The additional costs home buyers face when purchasing a home generally run 1.5% to 2.0% of the purchase price, depending on the province in which the property is located and whether they are first time home buyers and as such qualify for a partial/full refund of the Land Transfer Tax. These closing costs include the following:
Legal Fees and Disbursements
PST on High Ratio Mortgage Insurance, if your down payment is less than 20% of the purchase price.
Land Transfer Tax
Moving Costs and New Account Set Up Fees
Property Tax Adjustment and Adjustments in General*
* Depending on your closing date and how much of the current year’s tax bill has been paid by the owner of the property you may be faced with a property tax adjustment on closing. This adjustment will be agreed to between your respective solicitors. You are responsible for property taxes from the date you become the owner. If, however, the current owner has pre-paid taxes for the year or for more than his/her share, this overpayment will be credited at the time of closing.
An adjustment for condominium fees will also be made if your closing date doesn’t coincide with the date condo fees are payable. Condo fees are generally paid on the 1st day of the month and cover that particular month. Should you take title on the 15th day of the month, you would owe the Vendor for the period from the 16th to the end of that month. If monthly condo fees are $299 and there are 31 days in the month, you would owe $299/31 x 16 days = $154.32.
If you are buying a home that is heated with oil the Vendor will be given credit for a full tank of oil. The tank will be topped up prior to closing and you will be charged for a full tank at the prevailing rate per litre.
There may be an interest adjustment if your closing date (the date on which mortgage funds are advanced) doesn’t correspond with the lender’s payment dates. Knowing that mortgage payments are made in arrears will help to clarify the examples below.
Example 1. You have chosen to pay monthly, your closing date is May 28th and your lender only allows monthly mortgage payments to be made on the 1st day of every month. Your first payment date will be July 1st and will cover the period from June 1st to July 1st. As the mortgage was advanced to you on May 28th, 3 days before the end of the month you will owe the lender an additional 3 days interest. This sum will either be deducted from the advance or your lawyer will be instructed to collect it on closing.
In the past this was a common occurrence, but many lenders now allow for monthly payments to be made exactly one month after closing, on the 28th day of each and every month in this case.
Example 2. You have chosen to pay bi-weekly, your closing date is a Wednesday, but your lender only allows for bi-weekly mortgage payments to be made on Fridays. Two day’s interest will be due to the lender for the period from Wednesday to Friday and, as above, will be deducted from the mortgage monies, collected by your lawyer or may be debited separately to your mortgage account at a later date.
If you would like more specific information about closing costs please feel free to call or email me.
The first and most important step in the home buying process is establishing how much you qualify for in terms of financing. The terms rate hold and pre-approval shouldn’t be used interchangeably, but they often are. Being pre-approved for a mortgage means a mortgage broker has taken an employment and residence history from you, asked questions about your assets and liabilities, obtained your permission to pull your credit bureau history, perhaps asked for a letter confirming your employment and a supporting pay stub and generally looked in detail at your ability to qualify under the lender’s and insurer’s guidelines for a mortgage. An application is made to a lender and a formal pre-approval is obtained setting out the maximum financing available to you and the conditions under which the lender will advance the mortgage monies. With this comes a rate hold for 90 or 120 days depending on the lender. During this rate hold period you will be protected from rising interest rates and if rates decrease your lender will offer you the lower rate. In a nutshell, you will be able to go house-hunting without worrying that your mortgage payments are going to increase.
It is possible to obtain a rate hold only, without obtaining a credit bureau report, and, in fact many banks are doing just this. This can backfire at application time if it is found that the applicant doesn’t qualify for the full amount of financing needed or doesn’t qualify for any amount. I’ve encountered numerous situations where prospective home buyers have thought they had their financing in order, put in an offer and then and only then has the credit bureau report been pulled. Too late it is discovered that the credit score is too low or that there is an outstanding collection that hasn’t been satisfied. Depending on the closing date there may not be enough time to increase the credit score sufficiently to meet the lender or the insurer’s guidelines.
Your interests are better protected if a pre-approval is obtained – if the broker does his or her homework in advance. If there is a potential problem or an error on your credit bureau report then corrective actions can be taken before house-hunting commences and before an offer is made. A broker has access to many lenders, which means that he or she may be able to find you a lender whose minimum score requirements are lower. Minimum score requirements are dictated by the individual lenders and also by the insurers (CMHC, Genworth Financial) if your down payment is less than 20%. Just as a side note minimum score requirements also dictate how much you qualify for – a higher score suggests a more mature credit profile and as such a lender will allow you to take on a larger mortgage.
Changes to mortgage rules were much in the news this week and not necessarily well explained. 3 main changes, which only time will tell if necessary or not.
If you are buying an investment property, i.e. non-owner occupied, non-family occupied, then your minimum down payment must now be 20%. I would love to find stats for the number of investment properties purchased in each of the last 3 to 5 years to see how the numbers increased year over year for high ratio deals – for financing over 80%. I know Flaherty proposed this change to combat real estate speculation, simply not aware this was a problem.
If you are refinancing, taking any equity out of your home, then the max amount after April 19th is 90% of the value of your home. Before that time can still refinance up to 95% of the value of your home. Many Americans were using the equity in their homes as ATMs. Canadians were not to the same extent, but it is a prudent move should real estate prices decline. No one wants to see home owners in a negative equity position.
Finally, all mortgagors will, after April 19, have to qualify at the 5 year fixed rate. Smart move for those currently negotiating their mortgages as rates will be much higher in 2 to 5 years time. A lot of mortgage brokers have been prudent in this regard and have shown their customers what a higher rate means in terms of monthly payments and reduced cash flow. I stay in touch with customers so any increases don’t come as a shock. If you are closing on new construction or doing a self build and have a long term rate guarantee that is based on the bank’s posted less so many points, then you could run into problems should the current qualification criteria not be grandfathered in. Feds don’t want anyone to face negative consequences so presume once the details are rolled out current rules surrounding qualification and affordability for existing deals will be allowed . However, you will probably face a larger mortgage payment as rates are forecast to be higher come the fall. Hoping you are working with someone who has already qualified you based on a higher mortgage amount so increases won’t adversely affect your monthly budget. If not feel free to run your budget and mortgage terms by me.
In the article entitled, Good and Boring, by Paul Krugman, Op Ed Columnist with the new York Times, published on January 31, 2010, he discusses the conditions that led up to the financial crisis and why our respective financial systems didn’t suffer the same melt down. The economic conditions we faced were similar in terms of Federal interest rate policies and global market conditions, but the restrictions placed on our banks’ leveraging ratios and the regulations imposed on mortgage lending were vastly different. ( “Canadian banks are typically leveraged at 18 to 1–compared with U.S. banks at 26 to 1.” Fareed Zakaria )
In a nutshell, US banks opened themselves up to a whole lot more risk. He calls Canada “fascinating”, a good “role model” and yes “boring” – our banking system that is – and I’m happy to keep it this way.
But we Canadians and especially our media are nothing if not contrarian, so here, for your reading pleasure is a link to an article that appears in today’s Vancouver Sun, entitled: Luck, rather than skill, may have helped our banks appear to perform better during financial crisis. The author, William Watson, an economics prof at McGill, even refers to the aforementioned article and its author, thus making this blog post very relevant and a little more interesting. In his opinion, based on findings from an IMF study from the summer of 2009, “the variable that had the greatest explanatory power was where a bank borrowed its money. Banks that relied mainly on a widespread retail deposit base — as our Big Six banks do — fared better than banks that relied on wholesale borrowing from other large financial institutions.”
Hey, the final conclusions of both articles still suggest that boring and safe are good words to apply to our banking system. Canadian banks did not and still do not offer as many mortgage loan options, sometimes referred to as exotic mortgages. Our lenders don’t securitize, don’t sell off their mortgage books of business to the same extent US banks do. 40 year amortizations were briefly available, approximately 2.5 years depending on the lender and in October of 2008 the minimum down payment was increased from 0% back to 5%, what it had been 4 years prior. These measures, while not universally applauded, will go a long way to keeping our envied mortgage and banking system healthy and our real estate markets stable.
All Canadian banks and most Canadian mortgage companies require mortgage loan insurance if your down payment is less than 20% of the purchase price. The insurance premium you pay depends on the amount borrowed from the lender. If you borrow 90% of the purchase price then your premium is 2.0% of the mortgage amount. 95% financing results in a premium of 2.75%. These figures are for Off-Reserve Housing and assume an amortization of not more than 25 years. See below for the various programmes and resulting premiums charged by the 3 insurers in Canada. If you find it confusing, please call or email me. It is my job to know what the various insurers are offering and what the lenders will accept.
Mortgage Loan Insurance allows Canadian home buyers, especially first time home buyers, to qualify for best rates and to become home owners sooner. The insurance premium is usually added to the mortgage amount and paid as part of the regular mortgage payment but it can also be paid in a lump sum.
CMHC’s Home Ownership Products: http://www.cmhc-schl.gc.ca/en/hoficlincl/moloin/hopr/index.cfm
Genworth Financial Canada Home Ownership Products: http://www.genworth.ca/homeownership/c_on-your-terms/products_available_terms.asp
AIG United Guaranty Home Ownership Products: http://www.aigug.ca/products.html
Was reminded tonight that (1) I need to talk a little more slowly and (2) first time home buyers shouldn’t be overwhelmed with mortgage terminology. In my quest to give good advice, lots of options and be as thorough as possible I sometimes forget that the phone isn’t a perfect medium for gauging understanding. It is exciting to be looking for your first home and exciting for me to be helping you. My enthusiasm, shall we say, bubbles over.
So here is a great link to the Financial Consumer Agency of Canada’s ABC’s of Mortgages which has definitions of common mortgage terms, explains some of your rights and responsibilities and provides a couple of calculators. The calculators are good, but before you budget based on these calculations call me. Your individual situation, your credit history, amount of available down payment and other factors will decide whether those calculators can be relied upon or not. They serve as a good rule of thumb but your situation might warrant a reduction or might allow for me to stretch the numbers.