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Balancing mortgage rate (Comstock Images/Getty Images/Comstock Images)
Balancing mortgage rate (Comstock Images/Getty Images/Comstock Images)

Book Excerpt

Home ownership isn't for everyone Add to ...

If you're happy with the answers to these questions, then your house's location can keep its rose-coloured lustre.

Down-Payment

A mortgage can be conventional or high-ratio depending on the size of the down-payment you make. A conventional mortgage is one that does not exceed 80% of the property value. This means that, if you have 20% or more saving to put towards the purchase of the property, you don't pay insurance and save money as a result. The down-payment required by your lender will depend on that lender's analysis of your income, saving, and investments. Typically, the lender will request 3 months of statements. You can use your RRSP savings, up to $25,000 for each adult partner in the purchase, if you are a first-time home buyer. See chapter four for the details on RRSP first-time home buyer withdrawals.

In some cases, a gift or inheritance from an immediate family member is acceptable as part or all of your down-payment. However, you will still have to prove you have enough income to stay current with your mortgage payments.

If you contribute less than 20% of the property price as a down-payment, you will need to have what is known as a high-ratio mortgage and to pay mortgage insurance. The minimum down-payment one can make is 5%. The lenders set the refinancing limit at 85% so as to prevent people with inadequate funds of their own from buying properties they may not be able to finance in the long term.

The cost of mortgage insurance can be added to amount borrowed through the mortgage. This will mean a higher monthly payment, but at least you won't have to pay for it with cash.

The most used insurance company in Canada it is CMHC (Canadian Mortgage Housing Corporation), 18 but you can use others, such as Genworth Insurance, a major bank, or an insurance company.

These are the typical insurance charges for a mortgage with a 25-year amortization period (see below for more on amortization):

  • 2.75% of the mortgage value with a 5% down-payment.
  • 2% with a 10% down-payment.
  • 1.75% with a 15% down-payment.
  • 1% with a 20% down-payment.

18 See www.cmhc.ca.

If you would like more than a 25-year amortization (you can get up to 30 years) to lower your monthly payments, you will pay a 0.20% more premium for an amortization of 26 to 30 years. The Minister of Finance changed the maximum amortization period from 35 to 30 years just before this book was published.

Please use a mortgage calculator to see the difference in monthly payments when the amortization is greater, this will help you to keep your payments within your budget.

Mortgage Term

The term of a mortgage is the length of time that the mortgage conditions, including the interest rate you pay, are in effect. Terms can be between six months and 10 years. At the end of the term, you can pay off the remaining balance or you can renew the loan with a new term and interest rate. Interest rate negotiation is the most important process when it comes choosing a term.

You will probably find that taking a shorter term means paying a lower rate of interest. This is because lenders are less able to predict where interest rates will go the further out in time they need to take into consideration. The result is that they charge more for the privilege of borrowing their money.

As a borrower, choosing a shorter term means not only getting a lower interest rate, but having to renegotiate your mortgage sooner. Many people take a five-year term just to avoid having to renegotiate often.

You can get mortgages with terms of up to ten years, though five years is much more common.

Amortization

Amortization is the period of time in which you will pay off the mortgage completely. If you have a 25-year amortization, you will need a series of seven 5-year term mortgages to pay off the entire amount you owe, complete with interest.

Amortization can be done over a period of up to 30 years, 19 though most people opt for 25 years. This amortization period is what is required to pay off the mortgage when all regular payments are made on time. If you miss a payment, you will either have to make it up, or extend the period over which you are borrowing, or increase the amount paid per month in later years.

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