First Time Home Buyer Mortgage
Mortgage agent Warwick Johnston loves working with and educating first time home buyers.
There are a lot of factors to consider when securing a mortgage for your home purchase. When you work direct with a bank, they can only sell you their products and their focus is to make as much money off you as they can. My focus is to select a mortgage that suits your future plans from multiple banks, to secure you the best interest rate so that you pay the banks as little interest as possible and to get you mortgage free as quick as you can go.
First Time Home Buyers Guidelines
If you or your spouse have never owned a home, or have not owned a principle residence for the last 5 years*, you qualify as a first time buyer.
This makes you eligible for the following:
- Ontario Land Transfer Tax Rebate of up to $4,000. *This rebate is only applicable if you have never owned a home anywhere in the world.
- Ability to loan up to $25,000 from RSP's with no initial tax implications. You have 15 years to repay the loan. Annually, CRA will notify how much of the loan is repayable. If you choose not to make the payment, the amount due will then be added to your taxable income. Some provisions apply for the principle residence qualification.
- Borrow up to 95% of the value of the home. The 5% downpayment can be gifted to you from immediate family members.
Home Buyers Tax Credit (HBTC) The HBTC is a non-refundable tax credit, based on an amount of $5,000, for certain home buyers that acquire a qualifying home after January 27, 2009. The HBTC is calculated by multiplying the lowest personal income tax rate for the year (15% in 2009) by $5,000 which will be $750.
Mortgage information and Terms You should know:
- Down Payment - as a first time buyer a minimum of 5% of the value of the home you are buying needs to be paid from your own resources. This money can be gifted from your immediate family and must be in your account at least 15 days before closing.
- Loan To Value (LTV) - This is a percentage calculated on how much the mortgage loan is relative to the value of the property. For example, if a property is worth $100,000 and the mortgage is $80,000, the LTV is 80%. The less the LTV, the more equity you have in your home and the less risk to the bank lending you the money. The higher the LTV the more risk there is to a mortgage lender and therefore your interest rate and terms could be less favourable, unless your mortgage is insured. See Mortgage Loan Insurance Costs below.
- Conventional Mortgage - A mortgage loan up to and including 80% LTV is referred to as a Conventional Mortgage.
- Hi-Ratio Mortgage - A mortgage exceeding 80% LTV is referred to as a Hi-Ratio Mortgage. In other words, if have less than 20% down payment, the mortgage then needs to be insured. See Mortgage Loan Insurance Costs below.
- Mortgage Term - This is the initial time period that you contract with the mortgage lender and can be periods of 6 months, 1, 3, 5, 7 or 10 years.
- Amortization - This is the time period used to calculate what your monthly payment would be to pay off your mortgage over that time. The maximum amortization currently for a High Ratio Mortgage is 25 years and for a conventional mortgage can be 30 years. The longer the amortization period the longer it takes to pay off your mortgage and you end up paying a lot more interest over the time period.
- Mortgage Rates - this is the interest rate that you are charged for borrowing the money from the mortgage lender.
- Fixed Mortgage Rate - the annual interest rate is fixed for the mortgage term that you initially contracted with the lender. Your rate is not affected by fluctuations in the Bank of Canada's lending rate, known as the prime lending rate.
- Variable Mortgage Rate - the mortgage interest rate is not fixed and fluctuates up and down as the prime lending rate moves up and down. A Variable Rate is initially cheaper than a fixed rate but is risky as one is unable to determine what the rates will do in the near to medium terms.
- Convertible Mortgage - is a mortgage that gives you the ability to change the term and or the repayment schedule without any costs or penalties.
- Mortgage Penalty - This is a very important factor to consider when selecting your bank and mortgage product. If you pay off your mortgage before the end of your term, the bank will charge you a penalty for breaking the mortgage. The banks all use different formulas when calculating the amounts.
- Pre-Payment Privileges - Lenders will allow you to pay extra into your mortgage every calendar year without costs or penalties. This is done in 2 ways - by increasing your monthly payments and by making additional lump sum payments over and above your monthly payments. These Privileges are different between lenders and vary from 10% to as high as 20%. For example, a lender with 20% Prepayment Privileges will allow you to increase your initial monthly payment by 20% every year and will allow you to pay an extra 20% of your initial mortgage amount every year into your mortgage. These payments can save a significant amount of interest you pay and shorten the life of your mortgage.
- Payment Options - Many people elect to pay their mortgage monthly, however you can also elect to pay semi-monthly, bi-weekly or weekly. The more frequent you elect to pay, the more you will save on interest.
- Mortgage Closing Costs - as a qualified first time home buyer your mortgage costs are less than normal mortgage costs. Banks would like to see at least 1.5% of the value of the property available for closing costs. (1) There are legal costs incurred to register the mortgage and these typically range from $650 to $1,000 and paid to the lawyer. In addition to the legal fees, there are additional disbursements and Land Title Insurance. So budget for around $1,850 for the total of these fees. (2) A Property Appraisal Fee paid to an independent appraiser who will value your property for the lender. This fee ranges from $250 to $400 for residential homes. (3) Some mortgage brokers will charge a Broker Fee, over and above the fee they are paid from the mortgage lender. The fee can only be paid upfront if the mortgage is over $300,000, otherwise a Letter of Direction is signed for the lawyer to pay the mortgage broker on closing. As part of my bsuiness, I do not charge brokerage fees when we are getting paid by the bank
- Mortgage Loan Insurance Costs - for any mortgages where the LTV is over 80% (65% for self employed people), the mortgage needs to be insured to protect the mortgage lender in the event you default on your payments. This mortgage loan insurance is legislated by the government and is available through 3 providers: Canadian Mortgage and Housing Corporation (CMHC), Genworth Financial and Canada Guaranty. The cost of this insurance depends on the LTV and the once off payment is added to your mortgage - this table shows the Insurance Premium percentages for the Insurance:
|Loan to Value||% of Mortgage|
|Up to 65%||0.60%|
|Up to 75%||1.70%|
|Up to 80%||2.40%|
|Up to 85%||2.80%|
|Up to 90%||3.10%|
|Up to 95%||4.00%|
SELF EMPLOYED Premiums
|Loan to Value||% of Mortgage|
|Up to 65%||1.50%|
|Up to 75%||2.60%|
|Up to 80%||3.30%|
|Up to 85%||3.75%|
|Up to 90%||5.85%|
|Up to 95%||N/A|
First time Buyer programs
The most common program used today by First Time Home Buyers is the 95% high-ratio financing program through both the CMHC, Genworth Financial and Canada Guaranty.
CMHC also permits first-time buyers to borrow their 5% from any other source under certain conditions. For further assistance in understanding these programs and how they work, feel free to Contact Us for unbiased first time home advice.