If you have a question we have not answered below, click here to send us an email, or go to our Submit a Question page to see your other options..

• How important is it to get pre-qualified for a mortgage?
• How does the RRSP home buyers’ plan work?
• How does the mortgage broker get paid?
• When should I refinance?
• What are private mortgages?
• What are high-ratio mortgages?
• How does the 100% financing program work?
• What are second mortgages?
• What are reverse mortgages?
• What are my closing costs?
• What will my net proceeds be after selling?

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Mortgage Pre-qualification

The first thing you should do before seriously starting to look for a home is get your self pre-approved for a mortgage. The benefits are:

• Costs nothing!
• A protected interest rate (up to 120 days)
• You will determine what price of home you can afford
• You will learn much about the carrying costs of home ownership
• A better understanding of the process of getting a mortgage
• Vendors will want to known if you have been pre-approved for a mortgage

Lets examine these points a little closer:

Protected Interest Rate

If you are shopping for a home, think about the time-line involved. It may take 1½ months to find the house you like. Then, you may need to give your landlord 60 days notice that you’re moving. Hence, you will want the closing date (move-in day) to be 2 months from the date of your offer. Similarly, if you currently own your home and are buying before you sell, you will want to have enough time to sell your home and may request the closing date 90 days later. Whatever the case, from the time you are pre-approved for a mortgage, it could be 30-120 days later before you close on your purchase.

You can see how important it would be to have an interest rate protected right up to the time of closing. Especially if rates were headed up during the time you were shopping for a home. Make sure your mortgage originator understands the time you need and advises accordingly.

Maximum Price of Home

You may not buy the most expensive house you can afford, but you should know what your limits are. Secondly, your maximum loan could very from lender to lender depending on your application vis-à-vis your credit history, verifiable income, etc. For example, if your credit is damaged you may have to qualify at a higher rate which will adversely affect the size of loan. You may be restricted to a bigger down payment. You may not even be able to get a protected interest rate while you shop. Knowing what mortgage terms you are going to get in advance is imperative! Make sure your mortgage originator has a clear understanding of your financial circumstances. No one likes surprises.

Home Carrying Costs

Along with your mortgage payment there will be some additional carrying costs you may not be accustom to.  Especially if you are a first time home buyer.  These include:

• Property taxes
• Condo fees (if applicable)
• Home insurance
• Mortgage life insurance
• Utilities
• General house maintenance costs (e.g. furnace, roof, yard, etc.)

It easy to loose sight of this when applying for a mortgage. Keep this in mind and try to avoid taking the maximum loan.

Mortgage Process

In a purchase transaction, timing is critical. When you finally find your dream home and the vendor has signed back your offer to purchase, you will not feel like celebrating until you know the financing is in place. Everyone is anxious at this point to hear not only your mortgage application has been approved but also, that all the lenders conditions have been met so you can sign the waiver to remove the financing condition. Here are some of the standard conditions that come with most mortgage approvals on a purchase transaction, and the corresponding documentation required to fulfill them:

As mentioned above, in a purchase transaction, everyone is anxious to remove your financing condition and there is a deadline for this. The above list is by no means exhaustive of all the potential conditions. There can be many more conditions depending on the borrowers circumstances. Your mortgage originator should advise you up front of all the documentation required to expedite the process. Here is a short list of a few other conditions that could be included in your mortgage approval:

• Separation Agreement (to confirm support payments received or paid)
• Proof of discharge from bankruptcy
• Proof of certain debts paid which still show outstanding on your credit report

You can see how important it is to have your paperwork together. Getting your mortgage approved from the bank takes no time. In most cases, approvals can be obtained the same day as the application being submitted. Although don’t count on this, especially if you purchase in the Spring – the busiest season for the banks. The key is to get started early. For example once you have an accepted offer, request your job letter from your employer. Your mortgage originator will help guide you and make sure everything is done on time.

Vendors and Pre-Approvals

More often than not, the vendor will be asking your agent if you have been pre-approved. In a “sellers market” vendors have the luxury of receiving multiple offers. However, they like to weed out the offers where the buyers have not been pre-approved. Don’t let this happen to you or you could end up loosing the home you really wanted. Conversely, if you have your pre-approval in place and one of the other buyers doesn’t, it could work to your advantage.

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How does the RRSP Home Buyers’ Plan work?

In 1992, the federal government introduced the RRSP Home Buyers’ Plan. Eligible taxpayers can withdraw up to $25,000 tax free from their Registered Retirement Savings Plan (RRSP) to buy a home. Your spouse, or partner can also take advantage of the Home Buyers’ Plan (HBP), which can bring your total withdrawal up to $50,000. The plan was supposed to have been a temporary measure to fix a lagging economy, but its popularity led the government, in its 1994 budget, to make the plan a permanent part of the RRSP rule book.

Who is eligible?

• You must be a Canadian resident and intend to make the home your purchasing, your principal residence.
• You and your spouse must not have owned a home within the past 5 years, together or individually.
• You must buy or have an agreement to build a “qualifying home” by October 1 of the year following your withdrawal.
• The money must be in your RRSP for at least 90 days before you can make a withdrawal under the HBP if you want to claim a deduction on your income tax.
• You must put back into an RRSP what you take out, and you have 16 years to do that. Payments begin the second year after you withdraw the funds, subject to a minimum payment each year of 1/15^th of the amount originally borrowed.

What if you don’t have any money in your RRSP?

Don’t worry, you can still take advantage of the HBP. If you are earning income, or have earned income in the past few years, you are entitled to contribute to an RRSP. What is not very well known about the HBP, is that you can contribute to an RRSP retroactive to 1991. Therefore, check to see what your RRSP contribution limit is. It is shown on your previous years Notice of Assessment, or call Revenue Canada.

If you need help raising a downpayment, the HBP may be of some use to you. If there are significant unused contributions from previous years, take out a short-term RRSP loan to cover them. After 90 days, you repay your loan by cashing in your RRSP and you use your tax refund for the downpayment on your new home. A tax refund is an acceptable downpayment if it is in hand at the time of closing.

As an added benefit, using the HBP this way will guarantee you also build on your retirement savings. Each year, you will have to repay 1/15th of the total amount you have withdrawn from your RRSP until your total withdrawals are repaid in full. Each year the government will send you a HBP statement with the amount you have repaid, the balance repayable, and the amount you have to repay the following year.

That’s what Jim and Mary did. They had not contributed to their RRSPs since 1991. Therefore, they contributed $20,000 each. They got an RRSP loan on the understanding that it was for 90 days only. As soon as the 90 days were over, Jim and Mary cashed out their RRSPs under the HBP and immediately paid off their temporary loan. Their RRSP tax deductions generated a combined tax refund of $14,600 which they had in time to purchase their first home. With no money saved, Jim and Mary got a tax refund, bought their first home and secured their future with an RRSP.

HBP drawbacks: Before making your final decision to use the HBP, consider the following points :

• Until you have paid back the money borrowed from your RRSP, you cannot receive a tax deduction for yearly RRSP contributions. Only the portion that exceeds the minimum HBP repayment (1/15^th).
• If the minimum HBP repayments make it impossible for you to contribute each year to a new RRSP, not only do you loose the compound growth on the amount withdrawn under the HBP, but also the growth on new contributions you might otherwise have made.
• The younger you are, the more time your RRSP has to grow, and therefore the greater the cost of using the HBP.
• Bear in mind, the appreciating value of your home might offset some of the growth you have foregone in your RRSP. And the capital gains in your home are tax free.
• The money you withdraw from your RRSP may be wisely invested in a diversified portfolio, and now you are investing it in one asset – Real Estate.
• If you miss making the minimum HBP payment, or even part of it, the amount missed is added to your taxable income for that year.
• In the end, your decision to use the HBP will be based on personal as well as economic considerations. Waiting until you have a bigger down payment may mean facing higher house prices and higher interest rates. Just make sure you understand that while this plan may help you to realize the dream of owning your own home, it has its costs.

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How does the mortgage broker get paid?

Residential mortgages

“A” Paper (prime)

Mortgage broker services are not free. They are however, frequently paid in full by the financial institutions as they regard mortgage brokers as an extended sales force. This creates an ideal situation for the client who represents little or no risk to mainstream financial institutions. The client can access independent professional counselling, secure favourable mortgage terms, and not pay for the service.

“B” and “C” Paper (subprime)

Clients who fail to meet the qualifying criteria at mainstream financial institutions know how difficult it is to find mortgage financing. For them mortgage broker services are especially worthwhile. Since mortgage brokers are independent, no adversarial lender-borrower relationship limits the questions, an important consideration for hard to place deals. Likewise, In today’s automated adjudication of loan applications, it is critical to minimize the number of lenders doing credit checks on you, as this can adversely affect your credit score. The mortgage broker will acquire one credit report that can be used by as many lenders as needed to get the deal approved.

A good mortgage broker can provide clear, objective and confidential advice to find minimum cost solutions.  When broker fees are required, depending on the difficulty associated with the application, they can range from a few hundred dollars up to 2 or 3 per cent of the funds advanced. This valuable benefit helps client’s in difficult circumstances to plan and organize their mortgage financing without the apprehension and tension normally inherent in a visit to the bank.

Commercial mortgages

For commercial property transactions, generally speaking the mortgage broker has to rely on broker fees completely.  That is, compensation from the lender is rare, and if available, is nominal.  Commercial mortgages require a great deal of work and broker fees will vary greatly since there are so many different types of commercial properties.  Typically, mortgage broker fees will range between 0.5 and 2 per cent of the funds advanced.  Again, the more difficult deals vis-a-vis the borrower’s qualifications as well as property type will be the more costly ones.

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When should I refinance?

Under the right circumstances, refinancing your home can save you money – lots of money. Refinancing can also be a mind-bending experience because you have to make a lot of decisions: Does it make sense for you? Is now the right time? What kind of mortgage you should get? Should you get a new first mortgage or arrange a second mortgage? What are the refinancing costs? What will be the break-even point? Should you take a fixed rate or floating rate? These and other matters can cause you serious concerns.

The first thing people generally tackle is whether or not they should refinance. Answering this question leads to many other considerations, such as why should you refinance. Some decide to refinance to lower their mortgage interest rate. This especially works well for people who got their first mortgage when rates were considerably higher than they presently are. A lower interest rate means lower monthly payments and this concept is attractive to many home owners. These individuals are most likely seeking to move from one fixed rate loan into another, just at a lower interest rate. Fixed rate mortgages are viewed by most as the lowest risk mortgage through a lender. If a home owner locks their mortgage into a low rate, they can be assured that they will maintain that rate even if the market fluctuates upward and rates begin to soar.

Another reason some people consider refinancing their mortgage is to consolidate their debts. They may have a car loan, other installment loans, and credit card loans – some of which may be at very high interest rates. Others want to get money to use for home improvements or to invest. Some people may want to refinance because of divorce. They want to remove the other person’s name from the mortgage papers. Still others may want to change a mortgage because the mortgage holder is a private lender who wants to cash out.

The second major thing that people often tackle is how much the refinancing costs will be. Most of the costs are very much like the costs the person faced when getting his or her first mortgage. These costs include an appraisal fee, and legal fees. They will most likely include a penalty charged by your existing lender for paying off the mortgage early. If the new loan exceeds 75 per cent of the property’s value, there may be mortgage default insurance premiums.

You certainly have to evaluate carefully how many years, if any, refinancing will add to your mortgage payments. You most likely would not want to add another 10 or 15 years to your mortgage payments. However, if the current rate is low enough, you may want to take advantage of it.

As you have seen, much planning and thinking needs to go into your decision whether or not to refinance. Depending on your personal situation and current mortgage rates, the answer for you could be either “yes” or “no.” In any case, you will feel much better about your final decision because you have approached it carefully and wisely. Give us a call, we would be glad to address any and all issues with you.

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What are private mortgages?

Institutional mortgage lenders use the most complete, formal, and conservative borrower qualification practices. They serve a reinvestment function (lending or investing funds “borrowed” from depositors or policy holders), and restrict their lending activities to first mortgage loans either well secured ( 75% loan-to-value) or covered by default insurance. Furthermore, they operate from an extremely large capital base with the ability to spread their risk over a large number of mortgage loans and other investment vehicles.

What that means is, there are many mortgage loan applications that get turned down by institutional mortgage lenders. That’s where private mortgages come in. Most Mortgage Brokers, including Anderson Associates Mortgage Brokers, have access to private investors willing to fill the gaps that institutional mortgage lenders cannot or will not fill. Private mortgages offer an alternative source of financing for borrowers, and a high yield investment opportunity for investors.

Alternative source of financing If either you or the property do not conform to the conventional lending criteria at mainstream financial institutions, you will most likely need access to private funds. You are going to pay a higher rate of interest, and additional fees. How much will depend of the level of risk. Most borrowers today would pay fees (mortgage broker fees and lender fees combined) between 2% and 4.5% of the mortgage amount. Interest rates could range between 9 and 15%.

Bear in mind, private mortgage financing might only be for a short-term. Perhaps, the vendor took back a mortgage so you could purchase his/her house, and he/she wants to cash-out in one year, or you may have needed to reestablish credit this way. After one year of making payments on time you will be in a better position to approach the mainstream lenders to refinance.

High yield investment opportunity Every consumer wants to invest their money wisely to maximize their returns. But with increasing returns, comes increasing risk. Therefore, if you are going to invest in private mortgages, we strongly recommend you have a better than average understanding of the local real estate market you want to invest in, a very good understanding of your own tolerance to risk, and perhaps even the willingness to get involved with the administration end of your investment.

Poor underwriting procedures and inadequate security analysis have been the downfall of more than one private lender. We have the expertise and resources to carry out these activities with your long-term interests first and foremost. In fact, given the higher level of risk, we approach each application with the same or more rigor than an institutional lender.

If you are less familiar with this kind of investment, we can help keep the risk to a minimum. For example, you should only lend against owner-occupied residential properties at 75%-80% loan-to-value. Also, you could hold the mortgage inside a self-directed RRSP. That way, you not only earn tax-free interest income, but also, the plan, and its trustee, legally MUST receive its payments every month. If the borrower starts skipping payments, the matter is out of your hands. In plain English, he/she gets sued.

Under the provisions of the Mortgage Brokers Act, you are certain to be provided all pertinent information regarding any mortgage investment. If you would like any more information on becoming one of our private investors, please contact us today.

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What are high-ratio mortgages?

For most Canadians, the hardest thing about buying a home – especially a first home – is saving the necessary down payment. Conventional mortgage financing which requires a 20% down payment can put home ownership out of reach for most Canadians.

Fortunately, real relief came in 1954 when the government introduced significant changes to both the National Housing Act and the Bank Act which would increase the supply of mortgage funds available.

By providing default insurance to financial institutions, also know as mortgage loan insurance, home buyers today can arrange financing up to 95% of the property’s value. Lenders refer to this as a 95% Loan-To-Value Ratio (LTV). Hence, any financing beyond the conventional 80%, which requires default insurance, is referred to as, high-ratio financing.

There are currently three mortgage insurance companies in Canada:

• Canada Mortgage and Housing Corporation (CMHC)
• Genworth Financial Canada
• AIG United Guaranty

The purpose of the insurance offered by these companies is to indemnify the lender in the event of borrower default. However, it is the borrower who pays for the insurance.

What is the cost of insuring the loan? Mortgage loan insurance is expensive. A one-time premium is paid by the borrower on the total amount of the mortgage and not just on the portion exceeding 80% of the purchase price, the high-ratio portion that is deemed at risk. Depending on the size of your down payment, the insurance premiums range from 1.00% to 2.90% of the total amount of the loan.

The premium can be paid in one lump sum at the time of purchase, or it can be added to your mortgage. If you do the latter, you’ll end up paying a good deal of interest on the premium. To that end, it is worth comparing high-ratio financing to your alternative: a first mortgage for 80% of the purchase price and a second mortgage for the high-ratio portion. This eliminates the need for default insurance. If you contact our office we will gladly help you determine the best choice for your situation.

What homes qualify for mortgage loan insurance? Virtually every type of home qualifies: new homes or resale homes which include town homes, detached homes, semi-detached homes, condominiums, single and multiple wide mobile homes constructed to CSA Standard Z-240 and single and multiple wide modular homes constructed to CSA Standard A-277. In the case of manufactured homes, they must be situated on land that you own or lease. All three of the insurance providers listed above offer default insurance to lenders at the 95% financing level, or LTV. Each of them has come up with their own unique names associated with their respective programs. There is very little difference between insurance companies with respect to the 95% financing programs they offer and the premiums are the same. Therefore, we have provided an overview of CMHC’s program below to give you the general flavor of this type of program. Listing all three company’s programs would be too repetitive.

CMHC Flex Down CMHC Flex Down provides borrowers with the opportunity to purchase their own home sooner by using a wider range of sources for a down payment. The CMHC Flex Down product is intended to appeal to homebuyers who may lack, or have made the financial decision not to provide, a traditional 5% down payment from their existing resources but who have a good credit history and sufficient income to support the financial obligations of homeownership.

The following table provides more details on each of these programs:

* Down payment requirements – Traditional sources of down payment include: Applicant’s savings, RRSP withdrawal, funds borrowed against proven assets, sweat equity (<50% of min. required equity), land unencumbered, proceeds from sale of another property, non-repayable gift from immediate relative, equity grant (non-repayable grant from federal, provincial or municipal agency).

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Non-traditional sources of down payment include: Any source that is arm’s length to and not tied to the purchase or sale of the property, such as borrowed funds, gifts, 100% sweat equity, lender cash-back incentives.

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What are second mortgages?

Having a second mortgage put against your property means you have pledged your property as collateral a second time for another loan. You now have two loans, each secured against the same asset – your property. One is called a first mortgage, the other, a second mortgage. And yes, if you pledged your property a third time, for another loan, it would be called a third mortgage. No rocket science here!

From the lender’s perspective, to hold the first mortgage is the most advantageous. It means, when the property is sold, the proceeds from the sale go to pay off the first mortgage, then the second mortgage, and then the third mortgage. Any remaining equity goes to the property owner. To offset the additional risk, the lender’s holding mortgages two and three will charge a higher rate of interest. The actual rates depends on the borrower’s equity in the property, their strength as borrowers, and the lender.

So why do people have a phobia about second mortgages? Instead of the number of mortgages, people should be concerned about the amount of money borrowed and their equity position behind it. If the purpose of the second mortgage was to consolidate debts, probably your main concern is cash-flow.

Lets take a closer look at the debt consolidation example, since it is a common reason why people arrange a second mortgage. John Doe has the following financial profile:

John Doe’s monthly debt load ($2,750) is dangerously high at 62% of his income ($2,750 / $4,417). And that doesn’t include his utilities, food, entertainment…

John could arrange a $30,000 second mortgage to consolidate or pay off his car loan, consumer loan, and credit cards. His new profile would look like this:

With the same amount of debt as before ($180,000), John has freed up $1,285 per month ($2,750 – $1,465) to pay it down faster. His debt load is only 33% of his income, and he has only 2 payments each month instead several.

Second mortgages can be a useful tool for consolidating debt and paying it down faster. They can also be wisely used for home improvements or other investments.

If you would like us to review your profile, contact us today.

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What are reverse mortgages?

A reverse mortgage is similar to a traditional mortgage, only it works in reverse. The lender makes a lump sum payment to you based on the equity in your home, but no payments are required by you during your lifetime. Instead, the principal and interest is repaid by the estate or by you, should you decide to sell.

With a traditional mortgage, you are borrowing money and pledging your property as security. Your equity in the property may be as little as 5 per cent of the property’s value. With a reverse mortgage, you are not borrowing money that you don’t have. You are accessing money that is already yours.

What are the benefits of a reverse mortgage?

• Get cash or extra monthly income: Use the money as a source of extra monthly income or the cash for travel, home renovations, a new car, etc…
• Tax advantages: A reverse mortgage can be used to provide tax-sheltered income, and minimize capital gains exposure to your estate. The initial funds received are tax-free.
• No repayments: As long as you continue to live in your home.
• Complete flexibility: You can sell or move at any time. You can repay the mortgage at any time. You can even rent your home to someone else if you wish.
• Your home is never at risk: Title remains in your name. If property values increase, the increased equity is yours.
• Equity preservation with additional cash-flow: The amount to be repaid is guaranteed not to exceed the fair market value of the home at the time it is sold, protecting the homeowner or the estate.

Eligibility

To qualify for a reverse mortgage you must be:

• Available to homeowners 60 and older on their principal residence.
• Location and type of home must qualify.
• There are no credit checks, no medical requirements, and no income restrictions.

Here’s how it works

You can access up to 40% of the current value of your home. The exact amount depends on your age, gender, marital status, and geographical location. The older you are, the more equity you can access.

You can receive your money in three ways:

1. All in cash
2. Invest the entire amount to generate tax-sheltered guaranteed income, just like a pension
3. A combination of the above

If you would like to know more about reverse mortgages, and how much equity you can access, contact our office today.

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What are my closing costs?

There’s more to buying a home than your down payment and mortgage. You’ll need to budget another 1.5% to 4% of the price of your home for extras or “closing costs.” Use the following worksheet to prepare yourself. If you need help filling in any of the numbers, give us a call.

Purchase price

Plus

Home inspection fee

Property appraisal fee

Mortgage default insurance application fee (CMHC or GE Capital)

Property survey or title insurance fee

Legal fees (for purchase, mortgage, and disbursements)

Taxes (land transfer tax, Provincial sales tax, GST (if applicable))

Adjustments (interest, property tax, utilities, condo fees)

Home fire insurance premium

Moving expenses

Immediate repairs

Appliances

Other

Total estimated purchase costs

Less

Purchase price

TOTAL ESTIMATED CLOSING COSTS

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What will my net proceeds be after selling?

Don’t overestimate the net proceeds from selling your house or you will be caught short when buying your next home. Use the worksheet below as a guide. If you need help filling in any of the numbers, give us a call.

Selling price

Less

Outstanding mortgage

Realtor’s commission

Property survey or title insurance fee

Legal fees (for sale and discharge of mortgage)

Mortgage prepayment penalty

Lender’s discharge fee

Property tax adjustment

Other

Equals

ESTIMATED NET PROCEEDS FROM SALE

RRSP Home Buyers Plan

In 1992, the federal government introduced the RRSP Home Buyers’ Plan. Eligible taxpayers can withdraw up to $25,000 tax free from their Registered Retirement Savings Plan (RRSP) to buy a home. Your spouse, or partner can also take advantage of the Home Buyers’ Plan (HBP), which can bring your total withdrawal up to $50,000. The plan was supposed to have been a temporary measure to fix a lagging economy, but its popularity led the government, in its 1994 budget, to make the plan a permanent part of the RRSP rule book.

Who is eligible?

• You must be a Canadian resident and intend to make the home your purchasing, your principal residence.
• You and your spouse must not have owned a home within the past 5 years, together or individually.
• You must buy or have an agreement to build a “qualifying home” by October 1 of the year following your withdrawal.
• The money must be in your RRSP for at least 90 days before you can make a withdrawal under the HBP if you want to claim a deduction on your income tax.
• You must put back into an RRSP what you take out, and you have 16 years to do that. Payments begin the second year after you withdraw the funds, subject to a minimum payment each year of 1/15^th of the amount originally borrowed.

What if you don’t have any money in your RRSP?

Don’t worry, you can still take advantage of the HBP. If you are earning income, or have earned income in the past few years, you are entitled to contribute to an RRSP. What is not very well known about the HBP, is that you can contribute to an RRSP retroactive to 1991. Therefore, check to see what your RRSP contribution limit is. It is shown on your previous years Notice of Assessment, or call Revenue Canada.

If you need help raising a downpayment, the HBP may be of some use to you. If there are significant unused contributions from previous years, take out a short-term RRSP loan to cover them. After 90 days, you repay your loan by cashing in your RRSP and you use your tax refund for the downpayment on your new home. A tax refund is an acceptable downpayment if it is in hand at the time of closing.

As an added benefit, using the HBP this way will guarantee you also build on your retirement savings. Each year, you will have to repay 1/15th of the total amount you have withdrawn from your RRSP until your total withdrawals are repaid in full. Each year the government will send you a HBP statement with the amount you have repaid, the balance repayable, and the amount you have to repay the following year.

That’s what Jim and Mary did. They had not contributed to their RRSPs since 1991. Therefore, they contributed $20,000 each. They got an RRSP loan on the understanding that it was for 90 days only. As soon as the 90 days were over, Jim and Mary cashed out their RRSPs under the HBP and immediately paid off their temporary loan. Their RRSP tax deductions generated a combined tax refund of $14,600 which they had in time to purchase their first home. With no money saved, Jim and Mary got a tax refund, bought their first home and secured their future with an RRSP.

HBP drawbacks: Before making your final decision to use the HBP, consider the following points :

• Until you have paid back the money borrowed from your RRSP, you cannot receive a tax deduction for yearly RRSP contributions. Only the portion that exceeds the minimum HBP repayment (1/15^th).
• If the minimum HBP repayments make it impossible for you to contribute each year to a new RRSP, not only do you loose the compound growth on the amount withdrawn under the HBP, but also the growth on new contributions you might otherwise have made.
• The younger you are, the more time your RRSP has to grow, and therefore the greater the cost of using the HBP.
• Bear in mind, the appreciating value of your home might offset some of the growth you have foregone in your RRSP. And the capital gains in your home are tax free.
• The money you withdraw from your RRSP may be wisely invested in a diversified portfolio, and now you are investing it in one asset – Real Estate.
• If you miss making the minimum HBP payment, or even part of it, the amount missed is added to your taxable income for that year.
• In the end, your decision to use the HBP will be based on personal as well as economic considerations. Waiting until you have a bigger down payment may mean facing higher house prices and higher interest rates. Just make sure you understand that while this plan may help you to realize the dream of owning your own home, it has its costs

Mortgage Life Insurance

The information provided here is courtesy of The Mortgage Protection Plan. The “Plan” is an insurance program designed to provide life and disability protection to the clients of Anderson Associates Mortgage Brokers. The Plan is underwritten by The Manufacturers Life Insurance Company (the “Insurer”) and administered and managed by Lorriman & Long Management Inc. and its appointed agents (collectively these parties are called “MPP”)

With very few exceptions (e.g. private mortgages), mortgage life insurance is optional. Be prepared however, some banks still use pressure tactics to sell this product. If you don’t need it, you don’t have to take it.

It may be optional, but for most people your home is not only your largest single investment, but it is also where you have chosen to raise your family. If your mortgage is not protected, you risk losing everything. The simple truth is that illness or death can happen to anyone of any age at any time. In fact:

44% of claims have been made in the first 2 years of the mortgage.

(Source: over 10 years of MPP claims data

11.4% of working age Canadians suffer from some form of disability with 43% of those disabilities severe or very severe.

(Source: Statistics Canada: 89-579)

With today’s high cost of living, taxes, and mortgage payments, it’s more difficult to save than ever before. An unexpected death or illness can be financially devastating for your family. The Mortgage Protection Plan was created as an affordable, simple and convenient solution. It allows you to protect your investment right away – at the same time you arrange for your mortgage. There is no reason to gamble – you can insure your mortgage now and you can cancel at any time. We’ll even refund all your premiums if you find a better solution within our 60 day guarantee period (or even if you just change your mind).

The Mortgage Protection Plan was also designed to be more affordable than you think. In fact, a typical couple can save 300% over a very competitive term life product. Unlike term life products, Mortgage Protection Plan premiums do not increase automatically as you get older.

In this case, MPP starts out being slightly more expensive. However, over the 25 year amortization the cost of the plan is three times less expensive! Not only is it 33% cheaper per dollar of coverage, but the overall coverage of MPP is designed to reduce as the balance of your mortgage declines. You don’t pay for any wasted coverage.

Unlike similar plans offered by mortgage lenders, Mortgage Protection Plan is independent of your lender. That means you are free to negotiate the best mortgage deal at renewal without having to worry about losing your protection. You’re also never locked in.

Don’t Gamble, Protect your home now!

With Mortgage Protection Plan we’ve made it easy and simple to get the protection you need now. For most applications, there is no medical exam and we will have your certificate on its way to you within 5 days. And if you find a better solution within 60 days we’ll refund all of your premiums. That’s why over 110,000 Canadians have made the Mortgage Protection Plan Canada’s No. 1 choice for independent mortgage protection.

Contact us at MortgageResource.ca for Canada’s No. 1 choice in independent mortgage protection.

Mortgage Default Insurance

For most Canadians, the hardest thing about buying a home – especially the first home – is saving the necessary down payment. Conventional mortgage financing which requires a 20% down payment can put home ownership out of reach for most Canadians.

Fortunately, real relief came in 1954 when the government introduced significant changes to both the National Housing Act and the Bank Act which would increase the supply of mortgage funds available.

By providing default insurance to financial institutions, also know as mortgage loan insurance, home buyers today can arrange financing up to 100% of the property’s value. Lenders refer to this as a 100% Loan-To-Value Ratio (LTV). Hence, any financing beyond the conventional 80%, which requires default insurance, is referred to as, high-ratio financing.

There are currently four mortgage insurance companies in Canada:

• Canada Mortgage and Housing Corporation (CMHC)
• Genworth Financial Canada
• AIG United Guaranty
• PMI Canada (as of April 26, 2007)

The purpose of the insurance offered by these companies is to indemnify the lender in the event of borrower default. However, it is the borrower who pays for the insurance.

What is the cost of insuring the loan?

Mortgage loan insurance is expensive. A one-time premium is paid by the borroweron the total amount of the mortgage and not just on the portion exceeding 80% of the purchase price, the high-ratio portion that is at risk. Depending on the size of your down payment, the insurance premiums range from 1.00% to 3.10% of the total amount of the loan.

The premium can be paid in one lump sum at the time of purchase, or it can be added to your mortgage and included in your monthly mortgage payment. If you do the latter, you’ll end up paying a good deal of interest on the premium. To that end, it is worth comparing high-ratio financing to your alternative: a first mortgage for 80% of the purchase price and a second mortgage for the high-ratio portion. This eliminates the need for default insurance. If you contact our office we will gladly help you determine the best choice for your situation. One advantage to this type of financing is that insured mortgages become open after three years. That is, you can pay off your mortgage by paying a 3 month interest penalty regardless of the lenders policy.

What homes qualify for mortgage loan insurance?

Virtually every type of home qualifies: new homes or resale homes which include town homes, detached homes, semi-detached homes, condominiums, single and multiple wide mobile homes constructed to CSA Standard Z-240 and single and multiple wide modular homes constructed to CSA Standard A-277. In the case of manufactured homes, they must be situated on land that you own or lease.

100% financing program(s) All four of the insurance providers listed above offer default insurance to lenders at the 100% financing level, or LTV. Each of them has come up with their own unique names associated with their respective programs. There is very little difference between insurance companies with respect to the 100% financing programs they offer and the premiums are the same. Therefore, we have provided an overview of CMHC’s two programs below to give you the general flavor of this type of program. Listing all three company’s programs would be too repetitive.

CMHC has two programs for 100% financing:

CMHC Flex Down CMHC Flex Down provides borrowers with the opportunity to purchase their own home sooner by using a wider range of sources for a down payment. The CMHC Flex Down product is intended to appeal to homebuyers who may lack, or have made the financial decision not to provide, a traditional 5% down payment from their existing resources but who have a good credit history and sufficient income to support the financial obligations of homeownership.

CMHC Flex 100 CMHC Flex 100 offers financing up to 100% of a home’s value on purchase transactions (including portability) to borrowers with a proven track record of managing their debt and the financial capacity to repay the mortgage.

The following table provides more details on each of these programs:

* Down payment requirements – Traditional sources of down payment include: Applicant’s savings, RRSP withdrawal, funds borrowed against proven assets, sweat equity (<50% of min. required equity), land unencumbered, proceeds from sale of another property, non-repayable gift from immediate relative, equity grant (non-repayable grant from federal, provincial or municipal agency).

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Non-traditional sources of down payment include: Any source that is arm’s length to and not tied to the purchase or sale of the property, such as borrowed funds, gifts, 100% sweat equity, lender cash-back incentives.

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So you got declined…

You need a loan, but your situation won’t allow you to get any of those great deals/rates with the major banks. You’ll be glad to know there are alternatives. In fact, there’s a whole segment of the mortgage industry that caters to borrowers, for whatever reason, who find themselves with less-than-perfect credit, self-employed with non-provable income, too much debt, new to Canada…the list goes on.

Called B-paper or subprime in industry lingo, subprime loans not only come with higher rates but also, less favorable terms, most of the time. For example, you may not be able to break your mortgage to refinance for the first 3 years. Terms vary greatly between subprime lenders, so having a mortgage broker in your corner is invaluable.

Most prime or A-paper lenders want to see 24 months of excellent credit history in order to approve a loan. So, if you take a B-paper loan you can put up with a higher interest rate, rebuild your credit, establish your business income, reduce your overall debt, obtain your citizenship, etc., and refinance into a better loan in 2 to 3 years.

B-paper is just as competitive as A-paper, if not more so. There are plenty of subprime lenders out there, so although you won’t get the lowest possible rate, you can still get the flexibility you need to get back on track with a prime lender at the earliest possible time with the least amount of cost.

Remember that you’re not only getting a loan, you’re also rebuilding your credit and establishing equity as a homeowner. Reapplying a few years later as a homeowner will improve your chances with the prime lenders.

For a closer look at the available programs in the subprime industry, click here.

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