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Mortgage Knowledge Centre

Welcome to the Mortgage Knowledge Centre! Here you will find all the basic information on mortgages and things you may not know about the mortgage process.

Your Down Payment

Most financial institutions would like to see 5% of the purchase price of the property as a cash down payment from the borrower in order to lend the resulting 95% to the borrower. This 5% will represent the equity in your new home.

The larger the down payment a borrower has, the less the home will cost in the end due to the interest being charged. Further to that, the larger the down payment a borrower has the lower the insurance premium will be on the total loan amount. See below for explanation on the insurance premium.

This down payment may also be received as a gift from a family member. Contact us if you would like a copy of a lender approved gift letter.

The CMHC Insurance Premium

Also, known as Mortgage Loan Insurance, Canadian Mortgage and Housing Corporation (CMHC) puts out guidelines on how lenders and financial institutions should be lending out money. Here is where the lenders require a 5% down payment on a mortgage loan.

If the borrower has 20% of the purchase price to put down on the mortgage (home equity can be used) the mortgage is then deemed “conventional” and will not be required to any insurance premium. The more the borrower has to put down on a mortgage loan the lower the insurance premium they will be required to pay.

Please keep in mind that there are some lenders that will give an option of up to 5% cash back on the loan amount so the borrower can put this towards closing costs or other costs. Contact us for more details.

A Fixed Rate Mortgage

A fixed rate mortgage has a pre-determined term that usually extends between 6 months and 25 years. Term is not to be confused with amortization – which is the life of the mortgage liability. This option for a mortgage product offers the security of knowing what you will be paying month after month for the entity of the term selected.

A Variable Rate Mortgage

A variable rate mortgage has payments fixed to the bank prime rates. Bank prime rates can fluctuate many times during the term of a mortgage. This mortgage product can be a little risky as borrower needs to be prepared for if interest rate fluctuates more or less of the payment will go towards the principal of the mortgage. If rates are up then more of the payment will go towards the interest and in turn less towards the principal.

*click here to read more about Variable vs Fixed rate mortgages

The First Time Home Buyer Program

A borrower can use up to $25,000 in RRSP savings ($50,000 a couple) to use towards a down payment for a mortgage loan and will avoid paying the taxes on this amount. The borrower then has 15 years to repay the RRSP; the borrower must pay 1/15th of the amount back per year. The RRSP savings must be in the borrowers account for at least 90 days. This is a great way to save money for a down payment and at the same time making a yearly RRSP contribution which counts towards a tax deduction. Please contact either our Mortgage Professionals or our Financial Advisors for more information.

The second part of this program is the Property Transfer Tax exemption. First time home buyers will be exempt for paying the tax the first time they buy a property as long as that property value is under $425,000.

Closing Costs

There are two categories of costs associated with a purchase: pre-closing and closing costs. You should plan for around 1.5% of the basic purchase price for all closing costs:

  • Pre-Closing Costs
  • At Closing Costs

The Appraisal: A Pre-Closing Cost

Appraisals can come in the form of a BC Property Assessment, an electronic appraisal, a basic (drive by) appraisal, or a full walk through appraisal. The type of appraisal that will be required will depend on risk of lending to the Financial Institution/ Lender.

Home Inspection: A Pre-Closing Cost

We highly recommend having a professional building inspector walk through your prospective home. This inspection will highlight areas of risk or where repairs can be done. As the potential owner you should request a written report from the inspector. At TAG Financial we have a list of recommended inspectors.

Attorney Fees: An At Closing Cost

You will be responsible for paying fees and disbursements for the lawyer or notary acting for you. As your mortgage brokers we will be more than happy to shop around to find you the best and most affordable option; we always have some great recommendations already on hand.

Property Transfer Tax: An At Closing Cost

This is a onetime tax that is based on a percentage of the purchase price of the property and or mortgage amount. Please ask us for more information or to provide a FREE ESTIMATE for you.

Title Insurance: An At Closing Cost

This is protection against loss from problems connected to the title of your property. This will depend on ownership changes and possible liens or charges on the property. The insurance covers for any claims and fees that may arise.

Fire Insurance Binder: An At Closing Cost

This is not relevant for condominium purchases. This insurance will insure the Financial Institution and the borrower prior to the closing date.

HST

The 12% HST only applies to newly built homes. Purchases up to $525,000 do not pay any HST and B.C. also provides a rebate of up to $26,250 for those that do pay the HST. Sometimes when you are purchasing a property your HST cost may be included in the purchase price. Please check with your Realtor.

The Differences Between a Pre-approval and Pre-qualification

In a Pre- qualification, the mortgage broker will candidly discuss your financial situation using the borrowers’ answers to household income, assets, and liabilities. In a pre-approval the Mortgage Broker will use your credit information, your exact house hold income amounts to give you a firmer commitment. Our Mortgage Brokers will always do a pre-approval so borrowers can be certain they will receive the mortgage amount and won’t go looking for properties that they may not be approved for. You can expect a approval notice to show your interest rate, mortgage amount you will be approved for, and lender that has pre-approved you. The proper pre-approval process will save the borrower from the possibility of rejection and the ultimate disappointment and time that could be wasted researching properties out of reach.
During the pre-approval process the Mortgage Broker will put you into a rate hold and you can have up to 120 days to find your property. If you do not find your property within those 120 days the Mortgage Broker will simply get an extension on the current rate for you.
Once you are approved, do not make big changes to your finances. Changing jobs will affect your pre-approval and typically Financial Institutions/lenders require that you are at least off of probation in a new job. Now is not the time to purchase a new car, TV, or take an expensive vacation on your credit cards. The Financial Institution may do a last minute credit check right before you close your mortgage.
Call our Mortgage Brokers or Financial Planners for more information. Being educated and prepared with your pre-approval and rate hold will help make the mortgage loan process much less stressful.

The Qualifying Rate

Mortgages with variable rates require that you qualifying at a higher rate than a regular fixed rate. This is to ensure that borrowers can handle their payments if rates increase. Lenders use the qualifying rate to calculate your debt service ratios (look below for more information on ratios). Lenders will check to ensure your debt ratios are low enough to meet their guidelines. Your mortgage broker will always ensure this is will be accedptable before submitting your pre-approval.

Prime Rate

The bank of Canada sets a reference interest rate used to quote lending rates. This applies to variable rate mortgages and lines of credit.

Debt Servicing Ratios

Before lenders will lend to a borrower they want to ensure that that borrower is able to afford the mortgage payments monthly. They base the ability to pay on two different ratios.

  • Gross Debt Service (GDS): The percentage of the borrower’s annual income that is required to pay monthly housing costs like mortgage payments, property taxes, heat and condo fees.
  • Total Debt Service (TDS): The percentage of the borrower’s annual income that is required to cover all monthly costs like housing costs as well as other liabilities the borrower holds.

Bridge Financing

When there is a gap in your real estate purchase between the date your home purchase deal closes and your home sale closes, the bridge mortgage loan will close the gap. Your mortgage broker will negotiate the best conditions and ensure you are offered the most competitive rates for bridge financing in Canada.