Residential Mortgage Guide

Mortgage Definitions

Mortgage
Type of loan when the lender takes Real Estate as security.

Principal
Is the amount of money you need to borrow

Interest
The cost of borrowing for the use of the funds

Blended Payments
Are equal payments consisting of principal and interest paid during the term of the mortgage.  The principal portion of the payment increases with each payment and the interest portion decreases but the total payment amount stays constant.

Interest Term
Is the length of time during which the agreement exists.   Where the interest rate and the payments remain constant.  2 main terms

Amortization Period
Is the number of years it will take to repay the entire amount of mortgage.  Usually between 5-25 years.

Equity
Is the current market value of the property less the amount of money owned on the mortgage.

Mortgage Types

Conventional
An uninsured mortgage is lending up to 75% of the purchase price or appraised lending value.

High Ratio
An insured mortgage is when financing required exceeds 75% of the value of the property.   The mortgage insurance insures the lender in case the borrower defaults on the mortgage and the lender has advanced more than 75% of the value of the property.  The two insurance companies in Canada are:
C.M.H.C - Canada Mortgage and Housing Corporation
G.E. CAP- General Electric Capital Mortgage Insurance Company of Canada

The insurance costs depends on the loan to value ration, as follows;

The insurance fee above can be paid up front from the borrower or added to the mortgage and paid off during the life of the mortgage.

Government Incentive Programs

5% Down Payment
This program was previously called the "First Time Home Buyers" program to assist first-timers get into the market.  As of May 1998 the Federal Government changed the program to allow previous owners to take advantage of the 5% down rule.  This program has the following stipulations;

• 5% equity can be by way of a family gift but must be in the applicants account prior to application.
• Property must be used as primary residence.
• Clients may take any term they want but must qualify based on a 3-year interest term.
• Purchasers must have an additional 1.5% of the purchase price to cover any closing costs of the purchase.

RRSP - Home Buyers Program

This program allows each applicant to withdraw up to $20,000 each out of their own Registered Retirement Savings Plan.  The Federal Government guidelines to the plan are as follows;

Maximum $20,000 each applicant
Property must be located in Canada
Property must be primary residence
Property must not previously be owned by applicant or applicant's spouse
Only funds that have been in RRSP for 90 days or greater are eligible
Applicant must not have owned their primary residence in the last 5 years
Applicants must repay the money withdrawn over the next 15 years
Revenue Canada to set up a repayment schedule

Qualifying
There are two ratios that lenders look at when qualifying an applicant, GDS and TDS-

A= Mortgage payment
B= Property Taxes
C= Utilities
D= 1/2 Strata fees
E= All other monthly expenses
F= Combined family monthly income ( net income if self employed)

GDS
Gross Debt Serviceability- not more than 32% of your monthly income can go towards paying your mortgage debt.

 TDS
Total Debt Serviceability- not more than 40% of your monthly income can go towards paying all of your debt. 

Closing Costs
Besides down payment there are other costs involved when purchasing real estate.  Costs listed below are guidelines only, they are;

Application fee- $165 - $185 usually only for high ratio mortgages.

Appraisal fee - $150 - $250 usually only for conventional mortgages  & cost depends on location and type of property.

Building Inspection -  $375 A building inspection is optional and only arranged at applicant's request.

Survey Certificate - $350 A survey certificate is required for all high ratio mortgages and some conventional mortgages.  Generally, if the vendor has an existing survey where the improvements have not change, most lenders will allow the use of this certificate.  Not required for strata properties.

Legal Fees - $650 for a single detached or $750 for a strata titled.  For more complex purchasers or leasehold properties the fees may be as high as $1,500.

Life and Property Insurance -  Life insurance is optional and ranges depending on the age of the applicant and the size of the mortgage.  Fire insurance is mandatory with the first loss payable to the lender.  Cost varies.  Not necessary for strata properties.

Property  Transfer Tax - 1% of the first $200,000 and 2% on the balance

Waiver of this tax is available under the following guidelines:

Purchase price in the Vancouver and Fraser Valley areas can not exceed $ 325 ,000. A partial exemption is available for homes between $ 325 ,000.00 and $3 50 ,000.00 (see formula below);
Purchase price in all other areas of the province can not exceed $2 6 5,000
Applicants must not have owned a primary residence anywhere in the world
Must be a Canadian Citizen or permanent residence of Canada and have lived in BC for 12 consecutive months prior to registration of the transfer.
Financing requirements must be 70% of greater.
Applicants term must be for 1 year or greater.
Applicants must move onto property within 92 days of title transfer.
Main conditions above but please consult your solicitor for more details.

Other exemptions exist as well, such as a transfer of a principal residence between family members. For details on this and other exemptions, go to http://www.rev.gov.bc.ca/itb/ and pick the "Property Transfer Tax" button located on the right hand side on this screen.

Property Transfer Tax should not be confused with Property Tax. The Property Transfer Tax is a one time tax paid to the Provincial Government by purchasers of real estate. The Property Tax is the tax paid on an annual basis to the local City/Municipality.

Please remember that the Property Transfer Tax Act may frequently change along with the exemptions for payment of this Tax. While we try to keep our website up to date as much as possible, please do not rely upon the information without talking to a lawyer.

Other Terms and Options

Fixed Term
Where the interest rate and payments are fixed for the term selected.

Variable Term
Where the interest rate fluctuates.  Rate usually follows prime lending rate.  As rates increase more of your blended payment goes to paying interest cost and less goes to paying down your principal amount.  On the reverse, if rates decrease more of the payment goes towards paying down the principal and less to interest cost.

Closed Mortgages
During a closed mortgage the borrower is restricted to any changes during the term selected.  Lenders only allow partial pre-payment without penalty and any other changes to the mortgage without penalty for altering the mortgage during the term selected.

Open Term
Open mortgages generally allow the borrower to change the terms of the mortgage during their term.  For example, changing payment frequency or extra payments or early renewing the mortgage.

Convertible Term
Short-term closed mortgage that allows the borrower to convert or lock-in the longer term prior to the maturity date of their existing term.

Payment Frequency
Most lenders allow borrowers to make payments other than the traditional monthly schedule.  By paying more often (bi-weekly or weekly) borrowers are effectively paying their mortgage off sooner.  Make sure you select options that are accelerated frequencies.

Extra Payment Options
Most lenders allow the borrower to make extra payments during closed mortgage terms.   They can be by way of lump percentage sum payments, percentage increase of existing payments, double up payments

Portability
Most lenders allow the borrower to move the existing terms of their mortgage to another property in order to avoid penalty of breaking a mortgage and/or to move an attractive rate to another property (usually when selling one property and purchasing another). 

Assumption
In order to avoid paying a penalty when breaking a mortgage when selling property, the purchaser may take over the terms of the vendor's mortgage.

Switching
Allows the borrower to move lenders if not satisfied.  Penalties may be involved usually unless at the maturity date of the term of the mortgage.