Mortgage 101

Mortgage payments are made up of a principal sum (the amount borrowed) and interest (the cost to you of borrowing money).

The best plan for any type of mortgage is to minimize the amount of interest you pay, here are a few ways to accomplish this:

  • A larger down payment means your home ultimately costs less because a smaller mortgage means less interest.

  • A shorter amortization, the period over which a loan is repaid.

  • A weekly or bi-weekly payment schedule, instead of monthly.
    Additional lump sum payments.

Remember you don’t have to get your mortgage from the same place you have your savings or chequing accounts. At the end of each term you will be able to change the options of your mortgage such as the payment schedule, the term, the rate, even the mortgage lender. Be sure to consult with your broker before renewing your mortgage term.

Mortgage Default Insurance

For most people, the hardest part of buying a home, especially a first home, is saving the necessary down payment. If you have less than 20% of the purchase price to put down, you will be required to purchase mortgage insurance through your lender. Mortgage insurance protects your lender against payment default.

By providing Mortgage Default Insurance to lenders, CMHC, Genworth, and Canada Guaranty enable you to finance up to 95% of the purchase price of a home. This means you can buy a property with as little as 5% down. So if the cost is $300,000, you would need a down payment of just $15,000! While you may have to pay an extra premium for their services, these mortgage default insurers have made home ownership possible for millions of Canadians who would otherwise have had to wait much longer in order to save a significant down payment.

What costs to expect

Buying a home involves many financial considerations. Some home buying expenses are one-time costs while others are ongoing commitments. In addition, there are other costs that you may not be aware of or that you may have forgotten to factor into your calculations.

Here is brief description of some of the costs you may need to consider:

Lawyer and Title Insurance

Even a straightforward home purchase requires a lawyer to review the Offer to Purchase, search the title, draw up mortgage documents, register the loan with the land titles office and tend to the closing details. Lawyer’s fees for a mortgage range widely and will depend on the complexity of the deal.
Some lenders will also require you take out title insurance. Title Insurance is insurance that protects the insured against loss resulting from title and survey defects that would otherwise have been revealed by an up-to-date survey or real property report. Title Insurance also protects the insured against losses associated with fraud and forgery as it relates to the title of your property.

Realtor Fees

In today’s ever-changing home market, it is an excellent idea to use the services of a real estate agent. A realtor has the ability to search thousands of potential listings and save you time and money by pinpointing the properties you will want to consider. Real estate fees are standardized and all fees are paid from the seller of a property. If you are selling your property you should expect to pay 7% on the first $100,000 and 3.5% on the remaining balance of a sold property. When buying you will not pay your realtor anything as their commission is paid from the seller alone.

Appraisal Cost

If your loan is not CMHC/Canada Guaranty/Genworth insured, most lenders will require a property appraisal to be done. The appraisal itself is a report designed to determine the current market value of a property. In some situations, the appraisal may be covered by your lender but typically this cost is the borrowers’ responsibility. A basic appraisal for mortgage purposes will fall in the $275–$350 range. Actual cost should be confirmed as it will vary based on the location and size of the property.

Home Inspection

A home inspection is different from an appraisal. A home inspection analyses the structural integrity of a home (foundation, electrical, heating etc.) rather than determining a current market value. Inspectors are unregulated in many provinces, and fees can range widely. You can expect an approximate cost of $350 – $500 for a home priced under $400,000. Larger, more expensive homes cost more to inspect. A thorough two-hour inspection carried out by an engineer will cost closer to the upper limit. Municipalities can also supply any available inspection reports on the property for a fee.

Property Taxes

You know what they say; there are only two certainties in life, death and taxes. Property Taxes are always a certainty! If you have a high-ratio mortgage, some lenders may require that you have your property tax paid monthly in instalments which are added to your mortgage. You can also have a monthly instalment paid through the city using the Tax Instalment Payment Plan (TIPP) depending on the province you live in. A good estimate of the annual property taxes due is roughly 1% of the total value of your home.

Condo Fees

Condominium associations charge monthly fees for common-area maintenance such as grounds keeping and carpet cleaning. Some Condo fees include your heat, electricity, cable etc. Fees range widely depending on the type of structure but will generally average between $200 – $600 per month. Be cautious with new condos when estimating your future monthly cash flow, as many builders set the initial condo fees low. Once a reserve fund study is completed within the first two years of the condo operation, the condo fees will be adjusted to ensure there is money available for repairs over the next 25 years.

Estoppel Certificate

An Estoppel Certificate is a document that outlines a condominium corporation’s financial and legal state. The certificate and supporting documents will cost you about $50. Your lawyer will usually handle the acquisition of these documents. (Does not apply in Quebec.)

Real Property Report

Your lender will require an up-to-date survey often called a Real Property Report (RPR). Ask the vendor (seller) to provide one as a condition in your Offer to Purchase, otherwise, you will have to pay to have one done. The cost of a new survey can be upwards of $500.

In some cases, Title Insurance may be used rather than providing an up-to-date survey, but this may mean getting a survey done at your cost down the line.