Mortgages

1. Mortgages Rachel Tseng, Pat Schoening, Anthony Volpe, Brendan Carpenter

2. Are you ready to make your move from renting to owing?

3. PURCHASING YOUR OWN HOME MAY BE THE SINGLE BIGGEST INVESTMENT YOU’LL EVER MAKE, ONE THAT COULD PAY OFF SIGNIFICANTLY IN THE LONG RUN. GIVE AN EXAMPLE OF THIS CONSIDERING THAT THERE HAS BEEN A 65% INCREASE IN THE VALUE OF THE AVERAGE CANADIAN HOME IN THE PAST 10 YEARS. • Over the past 10 years there has been a 65% increase in the value of the average Canadian home. To put that into dollar amounts, the average home in Canada in 1985 cost $150,720. • Today, that same house would be valued at $248,176. That is a substantial increase over time.

4. PURCHASING YOUR OWN HOME MAY BE THE SINGLE BIGGEST INVESTMENT YOU’LL EVER MAKE, ONE THAT COULD PAY OF SIGNIFICANTLY IN THE LONG RUN. GIVE AN EXAMPLE OF THIS CONSIDERING THAT THERE HAS BEEN A 65% INCREASE IN THE VALUE OF THE AVERAGE CANADIAN HOME IN THE PAST 10 YEARS.(CONT.) • It is evident by that increase that your house could potentially be one of the most profitable investments you ever make, stressing the importance of buying an adequate home and putting money into it early. • The earlier you invest in your home the longer and faster you will be able to build equity in your home, allowing for a larger margin of profit down the road.

5. What Does “Building equity in your home” Mean? Equity in your home is the difference between the value of your home and the amount of money you owe on it. The equity you have in your home will go up when you make mortgage payments, and when the value of your home appreciates in general. In general, building equity in your home is purchasing a home and slowly owning more of that home. If my house is worth $300,000 and I owe $100,000 in mortgage payments, I own $200,000 of equity in my home.

6. Why is purchasing a home, a good investment compared to the stock market? • Housing is typically a stable investment which offers good rates of return • There is less risk involved when you invest in a home • In the long run you are most likely going to have a large increase on the value of your home Vs. • The stock market is unstable and is subject to fluctuations • You have no guarantee that in the long run your portfolio will be successful do to the uncertainty of the market • You cannot live in your stock market portfolio

7. THE ARTICLE TALKS ABOUT THE NO ROLLER COASTER RIDE FOR TODAY’S BUYERS...IS THIS TRUE EVEN TODAY? EXPLAIN. • Unlike the 1980’s panic home buying, and over supply of homes is not evident >No swings in housing price • Now there is low inflation and low interest rates >These two factors help maintain a strong, steady market • The only chance of a roller coaster ride is if the buyer wants to buy in an area of high demand >Home prices in high demand areas are more likely to increase in price • Demographics, immigration, and a sound economy are deciding factors to whether a home is a good investment at the moment

8. What is the tax advantage to purchasing a home? • SCENARIO: you sell your residence for higher than you paid for it. >The capital gain you earn off of this sale is YOURS and tax free. • The government does not earn money off of your sale • Example: your home sells for 25% more than you paid for it, any profit that you earn goes in your pocket.

9. What are the four new financial obligations that you should be prepared to assume as a homeowner? • Initial costs: Down payment, closing costs and extras (eg. Moving costs, property insurance) • Monthly costs: Mortgage payments and other monthly obligations. (Eg. Property taxes, utilities)

10. GENERALLY HOW MUCH OF A DOWN PAYMENT IS NEEDED? ARE THERE EXCEPTIONS TO THIS? EXPLAIN HOW THESE TWO TYPES OF MORTGAGES DIFFER. • To qualify for a conventional mortgage, you generally need a down payment of 20% or more. You can qualify for a low down payment insured mortgage with a down payment as low as 5%. There are also no down payment mortgages. Each mortgage can utilize a fixed or variable interest rate.

11. Generally how much of a down payment is needed? Are there exceptions to this? Explain how these two types of mortgages differ. (Cont.)

12. Mortgage Questions (Buying a Home # 3-9) By: Jeremy Alvarado, Christian Chang, and Victoria Lee

13. Question 3 • Why is it beneficial to put a larger down payment down when purchasing a home? • It is beneficial to put a larger down payment when buying a home because it will the cost of the home in the long run. The interest costs on the house will be lower and it will amount to significant savings over time. An example of the savings made on interest will be shown in question 4.

14. Question 4 • How much would you save in the interest costs on the purchase of a $100,000 home if you put 25% down versus 5%?

15. Question 5 • List and briefly explain the sales closing costs and extras. • There are 11 sales closing costs and extras: • Inspection fee: Fees paid when house is initially inspected by professional building inspector. • Mortgage application fee: A charge you may have for processing your mortgage application. This fee may also be charged for renewing your mortgage.

16. Appraisal fee: Fee paid for hiring an appraiser that will insure that the property you are buying meets its criteria for a mortgage. • Legal/Notarial fees: Fees paid when you hire a lawyer or notary to act for you in the purchase and mortgaging of the property. You will be responsible for paying the legal or notarial fees and disbursements. (Fees for these services may vary significantly). • Closing or adjustments costs: Fees paid when the sale of a house is closed. • Interest adjustment costs: Lenders might charge a pro-rated interest if you close the purchase of a mortgage in the middle of the month. This is only if your mortgage payment is exactly one month after the purchase, which means they have the make up the difference. • Land transfer tax: A tax that most provinces levy a one-time tax based on a percentage of the purchase price of the property. • Property insurance: Insurance covering the risks of fire, theft, liability, and other risks of loss. Mortgage lender require lawyer or notary with proof that your insurance is in place by the closing date.

17. Moving costs: Costs involved in moving to a new home. • Additional costs: There may be additional costs depending upon the type of mortgage you decide and the province in which you buy. An example of this is the cost of a survey of the property or a new home warranty fee. • New home costs: Most new homeowners will likely need to buy certain items early on. Examples of items are kitchen appliances, tools, cleaning materials, carpets, and perhaps new furniture.

18. Question 6 • Aside from the actual mortgage payment, what are other monthly obligations you will have as a home owner? Briefly describe them. • The monthly obligations, other than your mortgage payment, that you have as a home owner are property taxes, school taxes, utilities, condominium fees, and maintenance and upkeep. • Property taxes are typically billed twice a year at six-month intervals. You can either pay them directly to the municipality or the financial institution may make an agreement for you to pay a portion of the payment of your property taxes in your monthly mortgage payment. The portion paid is calculated at 1/12 of the previous year’s tax bill

19. Depending on your municipality, school taxes could be integrated into your property taxes or they could be collected separately and are payable in a single lump sum. • As a homeowner, you’ll be responsible for all utility bills. • If you have purchased a condominium or a townhouse, it’s likely that you will be required to contribute to the exterior maintenance and upkeep of the common grounds and public areas on a monthly basis. • You will also have the responsibility of covering the costs of maintenance, lawn care, snow removal, and periodic renovations if you choose to do so.

20. Question 7 • How does a prospective lender determine whether a borrower has the financial ability to meet a specific mortgage? (explain both guidelines, with examples) • There are two guidelines that a prospective lender uses to determine if you can meet a specific mortgage and they are the Gross Debt Service ratio (GDS) and the Total Debt Service ratio (TDS)

21. The GDS ratio compares the total cost of your monthly mortgage payment, taxes, and heating with your gross monthly (pre-tax) income from all sources. The general rule is that these monthly payments should not exceed 32% of your gross income GDS = (Monthly Mortgage Payments + Property Taxes) / Monthly Income * 100% Total Monthly Income = $6,500 GDS = ($2,000 / $6,500) * 100% GDS = 30.7%

22. The TDS ratio examines the relationship between all monthly debts (i.e. mortgage payments, car loans, and credit cards) and your gross monthly income. These total monthly payments should not exceed 40% of your income. TDS = (Monthly Mortgage Payments + Property Taxes + Other Debt Payments) / Monthly Income * 100% Total Monthly Income = $6,500 TDS = ($2,550 / $6,500) * 100% TDS = 39.2%

23. Question 8 • What is the general rule for GDS? Why do you think this is set as a rule? • The general rule for GDS is that these monthly payments should not exceed 32% of your gross income. This is because if you do exceed the 32%, you will not be qualified for Canada Mortgage and Housing Corporation (CMHC). Banks may also not give you the mortgage if your GDS exceeds the 32%

24. Question 9 • What percentage should your TDS not exceed? Explain why you think this is the case? • Your TDs ratio should not exceed 40%. This is likely the case because exceeding the 40% ratio may not allow you to cover your other expenses comfortably. The TDS ratio allows you to assess your situation and expenses to see if you have too many. Some banks not even lend you any more money if your TDS ratio exceeds 40%

25. 10. What is a pre-approved mortgage? Why would you want to have one? This type of mortgage occurs when you go in to the bank and see how much of a mortgage you can get; this allows you to know your budget for your house buying before you even start looking. A pre-approved mortgage gives you a gauge on what you can afford. When you do a pre-approved mortgage, you are usually guaranteed a 60 day zone in which the interest rate promised will not go up. This can be good since interest rates are always changing. With a pre-approved mortgage, it is easier to judge what you can and can not afford, since your budget has already been set.

26. 11. Why would it be a good idea to use a realtor? Through a realtor, you can not only get a good idea of what properties are available, but can also compare these various listings. Realtors can also arrange for visits to any property you are interested in, and can also help in making an offer once you have decided on the place you wish to buy. Realtors may also notice things you might normally miss about the house, and could save you from falling in love with the wrong place. Overall, realtors are there simply to help you find a place which you like, and do their best to work with you to meet your needs, since they are the experts in the area, working with them would benefit you greatly.

27. 12. What should you do before you begin to visit potential homes you are interested in buying? Before you begin to visit potential homes you are interested in buying you should prepare a checklist of specific details so that you can compare them later. Some of these details include the building itself, location, ongoing costs, additional features, legal requirements, existing mortgage, and structure and facilities. An example of a home-buying checklist could be seen as next slide.

28. Home-buying Checklist Example

29. 13. What does a “clean bill of health” mean?  What should you do while going through this process? Clean Bill of Health- Something that is given after a house is examined by you and you state that everything is in good condition to buy (after inspection). What to do: Check the roof, foundation, insulation, beams, gutters, bricks, siding and caulking. Plumbing, heating and electrical systems should be tested and fully examined. Any evidence of leaks, moisture accumulation, rot or faulty workmanship should be cited in the inspection report. Take notes on estimated costs for specific repairs and maintenance.

30. 14. Once you have found the home that best suits your needs and budget, the next step is to have an offer to purchase drawn up. As this is a legally binding document, it should never be made on impulse or under pressure. What should the offer outline? Page 23-24 After you have found the home that best suits your needs and budget, the next step is to have an offer drawn up. As this is a legally binding document, it should never be made on impulse or under pressure. The offer should outline the following: The proposed purchase price. A list of all items included in the purchase price (e.g. appliances, carpeting, draperies, fixtures etc.) as it compares with the original real estate listing, noting any additions or exclusions, stipulation that there are no liens or payments due on these items.

31. 14. Continued… Explicit details of all financial arrangements (e.g. amount of your deposit and interest rate payable on your deposit, if any; amount of down payment and mortgage, etc.). Closing date for the sale of the property. Full details concerning the vendor’s mortgage if you are assuming (e.g. balance, interest rate, term, repayment privileges, etc.). if you do not wish to assume the vendor’s mortgage the owner must provide clear title to the property, free of all encumbrances, and all existing mortgages must be discharged with the sale proceeds on closing. Date of occupancy. Any conditions attached to the sale (e.g. satisfactory house inspection, mortgage approval; sale of an existing home etc.) Any specific obligations to be fulfilled by the vendor between the closing date and the date of occupancy (e.g. repair and/or painting the areas structurally altered by the vendor upon vacating the premises.).

32. 14. Continued… Time period for which the author is in effect (from as short a period as several hours to as long as a week or two). A certificate of location or survey is required by the financial institution for Mortgage approval and by the lawyer or notary for transfer of ownership. Ensure that these certificates reflect improvements such as decks patios or pools. If outdated, the offer to purchase should indicate whether the vendor or the purchaser will incur the necessary expense to obtain the appropriate certificates.

33. How do you determine your proposed purchase price? The number of homes available (in general and in that neighborhood). The asking price of other comparable homes in the area. The recent history of sales of comparable properties in the area. Unique selling features (eg. pool, fireplace, etc.). The general condition of the property and the area. The immediacy of your need to purchase and the vendor’s need to sell. *asking price is usually higher than they’re actually willing to sell for.

34. 16. What is a counter offer? A counter offer is a response to your preliminary offer (original offer), detailing specific changes before the agreement can be accepted. After a counter offer is made by the seller, you in turn are able to either present your own counter offer, or to withdraw your original offer entirely.

35. Buying a Home 17. What is an advantage to purchasing a new home from a builder? the homeowner can get everything they want from the start. There is no dreading of previous homeowners furniture etc. due to the house being “used”. You know the house is built with superior engineering because the builder lays everything out for you at your request. With a second generation house, you do not know what kind of extensive renovations had to be done or what problems still need to be fixed. And even if you did, you still have to usually pay a hefty amount of money to fix them. Depending on your builder and contractors, a new homeowner can enjoy very beneficial warranty policies that cover their property or key components of the property for as long as 10 years.

36. Buying a Home 18. What questions should you as before choosing a builder? Are they a professional home builder by trade? What is their track record and how long have they been in business? What is the reputation of the trades people who work for the builder? Are they members of the Canadian Home Builders’ Association? What do they offer in terms of after-sales service? What kind of warranty do they offer? Do they have solid references? Will they allow you to visit their work site?

37. Buying a Home 19.What is the agreement of purchase and sale? a document that details every aspect of one’s purchase including appliances the closing date (when the house is taken possession) is fixed able to make a firm offer where one is bound once the seller accepts or a conditional offer where certain conditions must be met a counter offer or acceptance of the offer must be made within a specified amount of time a 5-15% deposit is usually required with the offer as an advance on down payment

38. Buying a Home 19. What is the agreement of purchase and sale? (Continued) should be reviewed by a lawyer and statements are legitimate only if acknowledged in this agreement when purchasing a condominium, factors to consider include: occupancy closing (taking possession of the home) and building registration (receiving the title of the condominium and the condominium is registered as a corporation)

39. Buying a Home 20. What is a bond deposit and how does it work? Bond Deposit a policy document acting as a substitute for the cash deposit necessary when purchasing a house can be issued for all or part of the deposit (up to 10% of the purchase price) usually an insurance company is the issuer of the bond this reassures the builder that the money will be paid by the insurance company if the purchaser fails to complete the sale allows one to purchase a house that requires a large deposit

40. Buying a Home 20. What is a bond deposit and how does it work? (Continued) How it works: generally, you would make deposit on your new home ex) $100 000 you would make a portion of the cash deposit ex) $20 000 for the remaining of the deposit, you would purchase a bond ex) for $80 000 the bond does not give the builder the remainder of the deposit, however it will act as the insurance that the amount will be paid

41. Buying a Home 20. What is a bond deposit and how does it work? (Continued) Advantages bond deposits cost 1.5% of the value plus a $100 application fee this compares to the interest that must be paid on top of the bond amount if you were to borrow the money from the bank if the builder were to go bankrupt before the completion of the house and you had borrowed the money for the deposit, that amount would be lost

42. Buying a Home 21. What is title insurance and how does it work? Protects individual or lender for loss or damage due to title or survey defects Coverage for bylaw violations, work orders, major encroachments, legal rights of access, and any other related problem that devalues a property Benefits:  May reduce client’s legal costs since lawyer is not required to check title  May provide faster access to funds since survey or title search is not required

43. Buying a Home 22. What is a pre-delivery inspection? Why is it important? • 3-5 days before moving in, you should have an inspection of the house • Any not to your satisfaction – be noted in the pre-delivery inspection report • Scratches and incomplete paintwork should be fixed by the day you move in/other items should be completed after you’re settled in • Inspections should address the following areas:Exterior: sod is rolled and watered, clean shingles with no lifting corners, etc.Interior: clean basement with no cracks, correct paint colour and even paint coverage, etc.

44. Buying a Home 23. What is the certificate of completion and possession? • Contains information regarding the enrolment number of the home, the address of the home, the homeowners name, the date of possession/occupancy and the final sale price of the home. •  It also records any outstanding items or deficiencies. • There’s a sticker on this certificate that your builder should remove and place on the electrical panel of your home. At the end of your inspection, you will be asked to sign the certificate, which does not in any way limit your warranty rights.

45. Mortgage Questions #24-30 By: Krishan Gandhi, Sarah-Jane Lam & Michele Tiwari

46. 24. List and define fundamental components of a mortgage The fundamental components of a mortgage include the principal, interest, mortgage payment and amortization period. The principal is the amount of money needed to be borrowed. This is usually calculated as the difference between the selling price of a property and the down payment made on the home. The interest is the amount being paid for borrowing the money. It is usually calculated as a percentage of the payment. The mortgage payment is made up of the principal amount and the interest amount and is divided by the chosen payment plan. These payments can be made monthly, accelerated bi-weekly, bi-weekly, semi-monthly, weekly, etc. This is how the mortgage is repaid over its term to maturity. The amortization period is the total amount of years that it would take to repay the mortgage (principal + interest). These periods can range anywhere from 15 to 40 years.

47. 25. What is a closed mortgage? Who would this be a good choice for and why? A closed mortgage is defined as a mortgage with where the interest rate is locked in for the entire term of the mortgage. At no point does this rate change, regardless of whether or not interest rates increase or decrease over the years. The mortgage is locked in at the interest rate for the time that the mortgage taken out. In order to negotiate the interest rate that the mortgage is locked in for or if you would like to pay out the mortgage before the term-end, breakage fees have to be paid to the mortgage lender. Closed mortgages are not for everybody. These mortgages usually appeal to those who are not interested in moving soon after the mortgage was taken out and for those who suspect that the interest rates will soon rise.

48. Quick Summaryso far… Breakage Costs A sum of money paid to compensate the lender for the prepayment of a closed mortgage in part or in full prior to maturity of the term. Closed Mortgage A mortgage that cannot be prepaid, renegotiated or refinanced prior to the expiry of the term, unless breakage costs are paid to the lender.

49. 26. What is a breakage cost? A breakage cost is the penalty for not following the “terms and conditions” of a contract. In the case of a mortgage, the home owner would be charged a breakage cost as a penalty for breaking a mortgage. Breaking a mortgage is basically when a home owner leaves a closed mortgage before the term expires. The breakage cost compensates for the money the bank would lose when prepayments of a mortgage are made. Breakage costs usually vary from bank to bank.

50. 27. What are open mortgages? What would you choose this type of mortgage? Open mortgages are mortgages that allow more flexibility with payment options. In comparison to a closed mortgage, an open mortgage allows a home buyer to make payments at anytime before the term expires without breakage costs. Because of the added flexibility, interest rates are generally higher for open mortgages. Someone would choose an open mortgage if they feel that interest rates are going to fall or if they are planning to move in the immediate future.