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A minimum cash down payment from your own resources is required because mortgage lenders won't advance the entire purchase price of a property. Your minimum down payment would normally be 10%, however, a recent government program has lowered the minimum to 5% for qualified first time buyers. Another temporary program allows first time buyers to use funds from their RRSP for their down payment.
It's to your advantage to aim for a down payment of 25% or more, so you'll qualify for a conventional mortgage and avoid paying the mortgage insurance premium. The larger your down payment, the easier it will be to arrange a mortgage and carry it comfortably. The smaller your loan, the lower your interest expense will be, and the more equity you will have in your home. Equity is equal to the value of your home minus the amount of your mortgage

When you insure your home, you should insure your home for the total amount it would cost to rebuild your home if it were destroyed. 12 Ways to Save Money on Homeowners Insurance Friends, family, the phone book and Internet are some of the sources you can use to find homeowners insurers.

Get a wide range of prices from several companies. But don't consider price alone. Private Mortgage Insurance - PMI Private mortgage insurance is a type of insurance that helps protect the mortgage company against losses due to foreclosure.

This protection is provided by private mortgage insurance companies and allows mortgage companies to accept lower down payments than would normally be allowed. PMI Cancellation Mortgage insurance can usually be canceled by the home buyer after he or she has at least 20 percent equity in the home.

Borrowers should contact their servicer to find out the procedure for canceling mortgage insurance when they think they have achieved 20 percent equity.

The length of time for which the interest rate is fixed is called the term. Most mortgages have terms of six months to five years.

Open versus closed term
An open mortgage is one which allows payment of the principal, in part or in full, at any time without penalty. Open mortgages tend to be for a short term - usually six months or one year. Since open mortgages offer greater flexibility than closed mortgages, they usually have a higher interest rate.

A closed mortgage requires you to maintain a specific payment schedule. A penalty usually applies if you repay the loan in full before the end of the term.

Convertible Mortgages
A convertible mortgage allows you to renew your mortgage at any time without penalty for a longer term, closed mortgage.

Short versus long term
When interest rates are either high or falling, there is a tendency to choose a shorter term mortgage. This strategy pays off if you can renew at a lower rate six months or one year later.
You may want to consider a longer term mortgage if interest rates are rising, if you have limited income or if you want to keep your mortgage payments the same for a few years.

The effects of interest rates on the term
As a rule, you'll find interest rates rise with the length of the term. The lowest interest rates are usually associated with schizos and one-year mortgages. Higher interest rates mean higher mortgage payments.

The three most common payment frequencies are monthly, bi-weekly and weekly. Increasing the frequency of your payments can allow you to pay off your mortgage sooner and reduce the total amount of interest paid.

You should select a payment frequency based on what is convenient for you. You may want to match your payments to your pay periods. If your goal is to pay off your mortgage quickly, consider accelerated weekly or bi-weekly payment plans. You'll make the equivalent of 13 monthly payments each year, rather than 12, and realize significant interest savings. Other options are to choose a shorter amortization period or take advantage of prepayment privileges.

Once you're settled on the type of mortgage that fits your financial circumstance, you are ready to start considering the various options available. Amortization refers to the number of years it will take to repay the loan in full - most commonly 25 years. Longer amortization periods result in lower payments, but increase the total amount of interest paid. If you can handle a shorter amortization period, you'll achieve tremendous savings on the interest cost of your mortgage and live mortgage free sooner!

Each mortgage payment consists of interest plus repayment of part of the principal. In the early years of a mortgage, a higher portion of your payment is used to pay interest. By the time you reach the last years of your mortgage, almost all of your payment will be applied against the principal.

The First-time Home Buyer's Plan (HBP) is a Federal Government initiative providing Canadian citizens the opportunity to withdraw up to $20,000 from personal registered retirement savings plans (RRSPs) for buying or building a home in Canada. To qualify, applicants must not have directly, or indirectly, owned a residence within the past five years.

  Under the HBP, qualifying withdrawals will not be included in annual income, and RRSP issuers will not withhold income tax from these withdrawn amounts. If you are jointly buying or building a home together with your spouse or other qualifying individual, each of you can withdraw up to $20,000.

  To withdraw these funds from your RRSPs, you must first have entered into a written agreement to buy or to build. You will also need to confirm that you will occupy the subject property as your personal residence. (Once you take occupancy there is no minimum period of time you are required to live there.)

  Your commitment to the HBP is to repay the amount withdrawn within a 15 year time period. In each year, you will need to make the minimum contributions to your RRSPs equal to 1/15 of the withdrawn funds until the total amount is repaid. You will receive a HBP Statement of Accounts on your annual Notice of Assessment showing you the total HBP withdrawal, the amount you have repaid to date, your HBP balance, and the amount you should repay the following year. Your repayment starts the second year following your withdrawal, and you may repay any amount in excess of the minimum to reduce payments in later years.

AMORTIZATION:
The actual number of years it will take to pay back your mortgage loan.

APPRAISED VALUE:
An estimate of the value of the property. Conducted for the purpose of mortgage lending by a certified appraiser. This appraisal is not to be confused with a building inspection.

ASSUMABILITY:
Allows the buyer to take over the seller's mortgage on the property.

CLOSED MORTGAGE:
A mortgage that locks you into a specific payment schedule. A penalty usually applies if you repay the loan in full before the end of the closed term.

CONDOMINIUM:
The owner has title to a single unit, as well as a share in the common elements such as elevators or surrounding land.

CONDOMINIUM FEE:
A common payment among owners which is allocated to pay expenses.

CONVENTIONAL MORTGAGE:
A mortgage loan issued for up to 75% of the property's appraised value or purchase price, whichever is less.

DOWN PAYMENT:
The buyer's cash payment towards the property. The difference between the purchase price and the amount of the mortgage loan.

EQUITY:
The difference between the home's selling value and the debts against it.

HIGH-RATIO MORTGAGE:
A mortgage that exceeds 75% of the homes appraised value. These mortgages must be insured for payment.

INTEREST RATE:
The value charged by the lender for the use of the lender's money. Expressed as a percentage.

LAND TRANSFER TAX, DEED TAX OR PROPERTY PURCHASE TAX:
A fee paid to the municipal and /or provincial government for the transfer of property from seller to buyer.

MATURITY DATE:
The end of the term, at which time you can pay off the mortgage or renew it.

MORTGAGEE:
The person or financial institution that lends the money.

MORTGAGOR:
The borrower.

MORTGAGE INSURANCE:
Applies to high-ratio mortgages. It protects the lender against loss if the borrower is unable to repay the mortgage.

MORTGAGE LIFE INSURANCE:
Pays off the mortgage if the borrower dies.

OPEN MORTGAGE:
Allows partial or full payment of the principal at any time, without penalty.

PORTABILITY:
A mortgage option that enables borrowers to take their current mortgage with them to another property, without penalty.

PRE-APPROVED MORTGAGE:
Qualifies you for a mortgage before you start shopping. You know exactly how much you can spend and are free to make a firm: offer when you find the right home.

PREPAYMENT PRIVILEGES:
Voluntary payments in addition to regular mortgage payments.

PRINCIPAL:
The amount borrowed or still owing on a mortgage loan. Interest is paid on the principal amount.

REFINANCING:
Paying off the existing mortgage and arranging a new one or re-negotiating the terms and conditions of an existing mortgage.

RENEWAL:
Re-negotiation of a mortgage loan at the end of a term for a new term.

SECOND MORTGAGE:
Additional financing. Usually has a shorter term and higher interest rate than the first mortgage.

TERM:
The length of time the interest rate is fixed. It also indicates when the principal balance becomes due and payable to the lender.

TITLE:
Legal ownership in a property.

VARIABLE-RATE MORTGAGE:
A mortgage with fixed payments, but fluctuates with interest rates. The changing interest rate determines how much of the payment goes towards the principal.

VENDOR TAKE-BACK MORTGAGE:
When the seller provides some or all of the mortgage financing in order to sell their property.

Want to know where you stand? With a few simple calculations, you can work out the home you can afford to buy. Use the examples above as a guide to calculate your own GDS and TDS ratios.

Understand GDS and TDS

GDS RATIO (Gross Debt Service Ratio):
The percentage of gross annual income required to cover payments associated with housing. Payments include mortgage principal, interest, property taxes and sometimes include secondary financing, heating, condominium fees or pad rent.

TDS RATIO (Total debt service ratio):
The percentage of gross annual income required to cover payments associated with housing and all other debts and obligations, such as car loans and credit cards. 

Example - GDS - Gross Debt Service Ratio

Monthly mortgage payment:
(principal and interest)* $1,191.84
Property taxes: (monthly) $150.00
Heating costs: (monthly) $105.00
Other:** $50.00
Total monthly payments:  $1,496.84
Gross monthly household income:  $6,000.00
  
GDS = Total monthly payments  (x 100)
           Gross monthly income    
GDS = $1,496.84  (x 100) = 24.95%
           $6,000.00     

* Principal and interest must be based on the total insured loan amount, including CMHC insurance premium (if you choose to add the premium to your mortgage and not to pay the premium up front).  Mortgage payment is based on a $200,000 mortgage, 5.25% interest rate, 25 year amortization.

** If you are purchasing a condominium, you must include 50% of the monthly condominium fee.  If the mortgage is for a mobile home (chattel mortgage) include 100% of the monthly site (pad) rent. 

Example - TDS - Total Debt Service Ratio

Total monthly housing payments:
(from GDS calculation):*
 $1,496.84
Other debts:
(personal loans, car loans, credit cards, etc.):
 $350.00
Total monthly debts: $1,846.84
Gross monthly household income: $6,000.00
  
TDS = Total monthly payments  (x 100)
           Gross monthly income    
TDS = $1,846.84  (x 100) = 30.78%
           $6,000.00 

CMHC - Canada Mortgage and Housing Corp.

Canada Mortgage and Housing Corporation (CMHC) is Canada’s national housing agency. Established as a government-owned corporation in 1946 to address Canada’s post-war housing shortage, the agency has grown into a major national institution. CMHC is Canada’s premier provider of mortgage loan insurance, mortgage-backed securities, housing policy and programs, and housing research.

We often here our friends, colleagues, mortgage people, real estate agents often talking about ‘Home Equity’. What is ‘Home Equity’ after all?
 

Current market value of a home minus the outstanding mortgage balance. Home equity is essentially the amount of ownership that has been built up by the holder of the mortgage through payments and appreciation. Typically, residential property is bought through a mortgage, which is then paid off over a number of years, often 15 or 30. After the mortgage has been fully repaid, the property then belongs to the mortgagor, namely the buyer. In the interim, however, the buyer simply builds up equity in the home. This is what a home equity loan borrows against. Although that equity cannot be sold, banks will lend money against it. Home equity loans offer significant tax savings due to the fact that the interest paid on a home equity loan is tax-deductible. Home equity loans are often used to consolidate other debt with high interest rates (like credit card debt), to finance large expenses (such as college or a wedding), or to purchase other costly items. There are two main types of home equity loans. The first type is the traditional home equity loan, also known as the second mortgage, which lends out a lump sum of money that must be repaid over a fixed period. The second type is the home equity line of credit, which provides the borrower with a checkbook or a credit card that is used to borrow funds against the home equity. Funds borrowed from a traditional home equity loan start accruing interest immediately after the lump sum is disbursed; funds borrowed from a home equity line of credit do not begin accruing interest until a purchase is made against the equity...
 

So, next time someone talks of ‘Home Equity’, we know it after all!

When you purchase a home, consider how you will protect your investment.

Homeowner's Insurance
Most mortgage lenders insist on fire insurance coverage at least equal to the loan amount or the building value, whichever is less. You should also consider a homeowner's policy which combines fire insurance on the building and its contents with personal liability coverage. Consult your general insurance agent or broker for professional advice on home insurance.

Mortgage Life Insurance
When lenders refer to mortgage insurance, they're referring to coverage that's provided by CHMC or MICC for a high ratio mortgage. Mortgage life insurance (MLI) is inexpensive coverage on your life which protects your family or beneficiaries by paying off your outstanding mortgage in the event of your death. For just pennies a day, you will have peace of mind knowing your beneficiaries will be mortgage free.
MLI premiums are based on two factors: your age and mortgage amount. Your premium is added to your mortgage payment so there's no extra paperwork, and it remains the same until your mortgage is paid off. Joint coverage for spouses is also available.

Disability Insurance
Disability Insurance is important if your mortgage payments depend entirely or in part on your income. Disability insurance provides replacement income if an accident or illness prevents you from working.

Job Loss Mortgage Insurance
Recently insurance companies have started to offer Job Loss Mortgage Insurance. This insurance covers the mortgage payments in the event that you involuntarily lose your job.