Inside Our Mortgages
The loan-to-value (LTV) ratio is a measurement lenders use to represent your loan amount for a home against the total appraised value of the property.
An insured mortgage is one that is typically high-ratio (for down payments less than 20% of the home purchase price) and is insured against default by one of three Canadian insurance providers:
- CMHC (Canadian Mortgage and Housing Corporation) is the most common and a federal government corporation
- Canada Guaranty and Sagen are private companies, and the Canadian Federal Government equally protects the insurance provided
Default insurance requires a one-time premium to be paid by the home buyer (usually added to the mortgage loan amount) and means the lender is protected against borrower default. Only cash paid for a mortgage is considered safer from a lender's point of view. The insurance allows a lower down payment, and lower rates may be offered due to less risk and potential cost taken on by the lender.
A Guaranteed Investment Certificate (GIC) is a deposit investment security sold by Canadian banks and Trust Companies. Individuals often purchase GICs for retirement plans because of the low-risk, fixed rate of return — the interest is at risk only if the bank defaults. The Canadian Federal Government, however, insures the principal through CDIC to ensure it's never at risk.
A second mortgage is a subordinate mortgage added while an original mortgage (or first mortgage) is still in effect. In the event of default, the original mortgage would receive all proceeds from the liquidation of the property until the original mortgage is entirely paid off.
Since the second mortgage would receive repayment only after the first mortgage has been paid off, the interest rate charged for the second mortgage tends to be higher, and the amount borrowed will need to be lower than that of the first mortgage.
Mortgage or loan servicing refers to the administrative aspects of taking care of your mortgage from when the funds are dispersed until the mortgage is paid off.
Mortgage servicing includes:
- Monthly payment statements and collecting payments
- Maintaining records of payments and balances
- Collecting and paying taxes and insurance
- Remitting funds to the mortgage holders
- Following up on delinquencies
A lender can register two different types of mortgage charges: Conventional and Collateral. Today, most banks in Canada register their mortgages as Collateral Charges.
Here at THINK Financial, we register all our mortgages as a standard Conventional Charge, as we feel it allows our clients the most flexibility and savings.
What is a charge? When you take out a mortgage loan, the house is used as security. It's registered with a land registry office and commonly referred to as a 'charge.' The charge registration gives the lender the legal right to claim the house if the mortgage defaults.
- Registered for the original loan amount only, which allows you to attain a line of credit with another institution
- Interest and payments are based only on the outstanding balance
- Can be transferred 'as is' to another lender at renewal time without incurring legal costs
- Registered for 100% of the property value, which can greatly limit your ability to attain secondary financing on your home
- Interest and payments are based only on the outstanding balance
- Transferring your mortgage to another lender at renewal time would involve refinancing through a lawyer with legal costs upwards of $750+
Before looking for a home, it's important to determine what you can comfortably afford for mortgage payments. Consulting a professional, unbiased mortgage broker can help outline your details and options for personalized advice.
Together, you'll review your financial details to determine:
- How much home you can afford while managing other living expenses
- What down payment amount you may need
- Ways to gather your down payment, including government programs and rebates
- The closing costs you'll need to budget for
- Other costs involved in owning and maintaining a home
- What rate and mortgage product can help you save the most
Two simple calculations can help you estimate how much of your income can be allocated to monthly housing costs for getting mortgage approval: the Gross Debt Service Ratio (GDS) and the Total Debt Service Ratio (TDS).
Most lenders recommend spending no more than 36% of your gross monthly income (before tax) on combined housing costs: your monthly mortgage payment (principal and interest), taxes, utility costs, and, if applicable, 50% of condominium fees.
Most lenders say you should spend no more than 42% of your gross monthly income to service your mortgage and cover other debts and obligations, such as vehicle payments.
Keep in mind that these numbers are maximums. Try to keep your housing costs as low as possible for a more affordable lifestyle.
Offered by the federal government, the HBP allows first-time home buyers to withdraw up to $35,000 per person from their Registered Retirement Savings Plans (RRSP) without tax liability to buy a home in Canada.
If you meet eligibility requirements, you don’t have to start paying back your RRSP until two years after the purchase of the home, and you can take up to 15 years with annual repayment amounts to pay it back, tax-free.
Talk to an expert mortgage broker for more info and to weigh the pros and cons for your financial and mortgage goals.
To be eligible for the Home Buyers Plan:
- You need a written agreement to buy or build a home
- You intend to occupy the home as your principal residence
- You must be a Canadian Resident
- You are a first-time home buyer — in the previous four-year period, you did not occupy a home that you or your current spouse or common-law partner owned
- The money must be in your RRSP account for at least 90 days
- Your HBP balance on January 1 of the year you withdraw has to be zero
Read more here about the Federal HBP.
This registered investment product offered by the federal government allows eligible first-time home buyers to put their money away (tax-free in and out) to use toward their first down payment and related home-buying costs.
- The FHSA combines the best aspects of both an RRSP (tax-deductible savings going in) and TFSA (tax-free savings plus interest coming out)
- It can be used toward both a down payment and other expenses like closing costs
- Contribute up to $8K per year to a maximum of up to $40K
- Allows you to carry forward only $8K of un-used contribution room at a time
- Over-contributing incurs a 1% tax each month of overage
To qualify for an FSHA as a first-time home buyer, you must:
- Be at least 18 or 19 years old (depending on residing province)
- A Canadian resident
- Not have owned or jointly owned a qualifying home that you lived in that year or the preceding 4 years
See the Government of Canada FHSA page for more qualifying and related info.
There is more to buying a home than the down payment and mortgage. You need to budget another 1%-4% of the home price for extra expenses associated with your purchase and closing the deal.
Some of these costs are area-dependent and can include a survey fee, home inspection cost, title insurance, property insurance, provincial land or mortgage registration fees, land transfer tax, legal fees, Goods and Services Tax (GST), moving expenses, and other closing costs.
Check into whether you may be eligible for tax rebates, depending on your area and details.
Your credit score and report gives a snapshot of your financial history, such as your previous and current debts and whether or not you’ve had any problems paying off those debts. We recommend that you check your credit report before seeking a mortgage pre-approval and shopping around for a house to ensure the information a lender sees is accurate, up-to-date, and error-free
You can obtain your credit report for free from Equifax and TransUnion and can take steps to dispute any errors you may find.
A down payment is the total amount of money you put toward buying a home. The amount can range from 5% (high-ratio mortgage) to 20% or more (conventional mortgage) of the purchase price. There are requirements for the source, and a 90-day transaction history of the amount will need to be provided (it's best to have it in a chequing or savings account and not transfer it during this time frame).
Minimum down payments are regulated based on the home's price and may require default insurance premiums (see 'What is an insured mortgage?' for more information).
In general, the higher your down payment, the lower the interest costs over the life of the mortgage.
THINK Financial requires private fire/home insurance on all properties to be in place at the time of funding. Your True North Mortgage broker or lawyer can help you arrange for this insurance, which is typically paid through monthly or yearly premiums.
Your insurance policy must include the first loss payee as being the following:
Computershare Trust Company of Canada
C/O True North Mortgage Inc.
P.O. Box 351 Station C
Kitchener, ON N2G 3Y9
It can be emailed to: email@example.com.
An open mortgage is a variable-rate mortgage product that can be repaid at any time during the term, typically without restrictions or having to pay prepayment penalties. Due to the higher degree of flexibility offered, interest rates are typically quite a bit higher on open mortgages.
Closed mortgages are the typical mortgage product Canadians choose, with a fixed term length and conditions — and a lower rate than an open mortgage in exchange for the commitment to pay the mortgage for a set time.
A closed mortgage cannot be repaid or renegotiated during the term without incurring penalties. However, it can still come with flexible and favourable options, such as an allowed annual amount for prepayments each year without penalty or payment changes without a fee.
A fixed-rate mortgage has a set interest rate for the chosen term length. The interest rate, payments, and amount going towards the mortgage principal do not fluctuate with market changes — and can help keep budgets on track. Because of the commitment to the interest rate for an entire term, fixed mortgage rates are often lower than variable rates.
With a variable-rate mortgage, the interest rate rises and falls as bank prime rates change (usually along with the Bank of Canada policy rate changes). THINK Financial only offers Adjustable Rate Mortgages (ARMs) with payments that change when the interest rate moves up or down. The floating payment helps to keep your mortgage amortization and the amount going to the mortgage principal on track. Because of the risk of change, a variable mortgage rate is often lower than fixed rates.
An assumable mortgage is when a home buyer wants to transfer (take on) the current owner's mortgage and assume its terms, interest, and payments. THINK Financial can consider a request to assume a mortgage. However, the buyer will still need to qualify for the mortgage loan they are assuming. THINK Financial's mortgages include an 'assumable' option.
An Early Renewal means renewing your mortgage before the term ends (the maturity date). This act essentially breaks your contract to likely incur prepayment penalties — though some fees may be waived.
You may consider an Early Renewal to get a better rate, refinance, or for a different rate type or features.
Here's when you don't need to pay a prepayment penalty with an Early Renewal:
- In the preceding 4 months before the term's maturity date, THINK Financial will contact you, or you may contact us to renew your term without penalty.
- If you have a 5-year variable-rate product, THINK Financial will allow you to lock into a 5-year fixed-rate product without a prepayment penalty.
Different prepayment penalties apply for fixed and variable-rate mortgage terms.
The date your mortgage contract (term) officially ends. If you do not contact THINK to renew your mortgage term or request a payout by this date, your mortgage is automatically placed into a closed 6-month convertible term at prime plus 3%.
A mortgage feature that allows the potential to move your current rate and term to another primary home (i.e. you sell your current home and take your mortgage to a new home). Government limitations and lender restrictions apply and may change without notice.