Mortgages & Additional Costs

How to find the right home in Toronto, Oakville, Mississauga or Brampton.

Here’s a breakdown of some important mortgage terms and the additional costs of buying a home.

Conventional and High Ratio Mortgages:

To qualify for a conventional mortgage, you need to have a down payment of 20% of the purchase price of the property. Additionally, the mortgage amount cannot exceed 80% of the appraised property’s value.

Not everybody has a 20% down payment ready. If this is the case for you, then you qualify for a high-ratio mortgage. This type of a mortgage gets its name because you are leveraging a higher ratio of the loan amount vs. down payment. Because of the higher risk to the bank, this type of mortgage requires loan insurance which can cost an additional 0.5% to 3.75% of the mortgage amount. A high-ratio mortgage also limits you to a maximum purchase price of $1,000,000.

Second Mortgage

If you cannot add to your current mortgage, you may consider taking on a second mortgage. Whenever you take out a mortgage, the mortgagee uses your home as collateral and gives the lender the right to take your home if you default on your loan. In the case of mortgage default, the first mortgage gets priority and is paid off first. This gives it the best chance of recovering all its money. Second mortgages usually demand a higher interest rate because of the decreased likelihood of a full payback as it does not have priority over previous mortgages.

Features of a Mortgage

In recent years, traditional lending institutions like banks have seen a number of smaller mortgage companies enter the mortgage market. These increases in competition and consumers’ options have made way to a variety of customizable mortgage options. When you’re in the market for a new home and need to lend some money, consider the follow features and their benefit to you.

Prepayment

A prepayment privilege gives you the right to make payments towards the principal portion of your mortgage in addition to your monthly payments. This is a great option if you receive regular bonuses or if your income fluctuates throughout the year.

A mortgage with a prepayment limit is considered to be a closed mortgage. This means you are only permitted to pay 15% of the original principal balance of the mortgage per calendar year. Conversely, an open mortgage means you can pay the entire principal sum without notice.

Portability

Mortgage portability is an option you’ll want to consider if you still have an outstanding balance remaining on that loan you negotiated some time ago. Simply put, a portability option allows you to transfer the balance of your current mortgage to your new home at existing rates and with the existing terms.

Assumability

With an assumable mortgage, the new purchaser of a home is able to assume the obligations of the existing mortgage on that home. This is a great option for the borrower if the terms of that mortgage are more favourable than current market conditions. However, something to remember is that you may still be held liable for any mortgage you allow the buyer to assume. This means if the buyer stops making payments, you could be accountable for their payments. To avoid this potential blunder, be sure to have the subsequent buyer approved for the assumption of your mortgage.

Expandability

If you think you might need additional funds down the road, expandability is an option you should consider. An expandability option allows you to increase the principal amount on your original mortgage. It’s most likely that your new rate will be a blended amount of the initial mortgage rate and the new prevailing rate. Expandability is definitely an option worth discussing with your mortgage broker if you foresee large expenses in your future like home renovations or a child’s tuition fees.

Mortgage Term

If you wish to change the structure of your agreement during the term, you may have to pay a large fee. Usually these types of changes are made between mortgage periods or when a mortgage term ends. Over the course of your amortization periods, you may have many different mortgages. The term is simply the length of time that a set of interest rates, payment schedules and mortgage obligations exist. Once a term comes to a close, you have the option to renew your mortgage at your current or new lending institution. At this time, you can also put a lump sum toward the principal without restriction, or even pay off your entire mortgage without a penalty.

Choosing Security or Flexibility

There are many mortgage options available in today’s competitive lender market. You should consider closed, open and convertible options, and fixed or variable rates. The options you choose will likely be based on your personality; whether you’re risk averse or risk seeking. They should reflect your short-term goals and desire for long-term security

Amortization

Amortization is the amount of time over which the entire debt will be repaid. Most mortgages are amortized over 15, 20 or 25 year periods. The longer the amortization period, the lower your scheduled mortgages payments, but the more interest you pay in the long run.

Open Mortgage

An open mortgage offers a great deal of flexibility. This type of mortgage can be rapid in part or full at any time without a penalty. This is a great mortgage if you think interest rates are moving down or you plan on moving in the near future. However, the term may be limited to six months or one year.

Closed Mortgage

Conversely, a closed mortgage has a fixed interest rate for the entire term of the mortgage. You must pay a penalty to change the agreement conditions. This type of mortgage is ideal for buyers who suspect that interest rates will rise and who are not planning to move in the near future. This type of mortgage is available in a variety of terms.

Convertible Mortgage

A convertible mortgage gives you the same peace of mind as a closed mortgage, plus the flexibility to convert to a longer closed mortgage at any time without penalty. If you think rates will drop, this will allow you to wait until you think they have hit bottom, or if rates rise, you can lock in.

ADDITIONAL COSTS & CLOSING

It’s always a good idea to organize your finances before a big move. Before you calculate the amount of your down payment to determine what you can afford, remember to set aside a few thousand dollars to cover the extra costs of doing real estate. Here’s an overview of the costs you can encounter. The good news is that not all of them will apply to your situation.

Property Taxes

Property taxes must be paid yearly by the owner of the home. If the previous homeowner has already paid a portion of the taxes on your new home, you will be responsible for reimbursing them on closing. Also, if you have a high-ratio mortgage, you lender may require you to have your property taxes added to your mortgage payments. It is vital that you pay your property taxes as any outstanding amounts will be put on a lien against your property; this means that the balance is put against your home and you must pay this balance before moving.

Utility Fees

Utility fees for a home are calculated through a meter located on the outside of your home. You will be responsible for paying what you have used based on the usage shown on your meter.

Land Transfer Tax

A LTT is a one-time tax levied on all transfers of property. In Ontario, the LTT is calculated based on a sliding scale of the purchase price. If the property is within the bounds of Toronto, an additional TLTT (Toronto Land Transfer Tax) is applied; approximately double the OLTT (Ontario Land Transfer Tax). The total LTT is payable through your lawyer on the date of closing. Unlike a property tax, the LTT cannot be paid through your mortgage payments. However, if you’re a first-time buyer a rebate may apply! See the LTT calculator here.

– 0.5% up to and including $55,000
– 1% above $55,000 up to and including $250,000
– 1.5% above $250,000 up to and including $400,000
– 2% above $400,000 where the land contains one or two single family residences

Survey Fee

If your property is an older property with a large amount of land, your lender may require an up-to-date survey. Fortunately, this is a condition you can put in the Offer of Purchase and Sale; a clause asking the previous homeowner to provide a survey. However, conditions like this are completely negotiable and you may have to get one done yourself. Depending on the size and age of the property, this can be costly.

If no survey is available, you have the option to purchase title insurance in lieu of a survey. Title insurance is usually a one-time fee of about $150 – $200 applied to your home during the title search. Having title insurance protects you against any problems against your new home’s title. Not having title insurance may require you to pay $500 – $700 for a new survey. We always recommend title insurance to our clients to avoid any future headaches. Contact your lawyer before closing to inquire about title insurance.

Appraisal Fee

Appraisals are used to calculate the value of a home or property. A basic appraisal usually costs under $250.

Home & Property Insurance

All lenders require you to have insurance on your property as your home is used as collateral by the lender in case of default on your mortgage.

Service Charges

You will be charged a monthly fee for telephone, cable, internet, home security and a variety of other services that you have installed at your new home.

Lawyer (Notary) Fees

All real estate transactions require the assistance of a legal professional to review the Offer of Purchase, to search the title of the home, to draw up the mortgage documents and to take care of some details on the day of closing. Lawyers’ fees can vary greatly depending on the complexity of the transaction, but all fees are negotiable. Ask your sales representative to recommend a lawyer.

Mortgage Loan Insurance Premium and Application Fee

If you have a high-ratio mortgage (less than 20% down payment), your lender will make it necessary for you to get mortgage loan insurance. With a valid appraisal, the application usually carries a fee of $75; without an appraisal it’s roughly $235. The mortgage insurance premium itself will range from 0.5% to 3.75% of the purchase price and is added onto the mortgage.

Mortgage Broker Fee

Brokers may charge as much as 2% of the total mortgage amount to find you a lender. However, in most cases, the lender pays the mortgage broker. It’s always a good idea to shop around for mortgages with various brokers to see what they can offer. Buyers with good credit should not have to pay a broker fee.

Moving Costs

Whether you decide to move yourself or to hire a moving company, now is the time to budget for these costs.

Status Certificate

If you’re moving into a condominium, this certificate outlines the condominium corporation’s financial and legal state. It will cost you up to $100 to obtain this certificate, but this price is usually paid for by the seller if agreed to in the Offer of Purchase. Status certificates can be quite exhaustive, so ask your sales representative for help in understanding this document.

Condominium Fees

These fees apply to all condominiums and vary greatly from complex to complex. The fees are applied to everything from grounds keeping and carpet cleaning, to security personnel and pool maintenance. Depending on the complex’s payment structure, these fees will usually be a few hundred dollars.

Home Inspection Fee

Depending on the size of your new home, you’ll receive a complete written report about the condition of the structure for around $400 – $600. West End Homes always recommends getting a home inspection for all real estate purchases. Click here to read more about finding a qualified home inspector or ask your sales representative.

Renovations and Repairs

Your home inspection may indicate the need for some general repairs or a major project. Have some money budgeted for renos and repairs, especially if you are buying an older home.

Redecoration

Your taste in a home will surely be different from the previous owner. Set aside money for new furniture, décor and paint. Prepare a list of things that you can live with for now and some items that need immediate attention. You just bought a new home, now you need to make it yours!

Septic System Inspection

When buying a home with a septic system, it’s important to get it inspected before your purchase. An inspection usually costs about $100 to $200, but can often be negotiated into the Offer of Purchase. If you have an older home with a septic tank, it’s always good to get an inspection done every 5 years to ensure that everything is running smoothly. Contacting a licensed septic tank installer is a good place to start.

Water Quality Certification

If you are purchasing a home with a water well, you’ll want to ensure the quality of the water. This will cost approximately $50 to $100. Click here for more information on water quality.

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