Home Financing Fundamentals
Written by Kelly Wharton for the Dec 08, 2006 – Jan 05, 2007 edition of the New Home Buyers Guide for Vancouver. The real estate market is hot and so is the competition for your home mortgage business. “The past six months have seen an incredible increase in the new products and options that lenders offer,” says Joanne Thomas, a mortgage broker with Centum Capital Group Inc.
Issue number one on your mind will probably be the down payment. A bank or other financial institution will lend you a significant portion of the purchase price of your real estate deal. The lender secures this loan by registering a mortgage against the title of your house. “The down payment amount is calculated on the purchase price of the house only, so the home mortgage does not usually cover closing costs like taxes and survey, appraisal and lawyer’s fees,” cautions Sheree Rankin, a Royal Bank mortgage specialist. So don’t forget these additional transaction costs in your savings plan, especially Goods and Services Tax if the house or real estate property is a new or substantially renovated, and the provincial property transfer tax or PTT calculated on the value of the house. First time home buyers may be exempt from the PTT if the value of the house is under $325,000.
In a normal or conventional home mortgage loan, you will need to save 25% of the purchase price. If you have less than the 25% down payment, you may qualify for a high ratio mortgage. These home mortgage loans require as little as 5% of the purchase price down since the lender is insured against the risk of default by mortgage insurers like the Canada Mortgage and Housing Corporation (CMHC). The premium for this home insurance – which is a percentage of the amount financed – is usually added to the home mortgage amount.
Whether you are getting a conventional or high ratio house mortgage, first time real estate home buyers can use up to $20,000 of their registered retirement savings plans (RRSPs) toward the down payment. This is a Canada Revenue Agency program called the Home Buyers’ Plan or HBP. It allows withdrawals from your RRSP to buy or build your home by October of the year following the year you withdraw the money. The withdrawn amount is not taxed and if you are buying with your spouse or partner, each of you can withdraw up to the $20,000. You can use RRSP contributions made up to 89 days before the withdrawal and still claim your current RRSP contribution as a deduction. You have to repay the withdrawn amount over a period of 15 years beginning two years after withdrawal. To find out if you qualify for the HBP, visit the website at www.cra.arc.gc.ca/tax/individuals.topics/rrsp/hbp.
In this new competitive world it is possible to finance 100% of your new house price with no down payment. First National offers this type of insured mortgage. Joanne Thomas reminds us that good things come at a cost, “The insurance rates associated with these types of home mortgages are higher than for other high ratio loans.”
Once your real estate down payment is settled, you will know how much you need to borrow or the principal amount of your house mortgage. Your focus can turn to establishing a repayment schedule that is comfortable for you. The factors that determine the monthly payment amounts are the amortization period, interest rate and principal amount. The amortization period is the number of years it will take to actually repay the mortgage loan plus interest. The common length of time was 25 years but some lenders are now using 30, 35 and even 40 year amortization periods to calculate repayment amounts. The greater the amortization period, the smaller the monthly payments, but the longer you have the debt.
The total length of a home mortgage loan on your real estate property will be made up of several terms, the period of time the lenders will agree to lend you the principal with interest. Once the term is up, you can renegotiate your home mortgage for a renewal term or repay the loan.
The annual cost of borrowing the principal or the interest rate will also affect your monthly payments. Each of the different real estate mortgage terms – usually between six months and five years – will carry with it an applicable interest rate and certain restrictions. Depending on your taste for risk, or your ability to read crystal balls, you can chose a mortgage loan that is variable (the interest rate changes with a lender’s prime rate) or fixed (the rate stays the same for the term), open (you can prepay the loan during the term without penalty) or closed (no prepayments or with a penalty).
Some new options may help you cope with the monthly mortgage nut for your real estate property. First National has an interest only mortgage which means you pay only the interest on the principal for a period of up to 10 years. The cost for this product is a higher insurance premium and you need a 10% down payment.
Lenders also advertise cash back mortgages which give you a percentage of the loan back in cash. A higher interest rate is the price tag for these types or mortgages. Planning the financing of your new home or real estate investment ahead of time by focusing on essential issues will mean exchanging headaches for homeowner bliss.
There is so much information swirling around on home financing that the thrill of buying your new house – especially your first one – can quickly be replaced with a money headache. This article will help you focus on the fundamentals of financing your new home purchase and explore some of the newest products out there.
Don’t let the down payment get you down
Issue number one on your mind will probably be the down payment. A bank or other financial institution will lend you a significant portion of the purchase price of your real estate deal. The lender secures this loan by registering a mortgage against the title of your house. “The down payment amount is calculated on the purchase price of the house only, so the home mortgage does not usually cover closing costs like taxes and survey, appraisal and lawyer’s fees,” cautions Sheree Rankin, a Royal Bank mortgage specialist. So don’t forget these additional transaction costs in your savings plan, especially Goods and Services Tax if the house or real estate property is a new or substantially renovated, and the provincial property transfer tax or PTT calculated on the value of the house. First time home buyers may be exempt from the PTT if the value of the house is under $325,000.
In a normal or conventional home mortgage loan, you will need to save 25% of the purchase price. If you have less than the 25% down payment, you may qualify for a high ratio mortgage. These home mortgage loans require as little as 5% of the purchase price down since the lender is insured against the risk of default by mortgage insurers like the Canada Mortgage and Housing Corporation (CMHC). The premium for this home insurance – which is a percentage of the amount financed – is usually added to the home mortgage amount.
Whether you are getting a conventional or high ratio house mortgage, first time real estate home buyers can use up to $20,000 of their registered retirement savings plans (RRSPs) toward the down payment. This is a Canada Revenue Agency program called the Home Buyers’ Plan or HBP. It allows withdrawals from your RRSP to buy or build your home by October of the year following the year you withdraw the money. The withdrawn amount is not taxed and if you are buying with your spouse or partner, each of you can withdraw up to the $20,000. You can use RRSP contributions made up to 89 days before the withdrawal and still claim your current RRSP contribution as a deduction. You have to repay the withdrawn amount over a period of 15 years beginning two years after withdrawal. To find out if you qualify for the HBP, visit the website at www.cra.arc.gc.ca/tax/individuals.topics/rrsp/hbp.
In this new competitive world it is possible to finance 100% of your new house price with no down payment. First National offers this type of insured mortgage. Joanne Thomas reminds us that good things come at a cost, “The insurance rates associated with these types of home mortgages are higher than for other high ratio loans.”
Freedom 25…Or 35… Or 40
Once your real estate down payment is settled, you will know how much you need to borrow or the principal amount of your house mortgage. Your focus can turn to establishing a repayment schedule that is comfortable for you. The factors that determine the monthly payment amounts are the amortization period, interest rate and principal amount. The amortization period is the number of years it will take to actually repay the mortgage loan plus interest. The common length of time was 25 years but some lenders are now using 30, 35 and even 40 year amortization periods to calculate repayment amounts. The greater the amortization period, the smaller the monthly payments, but the longer you have the debt.
The total length of a home mortgage loan on your real estate property will be made up of several terms, the period of time the lenders will agree to lend you the principal with interest. Once the term is up, you can renegotiate your home mortgage for a renewal term or repay the loan.
Cracking the Nut
The annual cost of borrowing the principal or the interest rate will also affect your monthly payments. Each of the different real estate mortgage terms – usually between six months and five years – will carry with it an applicable interest rate and certain restrictions. Depending on your taste for risk, or your ability to read crystal balls, you can chose a mortgage loan that is variable (the interest rate changes with a lender’s prime rate) or fixed (the rate stays the same for the term), open (you can prepay the loan during the term without penalty) or closed (no prepayments or with a penalty).
Some new options may help you cope with the monthly mortgage nut for your real estate property. First National has an interest only mortgage which means you pay only the interest on the principal for a period of up to 10 years. The cost for this product is a higher insurance premium and you need a 10% down payment.
Lenders also advertise cash back mortgages which give you a percentage of the loan back in cash. A higher interest rate is the price tag for these types or mortgages. Planning the financing of your new home or real estate investment ahead of time by focusing on essential issues will mean exchanging headaches for homeowner bliss.
Labels: Buying a Home, Checklist, Finance, Financing, Fundamentals, Home, investors, Real Estate Tips
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