Getting a Mortgage and Buying Your Home in Canada    Below are some of the answers to important questions regarding buying your home. Buying a home is one of the most important decision and investment you will make. Each situation is unique and therefore it is vital to consult with a professional in the area to discuss your situation. It is important to remember that most investments, including real estate, are influenced by various market conditions and have their ups and downs. It is important to look at various contributing factors to get a bigger picture of the pros and cons of any investments.   Al Kassam. Mortgage Associate. 403-921-4737. Calgary AB Canada.    1. What are the benefits of owning my home?   The obvious and important benefit is the pride of owning your own home and having more control of your environment. Besides that there are numerous financial advantages of having your home. For instance, over time, you generally “make money” or build equity as you pay off your mortgage as well as through increase in property values  .  For the sake of simplicity say you invest $15,000 in a venture other than a home. If your investment increases at a very good return of 20% then you will have made $3,000. In comparison if you put $15,000 down payment on a $300,000 home  and the property value increases to $306,000 (2% increase), your return on $15,000 down payment would be about $6,000 or about 40%!!!. Renting a home has its benefits but when you rent a home you basically give away the rent money, whereas when you own a home and pay your mortgage, part of the mortgage payment goes towards paying your principal balance.  S o in addition to possible increase in property value you also benefit from paying down the mortgage balance you owe. Further, when you sell the home in which you have lived in all the time you own it (that is, your principal residence) you do not pay taxes on the money you make. The tax savings can be substantial compared to other types of investments where as you are generally required to pay taxes for capital gain income. In addition, when you build enough equity in your home you have the option of refinancing if you choose to do so. Refinancing is discussed latter but briefly it may (or may not) help increase your cash flow, to pay off your high interest debts, to invest, and so forth.    Next, in order to buy a home you normally need to qualify for a mortgage. It is vital to look at your options when getting a mortgage as it can save you a lot of money in the long run.         2. Why is it important to get a right Mortgage that fits for me? Can one really save tens of thousands in interest over time? Getting an appropriate mortgage rate and making right payments can save you thousands of dollars over time. For instance, getting 1% less in interest rate can save you over $50,000.00, and making biweekly payments instead of montly payments can save you over $75,000.00 in interest (see the scenarios below).      SCENARIO 1      Purchase price: $300,000        Interest Rate: 5%   Amortization: 25 years   (Amortization is the number of years to pay off the mortgage) Monthly Payments: $1,744.82   Total interest over 25 years: $223,443.02      SCENARIO 2      Purchase price: $300,000        *Interest Rate: 4%   Amortization: 25 years   Monthly Payments: $1,578.07 Total interest over 25 years: $173,416.20 SAVINGS: $50,026.82 (about fifty thousand dollars less interest)      SCENARIO 3      Purchase price: $300,000        *Interest Rate: 4%   Amortization: 25 years   *Accelarated Biweekly payments: $789.04 Total interest over 25 years: $147,961.46 SAVINGS: $75,481.56 (about seventy five thousand dollars less interest)          The choice of appropriate payment and amortization will depend on your unique circumstances including your current budget and goals. For instance, based on your current situation, your priority may either be to pay the mortgage as quickly as you can or it may be to have the lowest possible monthly payments to meet your current obligations. Also, if you want to reduce your monthly payment you could choose a longer amortization period though this will increase your overall cost. The best alternative will depend on your financial situation and your goals. It may help to remember that even if you initially choose a longer amortization (such as 30 years) you could change the amortization when your term (such as 3 or 5 years) is up and the mortgage is due for renewal.    3. What can you as a Mortgage Associate do for me?   As a mortgage associate I can be extremely valuable in the process of achieving your home ownership dream. I can help shop for best mortgage rate available among lenders connected to the brokerage. I can also help you figure out how much mortgage you could qualify for before you begin searching for a home. As a mortgage associate I have increased options due to access to the rates offered by various banks and lenders competing for your business. In addition, I can help you get preapproved for a mortgage rate which may then be held for a period of time such as up to 120 days. During the hold period even if the interest rates increased you remain eligible for the preapproved lower rate. As always check with your associate regarding any feature mentioned in this report to make sure it applies in your case or with the relevant lenders.    4. What are some of the factors lenders take into account to approve a client for a Mortgage?   Credit score, employment stability, and “debt service ratios” are some of the factors that lenders take into account to qualify you for a mortgage.    A.    Suitable Credit Score: In order to determine your outstanding debts, your monthly payments, and your ability to make timely payments lenders will check your credit report and your credit score from a credit bureau such as Equifax and/or TransUnion. In order to have a credit score you need an ongoing credit history.             Credit history begins getting established when you apply for a credit such as a credit card or a loan and make timely payments. Your loans and payments are reported to the credit bureau/s and your scores are calculated based on the company’s credit scoring criteria. Check with your mortgage associate regarding the required score to qualify for a mortgage.         Generally, lenders want a score of at least 620 to qualify and at least 680 to get you a better interest rate. If your score is lower than required then there may be ways to qualify for a mortgage by putting higher down payment or getting a higher interest loan. Again check with your mortgage associate to find out what applies to your situation     In order to have the required score it is important to make timely monthly payments on all your credit cards, loans, utilities, and so forth. Avoid maximizing all your credit cards and loans. Conversely, some of the factors that may reduce or negatively affect your score include late payments, missed payments, bankruptcy, and so forth. Cancelling credit cards may lower your score, so depending on your situation, it may be wise not to cancel your cards right away even if you pay off the credit cards.      If you find that you have a lower than required credit score then start correcting your situation and building your credit. For instance, begin paying off your debts. Talk to your mortgage associate to determine which loan or credit cards to pay off to increase your cash flow and to increase your possibilities of getting approved.     Also, you can check your own credit rating and see what has been reported if you wish by going to    www.Equifax.ca    or       www.tuc.ca     Normally the companies charge a fee for getting an instant credit report online.  B.  Employment and income stability:  The other important factor lenders require includes your employment and income stability. The lenders generally need to know your guaranteed or ongoing income if you are employed.         T hey will need a letter from an employer and will call the employer to confirm your employment status. Ensure that your employment letter indicates your employment status (full-time, part time, etc), start date, and hourly rate and guaranteed hours, or guaranteed salary if full time. If your employment is on a casual basis or if you are self employed then the lender may need an average of the last two years income from your notice of assessment of your income tax returns. It is also important that you have completed your probation period in your employment.      If you work overtime or pick extra shifts you can use the extra income to increase your chances of qualifying, if needed.  In this case, the lenders will generally use the average of last two years of your income from your income tax returns. Other ongoing eligible income that you can use includes pension, rental, other investment income, child support, and so forth.     If your income is not sufficient you could have a family member co-sign with you. It is important to remember that the co-signer has to go through the same process of income verification and credit checks, and payment responsibilities. Check with your associate to find out pros and cons of having a co-signer and the responsibilities of the co-signer.      The third important factor lenders take into account includes the debt service ratio discussed next.    5. What if I am told by a bank that I cannot qualify for a Mortgage based on my income/debt calculations (debt service ratios) or other reasons?   Do not lose hope. Find out the reason you do not qualify so that you can correct the issue or quickly begin getting back on track. Lenders also take into account your “debt service ratios” to ensure that you can afford to pay your mortgage. The ratios are calculated by taking into account your income and debts. If your debt service ratios are too high then there may be a way to reduce your monthly payments and get the ratios within range. For example, you may be able to pay off a car loan with a credit line and reduce the monthly payments in order to get within acceptable ratio. Another way may include extending your “amortization” to lower your payments. The possible solutions will depend on your situation. Make sure you talk to a mortgage associate to discuss ways that may bring the ratios in range and to find out if the lender will accept the changes. A mortgage associate will help with the required calculations and explanations. I have included below explanation and examples of the debt ratios.   The ratios used by lenders involve Gross Debt Service (GDS) and Total Debt Service (TDS). The GDS involves your housing cost which is generally required to be below 32% of your total monthly income. Lenders may allow more based on your credit score. The housing cost includes your mortgage payment, property taxes, and heating cost (and half of your condo fee if applicable). For example if your housing cost is $1,200.00 and your gross income (total income before deductions) is $4,000.00 then the GDS would be 30% which is acceptable because it is below the required 32%.   The TDS involves payments for the house mentioned above and all other payments such as credit card, car loan, and so forth. The TDS is generally required to be below 40% (or more based on your credit score) of your total monthly income. For instance, if your total cost (including housing and other debts) is $1,500.00 and your gross income is $4,000.00 then the TDS would be 37.5% which is below the required 40%. Thus both the GDS and TDS are satisfied in this case. The ratios accepted by lenders may vary. Check with your mortgage associate to discuss your situation.    6. Briefly, what are the important elements of a Mortgage?   Generally a mortgage from a lender includes the following: the amount of loan for a home (for instance, $300,000), the interest rate and the type of mortgage (for instance, 2.75% variable closed, 3.79% fixed, etc.); term of the mortgage or the number of years before the mortgage is due for renewal (for instance, 3 years, 5 years, etc); and the amortization which involves the number of years used in the mortgage calculation to pay the entire loan (for instance, 25 years). Your monthly mortgage payment is calculated based on some of the factors mentioned.    7. Is there a penalty if I break a mortgage, that is, I don't complete my entire term (such as three or five years)? How is the penalty generally calculated? An important point to keep in mind is that anytime you pay off a mortgage before your term is up you will likely have to pay a prepayment penalty. For instance, there may be a prepayment penalty if you sell the house and are not transferring the mortgage to another home you buy or if you refinance before your term is up. The penalty is usually based on the greater of either 3 months interest or interest rate differential (IRD) on the balance of mortgage to be paid. Check with your bank for the amount of penalty you might incur if you have to pay off your mortgage earlier. The exception is a mortgage that is fully open. Do not assume even if your mortgage is open that it is fully open and that there is no penalty or cost.      An example of IRD is as follows: Assume that you have a mortgage balance of $100,000, that your interest rate (when you signed up) was 6%, and that you have 2 years remaining on the term. If the current interest is at 3.5%, then the differential is (6% -3.5% =) 2.5% and the IRD would be $100,000 X 2 Years X2.5% = $5,000. For variable rates the penalty is usually 3 month interest payment.   8. I don't have enough down payment. Are there other options to obtain down payment? There are options other than using your cash savings for down payment such as RRSP’s for first time home buyer and or gift from a qualified relative. If you are a first time home buyer then you can withdraw from your RRSP’s interest free up to $25,000 (or $50,000 for a couple) under the Canada Revenue Agency Home Buyers Plan. There are conditions you have to meet to qualify under the program such as being a Canadian resident, having an offer to purchase a home, buying with intention to occupy the home as your principal residence, and so forth. The total withdrawal from RRSP has to be paid back in 15 years.      Remember that you are required to have the savings, RRSP’s, and/or investments for 3 months and will need to provide the 3 month documentation/statements. You can also use down payment from other cashable investments you may have.   You can also use a gift (not a loan) from a qualified relative as your down payment. If you use the gift you will have to provide a gift letter that indicates the name and contact of the relative and the fact that the money is a non-repayable gift and not a loan. Some financial institutions will also allow use of down payment from your credit line. Further, you may also use money from sale of goods such as sale of your car and so forth. Again, you will have to show documentation to prove the sale.   In addition, some lenders also provide cash back (such as 3% or 5%) on closing but charge higher mortgage interest rates if you choose the cash back option. If you choose the cash back option then there are generally conditions that have to be met such as having to pay back the amount if you break the mortgage before the term is over.   9. What are the benefits of refinancing my home? If you own a home and have equity then refinancing may (or may not) be a good option for you depending on your situation. Equity is the value of your home after paying off the mortgages and any other loans registered against the title. For instance, if the appraised value of a home is $300,000 and the associated mortgage and loans are $250,000 then the equity would be $50,000.      Refinancing involves paying off and discharging the current mortgage and getting a new mortgage on the existing property. The balance of the current mortgage, any other loans registered against the title, any legal fees, penalty (if applicable), and so forth would have to be paid off and a new mortgage put in place. A mortgage associate can help with refinancing options if you already own a home and have the required equity. Refinancing may (or may not) be good option depending on your specific situation. For instance, it may be worthwhile reducing monthly payments by consolidating debts, by paying off high interest loans and debts, and/or saving money in the long run by getting a lower interest rate.   Depending on your situation refinancing could help increase your monthly cash flow by hundreds of dollars or could provide extra cash you may need for certain projects, for travel, for investments, and so forth. It is very important to take into account the equity you have in the home, as well as costs and benefits and your long term goals, to determine if refinancing is worthwhile for you. A mortgage associate can help calculate the relevant amounts and discuss the potential costs and benefits to help you decide.    Individual situations vary but just to demonstrate an example of potential cash flow with refinancing let us suppose the following scenario:   Suppose John has a current mortgage of $200,000 at 5% (and 25 year amortization) with monthly payment of $1,163.21. Suppose he also has $20,000 car loan with monthly payment of $450.00 and a $10,000 credit card loan with monthly payment of $300.00. John’s total monthly payment would be about $1,913. 21.   Now suppose John decides to refinance his home at an available rate of 4% and pay off his debts. Also suppose John incurs a penalty $5,000.00 for breaking the mortgage before his term is up. Further, suppose he decides to get an extra $5,000.00 to invest in RRSP. The total new mortgage would be about $240,000.00 and the monthly payments at 4% would be about $1,262.45. The refinancing increases John’s monthly cash flow by $650.76. John could further reduce his monthly payments if he chooses longer amortization up to 30 years. Again, discuss with your mortgage regarding the pros and cons, and possibilities of refinancing in your situation.  If your mortgage is due in the next few months or weeks it may be a good time to evaluate your situation. You may want to assess your financial situation and make positive choices.       Al Kassam. Mortgage Associate. 403-921-4737. Calgary AB Canada. Website:   http://mortgagealliance.com/Alkassam    All rights reserved. Reproduction of any documents, related graphics, or any other material from this Web site is strictly prohibited without permission