage home, or its appraised value is below the purchase price, the lender may not find it suitable and could deny you a mortgage.
Also, getting pre-approved for a mortgage does not mean that you should buy a home at the top of your price range. Your pre-approval amount only represents how much your lender is willing to lend you, not how much you should spend. You can choose to buy a home that is priced lower than your maximum purchase price which will ensure you have enough room in your budget for saving and paying down debt.
If you need advice, you can always consult a mortgage professional, like a mortgage broker. Mortgage brokers are independent and can give you expert advice on your application for free. They can also help you compare mortgages, negotiate a better rate, and help you through the pre-approval process.
One of the things lenders consider when deciding whether or not you are a good candidate for a mortgage loan is your credit score. Your credit score is a measure of your financial health and shows lenders their level of risk if they lend you money.
Your credit score is a number between 300 and 900. A credit score above 700 proves you manage your credit well, meaning a lender should feel comfortable letting you borrow money. A lower credit score shows that you have mismanaged your credit, making you more of a risk to the lender, which means you may be required to pay a higher mortgage rate.
Your credit score is built and tracked based on information sent to credit reporting agencies – more commonly known as credit bureaus – by companies that lend you money or issue your credit cards, such as banks, retailers, credit unions, and other financial institutions.
There are two credit reporting agencies in Canada: Equifax Canada and TransUnion. Upon request, both agencies will send you one free copy of your credit report each year, as well as allow you to look up your credit score at any time for a small fee. It is a good idea to check your credit report annually, to make sure there are no mistakes on it.
Each credit-reporting agency uses its own proprietary formula to calculate credit scores. Your credit score is calculated based on the following factors:
- Past Payment History – Late or missed payments, overdue accounts, bankruptcies, and any written off debts will all lower your credit score
- Credit Utilization – How much debt you have as a percentage of your available credit will also affect your credit score (You should try to use less than 35% of your available credit)
- Credit History – How long you have had accounts open (the longer, the better)
- New Credit Requests – How recently and how often you have applied for new credit (checking your own credit score will not affect your score)
- Types of Credit – Having a mix of credit is best, such as a credit card, an auto loan, and a line of credit
Your credit score is important because it affects which lender you can get your mortgage from, and what your interest rate on that mortgage will be. Prime lenders, such as major banks, will definitely give you a mortgage if your credit score is above 700, and they will consider applications with credit scores between 600 and 700.
If your score is between 600 and 700, the rest of your application will need to be strong in order to get approved. The lower your score the greater risk you pose to the lender. To compensate for that risk, some lenders will charge you a higher interest rate. Also, some lenders will not lend you money at all if your credit score is too low.
If you have a bruised credit score, or you have recently moved to Canada and would like to establish credit, here is a list of things you can do to improve your credit score:
- Make sure to have a least two credit facilities in use at all times. Use each credit facility every month and pay off the balance.
- Always make your payments on time, and always pay at least the minimum payment. If you cannot make the minimum payment, let your lender know right away, as they may be able to accommodate you by extending your payment due date.
- Do not use more than 35% of your available credit. For example, if you have a credit card with an available limit of $5,000, try not to use more than $1,750 ($5,000 x 35% = $1,750) during each monthly cycle.
- Establish a long credit history. Try not to cancel your oldest credit card, even if you rarely use it. The longer your credit history is, the better your credit rating will be.
- Limit how frequently you apply for credit. The more times you apply for new credit, the worse it looks to lenders. Please note that checking your own credit will not affect your credit score.
A conventional mortgage is one in which the down payment amount is equal to or more than 20% of the purchase price. Such a mortgage normally does not require mortgage loan insurance.
A mortgage which is greater than 80% of the purchase price or the appraised value, whichever is less, is known as a High-Ratio mortgage. A High-Ratio Mortgage requires mortgage loan insurance. Premiums for a mortgage loan insurance can vary depending on the value of the mortgage.
In a fixed-rate mortgage, the interest rate is pre-determined at the beginning of the mortgage term. The advantage of this type of mortgage is that it offers the security of knowing your monthly payments beforehand and allows you to plan accordingly.
In a variable or floating rate mortgage, the payments can be fixed or variable depending on the lender however, the interest rate can fluctuate depending on the market conditions. If the interest rates drop, more of the payment goes towards reducing the principal; if the rates go up, a larger portion of the monthly payment goes towards covering the interest. The interest rate is based on a predetermined formula which is in-turn based on the prime lending rate.
A home inspection is a visual examination of a house by a qualified professional to determine the overall condition and value of the home. When conducting a proper inspection, an authorized home inspector should check all the major components of the house such as the roof, ceilings, walls, and floors along with other systems such as heating, plumbing, drainage, and electrical. The inspector usually provides the results of the inspection in writing to the prospective homeowner.
It is always advisable to get a home inspection done before making a purchase decision. A thorough inspection is likely to give you peace of mind when purchasing a home. The inspection gives an idea about the quality of the construction and indicates whether any major repair work will be required. This allows you to calculate all the add-on costs before making the final decision. An inspection will definitely give you a more secure feeling about your purchase decision.
If you are paying child support and alimony to another person, generally the amount paid out is deducted from your total income before determining the mortgage amount that you would qualify for approval.
If you are receiving child support and alimony from another person, the amount paid to you will be added to your total income before determining the mortgage that you will qualify for approval.
Some lenders may consider you eligible for a mortgage even though you have faced bankruptcy. However, this decision may vary from lender to lender and will greatly depend on the circumstances surrounding the bankruptcy. Certain measures can be taken by the prospective borrowers to improve their credit rating. For more details discuss this with your mortgage professional.
Getting approved for a mortgage could be the most important step in the home buying process. If you were not already pre-approved, you will begin your mortgage approval process after you have made your Offer to Purchase and your offer has been accepted. Your Offer to Purchase will be conditional on financing, which means you need to secure your mortgage approval before you can move forward with your home purchase.
The mortgage approval process is similar to a mortgage pre-approval: you will need to provide your mortgage broker or lender with specific details about the home you are purchasing, along with your income and down payment details.
Some of the documents you may need to provide include:
- Current employment income from a T4, most recent payslip, and a signed letter from your employer
- Other sources of income such as investments, rental income, or freelance income
Down payment information:
- If you are using your own funds: savings or investment statements from the last 90 days
- If you are using the Home Buyers’ Plan (HBP): proof of withdrawal from your RRSP
- If you are using a gift from a family member: a letter stating the money is not a loan
- The deposit amount that was included with your Offer to Purchase
- An inventory of your current assets and liabilities such as investments or car loans
- A void cheque to setup mortgage payment withdrawals
Details about the home:
- The address
- The closing date
- Property tax, condo fees, and heating cost estimates
- A copy of the real estate listing
- A copy of the accepted Offer to the Purchase agreement, including the exact purchase price
- A copy of the home appraisal, home inspection, and/or land survey
- Your lawyer’s name, address, and phone number
Once your broker or lender has all of these details, they will send the application to an underwriter at a financial institution. The lender will use debt service ratios to determine if your application fits within their guidelines. If the lender is satisfied that both your finances and the property fit within their qualifying guidelines, they will approve you for the mortgage.
If your mortgage application is not approved, there are several steps you can take.
- You could get a guarantor to co-sign the mortgage application. This is often done by a parent or relative.
- You could seek financing through an alternative lender or a private lender. These companies specialize in lending to homebuyers who cannot obtain a mortgage through a traditional lender like a bank, credit union, or mortgage company.
Most Canadians choose a 5 year fixed term mortgage as it is the most competitively priced mortgage term in the industry however, statistically speaking, approximately 6 out of every 10 Canadians that hold a mortgage break their mortgage on average during the 38th month of their term.
Committing to a fixed-term mortgage for five long years exposes people to the most insidious aspect of residential financing: prepayment charges.
The Big 6 Banks typically have the highest mortgage penalties associated with fixed-term mortgages while Mortgage Finance Companies offer the best solutions when it comes to calculating mortgage penalties.
A fair-penalty lender calculates its standard prepayment charges, for lack of a better word, “fairly.”
It does so by comparing your actual mortgage rate to a rate equal to (or close to) what it charges new customers for a time frame similar to your remaining term.
Unlike the Big Six banks, fair-penalty lenders don’t use arbitrarily inflated rates (“posted rates”) in their calculations. That only serves to drive up penalties.
Many people are conditioned to pay more for big bank financing. Among other things, they trust the brand, like the convenience, or like knowing they can walk into a branch to talk to someone if there’s ever a problem (although, for most people, mortgage problems after closing aren’t too common). Unfortunately, the cost of that convenience is steep.
A Simple Example
Suppose you are a major bank customer with a $300,000 mortgage at a rate of 2.69% (originally a 5 year fixed term mortgage) taken out 38 months ago.
Now imagine you:
- Need to consolidate debt into your mortgage
- Just found a new job in a different city and must sell and rent
- Want to break and renegotiate to a lower rate
- Have to break the loan early for some other reason – maybe because of a loss of income, divorce, inability to get a fair rate from your bank on a “port and increase” (that’s where you move your mortgage to a new property and increase the loan size), or inability to qualify for a port.
In these scenarios, one popular bank would charge you an interest rate differential (IRD) penalty of roughly $10,409.18 to exit your existing mortgage.
Compare that with a “fair penalty lender” with an interest rate differential (IRD) penalty of $2500.00.
That is an astronomical difference!
Many determined mortgage shoppers focus simply on rate and will do anything to save even a 10th of a percentage point off their rate however, most mortgage borrowers are not aware of the hidden costs associated with their mortgage until after they have broken their mortgage.
The time has come to heed this lesson as borrowers. Big-bank IRD penalties clearly overcompensate banks for the legitimate expenses they incur when a customer backs out of a mortgage early. The more that people demand fair penalties, the more pressure it will put on Canada’s six biggest lenders to change their methods.
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.
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. If you are purchasing a home with a spouse, partner or friend, the combined claim cannot exceed $750. To receive your $750 claim, you must include it with your personal tax return.
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
- 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
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.
The land transfer tax rebate is another tax credit available to first-time home buyers in Ontario, British Columbia, and Prince Edward Island.
Ontario Land Transfer Tax Rebate
First-time homebuyers in Ontario can qualify for a rebate equal to the full amount of their land transfer tax, up to a maximum of $4,000.
To qualify for the Ontario Land Transfer Tax Refund for First-Time Homebuyers, you must meet the following criteria:
- You must be a Canadian citizen or permanent resident of Canada,
- You must be 18 years of age or older,
- You must live in the home within 9 months of purchasing it,
- You cannot have owned a home before, and
- If you have a spouse, they cannot have owned a home during the time they have been your spouse.
Based on the Ontario land transfer tax rates, the rebate will cover the full tax amount up to a maximum home purchase price of $368,333. For homes with purchase prices over $368,333, homebuyers will qualify for the maximum rebate, but will still owe the remainder of their land transfer tax. If you are buying your home with your spouse, but only one of you qualifies for this rebate, you can still receive 50% of the rebate.
If you qualify, your real estate lawyer will help you file the necessary paperwork. You can either file for your land transfer tax rebate electronically or download the Ontario Land Transfer Tax Refund Affidavit for First-Time Purchasers of Eligible Homes.
Toronto Land Transfer Tax Rebate
First-time homebuyers who live in the City of Toronto can qualify for a rebate equal to the full amount of their municipal land transfer tax, up to a maximum of $4,475. This rebate applies whether you are buying a Toronto townhouse, house, or condo.
You can also qualify for the Ontario rebate in addition to the Toronto rebate.
To qualify for the Toronto Municipal Land Transfer Tax Rebate for First-Time Purchasers, you must meet the following criteria:
- You must be a Canadian citizen or permanent resident of Canada,
- You must be 18 years of age,
- You must live in the home within 9 months of purchasing it,
- You cannot have owned a home before, and
- If you have a spouse, they cannot have owned a home during the time they have been your spouse.
Based on the Toronto land transfer tax rates, the rebate will cover the full tax amount up to a maximum home purchase price of $400,000. For homes with purchase prices over $400,000, homebuyers will qualify for the maximum rebate, but will still owe the remainder of their land transfer tax. If you are buying your home with your spouse, but only one of you qualifies for this rebate, you can still receive 50% of the rebate.
If you qualify, your real estate lawyer will claim the rebate electronically through Teraview when he/she registers your transfer/deed.
If you buy your home before it is built, or if you substantially renovate an existing home, you could qualify for a rebate of a portion of the sales tax. The amount of the GST/HST new housing rebate depends on the purchase price of the home and can only be claimed if the net purchase price is $450,000 or less. While this rebate is often taken advantage of by first-time buyers, this rebate is available to all Canadians who qualify regardless of whether they have owned a home before.
One great source of funding for your mortgage down payment is a Registered Retirement Savings Plan (RRSP). The Canadian government's Home Buyers' Plan (HBP) allows first time home buyers to borrow up to $35,000 from your RRSP for a down payment, tax-free. If you are purchasing with someone who is also a first-time homebuyer, you can both access $35,000 from your RRSP for a combined total of $70,000. However, since the HBP is considered a loan, it must be repaid within 15 years.
In order to be eligible as a first-time homebuyer, you must meet the following criteria1:
- RRSP funds you borrow must be in your account for at least 90 days prior to withdrawal
- You cannot have owned a home within the previous four years
- If you are buying with a spouse (or common law partner) who is not a first-time homebuyer, you cannot have lived in a house they owned for 4 years
- You have entered into a written agreement to buy or build a qualifying home
- You must intend to live in the home within one year of purchase as your primary residence
- If you have used the Home Buyers' Plan before, you cannot have any outstanding balance due
- You must make the withdrawal from your RRSP within 30 days of taking the title of the home
- You must be a Canadian resident
If you make a withdrawal from your RRSP, but do not meet the first-time homebuyer eligibility requirements, this withdrawal will be taxed, and you must include it on your income tax return as taxable income.
It is important to note that any funds you withdraw for the homebuyers' plan must be in your account for 90 days prior to your withdrawal.
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 then 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 on your income tax return for the year you made the withdrawal.
Also, you must make the withdrawal within 30 days of taking title of the home. If you try to make the withdrawal more than 30 days after you take title of the home, your withdrawal will no longer be eligible for the HBP and you will be taxed on the amount you withdraw.
Finally, beginning 2 years from your purchase you must make annual payments over 15 years to pay back the loan to your RRSP. 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.
What happens if I miss making repayment to pay back the loan to my RRSP?
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.
Let's look at an example where you buy a home in 2013 and withdraw $15,000 from your RRSP to put towards your down payment. Your first payment is due two years later, in 2015.
Calculate the minimum annual RRSP repayment
$15,000 total RRSP withdrawal ÷ 15 years to repay = $1,000 minimum annual repayment
If you still have an outstanding balance on your mortgage at the end of your mortgage term, you will have to renew for another term. By law, your lender has to send you a renewal notice 21 days before your term is up, but most allow you to renew with them anytime in the final 120 days of your current mortgage term, without having to pay a penalty to break your term early; this is known as an early mortgage renewal.
During the final 120 days of your term, most lenders will contact you with an early renewal offer. The offer will include a new mortgage rate (usually just slightly less than their posted rate) and term (typically the same length of the term you are currently in), as well as a letter you can sign to accept the offer and mail back. By signing the letter, you are accepting the early renewal offer and, therefore, your mortgage will be renewed with your current lender for another term.
If it seems all too convenient to sign your early renewal offer and send it back, that’s because it is – and that convenience comes at a price. By accepting your early renewal offer, you are going to end up paying a higher interest rate than what you could have gotten if you had shopped around and switched to another lender.
If you choose to pursue a Commercial Mortgage, there are specific criteria that you will have to satisfy. The bar is set quite high as the value of loans is considerably higher.
- Debt service coverage ratio. This is the main criterion that lenders will look at and is essentially the ratio of cash available to the required loan payments. Most lenders will apply a loan-to-value ratio and will expect you to invest some of your own money into the purchase to balance the odds.
- Credit History. Most lenders will require a good personal credit score as well as evidence that your business is creditworthy. There are lenders that may accept applicants with a less-than-perfect credit history, but they are few.
- Current business situation. If your business is up and running, commercial lenders expect your business to be profitable and steady. You may need to provide your business plan and financial projections to ensure that you will be able to make your payments on time. Some lenders may have a minimum net worth requirement.
- Type of business. The terms of a Commercial Mortgage are dependent on the type of business as well as the property you want to purchase. This can be quite a complex area so it is advisable to acquire a specialist, either a solicitor or chartered surveyor, to advise you.
- Down payment. A higher down payment is expected of a commercial property. A typical down payment on a mixed property falls between 20- 35%. A pure commercial property is typically higher, near 50%. Your risk profile directly determines the down payment that is required of you.
Canada Mortgage and Housing Corporation (CMHC) is Canada’s provider of mortgage loan insurance for the construction, purchase, and refinancing of multi-unit commercial real estate properties, including rental buildings, licensed care facilities and retirement homes.
CMHC Mortgage Loan Insurance enables approved lenders to help borrowers purchase multi-unit properties with a minimum of 15% down. Borrowers can also access competitive interest rates for the life of the mortgage and enjoy reduced renewal risk. A CMHC mortgage provides a number of flexible financing terms available including extended amortization periods and fixed and floating interest rates and is available for first and second mortgage products.
A Commercial Mortgage is more complex than a residential mortgage however, we have access to a network of commercial lenders to meet your needs.
A Reverse Mortgage is the opposite of a regular mortgage. A Reverse Mortgage allows you to monetize a portion of your equity, without mandatory principal and interest payments. A simple way to think of it is that you are taking out a loan in installments (or all at once), using your home as both the security for the loan and, in most cases, the asset that will eventually fund paying back the loan.
With a Reverse Mortgage, the lender advances you (the homeowner) a cash amount. This is to be repaid when the mortgage comes due. You do have options to repay principal and interest, but if that is not part of your plan, that is fine. It is important to know that much like other loans, when interest isn’t paid, the total balance goes up (accrues) rather than down, as is the case with a standard amortizing mortgage.
With a Reverse Mortgage, your unpaid mortgage balance increases. However, this may be partially offset if your home appreciates over the same time period.
It is important to note that reverse mortgage lender liens are registered in a similar fashion to traditional mortgage financing. You continue to retain homeownership and title to your home. As such, you are responsible for the maintenance of the property, including the payment of property taxes, condo fees, and fire insurance.
Depending on your lender and plan, you may be able to get the money from your reverse mortgage loan either upfront (as a one-time lump sum) or partially upfront, with the rest spread out over time.
Opting for an upfront payment of a reverse mortgage will result in interest being charged on the entire loan from the first day. However, it may also result in you being charged a lower rate on the mortgage, depending on your lender.
To be considered eligible for a Reverse Mortgage in Canada, you must be:
- A Canadian homeowner, and
- Aged 55 or older.
If you have a spouse and you are both on the title of the house:
- Both of you must be at least 55 years old to be eligible, and
- Both of you must be listed on the reverse mortgage application.
Additionally, the home you are using to secure the reverse mortgage must be your primary residence. This usually means you have lived in the home for at least six months to a year, and you must continue to live in the home while the loan is outstanding.
If you currently have any other outstanding loans or lines of credit that are secured by your home, such as a mortgage or home equity line of credit (HELOC), you must pay it off when you get a reverse mortgage. If the loans are less than the funds available from the reverse mortgage, you can use the money from the Reverse Mortgage to pay them off.
Reverse Mortgage borrower obligations
Because you will still retain ownership and occupancy of the home, you have several obligations. These include:
- Maintaining the property,
- Taking out an active fire insurance policy,
- Paying property taxes, and/or
- Paying condo fees.
To qualify for a Reverse Mortgage, lenders typically look at the following factors:
- Your age (and the age of your spouse if they are also registered on the title of your house)
- The equity you have in your home
- The appraised value of your home
- The location of your home