As a Fort McMurray mortgage planner, I live and work here and know the ins and outs when it comes to helping people in the oil and gas industry with their mortgage renewals & mortgage refinancing questions.
How much can I afford to pay for a home?
In order to calculate “affordability,” you must first need to know your taxable income, your debt load, and the associated monthly payments. If you are purchasing your principal residence, calculate 35% of your income to go toward housing costs, including a mortgage payment, property taxes, and heating costs. If you are purchasing a condo, 50% of the estimated monthly condominium maintenance fees must also be included in the calculation.
Next, calculate 42% of your taxable income and deduct all monthly debt payments, such as student loans, car loans, credit cards, and lines of credit payments. The lesser of either calculation will be used to determine how much of your income can be used toward housing-related payments, including your mortgage payment. These calculations are based on the usual guidelines of lenders and will help you determine what the ratios say you can afford.
In addition, calculate how much you think you can afford to pay for a home. If you are more comfortable with a payment amount that is less than 35% of your income, target the lower amount instead of stretching yourself financially. Rather than ending up “house poor,” targeting lower housing costs will give you more financial flexibility for savings, education, renovations, and vacations. Structure your payments so that you can still enjoy simple luxuries.
What is a home inspection? Should I have one done before purchasing a home?
A home inspection is a visual examination of a property to evaluate the overall condition of the home. The inspector will check all major components of the home, including the roof, foundation, ceilings, walls, floors, crawl spaces, attics, and retaining walls. The inspector will also examine the electrical, plumbing, heating, cooling systems and exterior elements of the home such as drainage, grading, and weatherproofing. The results of the inspection are provided in detailed written form to the purchaser, usually within 24 hours of the inspection.
A pre-purchase home inspection is always recommended, as it can reveal major structural repairs, or confirm that the house is in good condition. A home inspection helps you make an informed purchase or walk away.
Many home buyers make the Offer of Purchase conditional upon inspection. If any issues are revealed during the inspection, you can request a reduction in the price, ask the seller to pay for repairs, or withdraw your offer.
What is the minimum down payment needed for a home?
The minimum down payment required on homes less than $1M is 5% on the portion of the house price up to $500,000.00 and 10% on the portion of the house price that costs more than $500,000.00. Along with the down payment, you must demonstrate that you can cover the applicable closing costs such as legal fees and disbursements, appraisal fees, home inspection fees, land title registration fees, pro-rated property taxes and a survey certificate, where applicable.
Flex-Down programs from mortgage insurers allow you to borrow your down payment. This program has been developed for strong, established homebuyers who have excellent credit history, good job tenure but have not been able to save the required minimum down payment.
Generally, lenders will accept a gift from a family member as a qualifying down payment. However, it must be accompanied by a letter signed by the donor stating that the funds are a true gift and not a loan.
Mortgages with less than 20% down require mortgage loan insurance from a provider such as CMHC, Genworth Canada and Canada Guaranty.
What is mortgage loan insurance?
Mortgage loan insurance is required by law to insure lenders against defaults on high-ratio mortgages. High-ratio mortgages have a loan-to-value ratio greater than 80% (in other words, the mortgage was secured with a down payment of less than 20%). Mortgage loan insurance is provided by CMHC, a crown corporation, Genworth Canada and Canada Guaranty, who are approved private corporations.
The insurance premiums are paid by the borrower and can be applied directly to the mortgage amount. Premiums range from 0.60% to 4.50% (effective March 17, 2017). The higher the down payment percentage, the lower the premium. Mortgage loan insurance is not the same as mortgage life insurance.
What is a conventional mortgage?
A conventional mortgage covers 80% or more of the purchase price (in other words, a conventional mortgage requires a down payment of 20% or higher). As a result, the loan-to-value ratio is 80% or less. Conventional mortgages do not normally require mortgage loan insurance (some conditions apply).
How does bankruptcy affect mortgage qualification?
Some lenders would consider providing mortgage financing. It all depends on the circumstances of your bankruptcy and your current financial picture. General rule of thumb is the bankruptcy must be discharged for 2 years and there should be 2 re-esblished credit facilities for a minimum of 12 months.
How will child support affect qualifying for a mortgage?
If you pay child support and/or alimony to another person, this amount is generally deducted from your total income before determining what mortgage you will qualify for.
If you receive child support and/or alimony from another person, this amount is generally added to your total income before determining what mortgage you will qualify for. You must furnish proof of regular receipt for a period of time as determined by the lender.
Can I get a mortgage to purchase a home that requires some improvements?
Subject to qualification, you can obtain a mortgage to purchase a home. With as little as the minimum down payment required on the purchase, you may qualify to buy a home and finance home improvements. Insured mortgages provided by CMHC, Genworth Canada and Canada Guaranty are available to cover the purchase price of a home and the cost of renovations (some conditions apply) allowing you to buy a home that may require some upgrading or improvements.
For cosmetic improvements such as a kitchen remodel or installing hardwood flooring, the mortgage loan insurance premium remains unchanged from the standard schedule. If the improvements are deemed structural, the mortgage loan insurance premium will increase by .50% over the standard schedule.
Can I use gifted funds as a down payment?
Yes, you can use funds gifted from a family member as an acceptable down payment. Generally, the lender will require a gift letter signed by the donor, pledging that the funds are a true gift and not a loan. Where mortgage loan insurance is needed, CMHC, Genworth Canada and Canada Guaranty requires that the gift money be in the purchaser’s possession 30 days prior to closing. See “what is mortgage loan insurance?” for more information.
What is a pre-approved mortgage?
A pre-approved mortgage secures an interest rate guarantee from a lender for a specified period of time (typically 60-120 days) and for a set amount of money. Pre-approval is calculated based on your credit score, down payment, debt service ratios, and supporting documentation. Some conditions may apply, such as proof of income (pay stubs or Notice of Assessment) or proof of down payment from your own resources.
Mortgage pre-approval helps simplify the house hunting process. For one, it ensures that you narrow your search to properties within your affordable price range. It also means you will be a very attractive buyer as you can make an offer right away when you find the right home.
All things considered, securing a pre-approved mortgage is one of the first steps a purchaser should take before starting the buying process.
Should I renew my mortgage?
Often, lenders will guarantee an interest rate for as long as 120 days before your mortgage matures. If you are not increasing your mortgage, they may also cover the costs of transferring your mortgage. With a rate guaranteed well before your mortgage’s maturity date, you won’t need to worry about higher rates. If rates drop before the actual maturity rate, the new lender will adjust your interest accordingly.
Most lenders send out mortgage renewal notices and offer existing clients their posted interest rates. While this may sound convenient, the rate you are being offered is not usually the best one available. Always explore the possibility of a lower interest rate with your current lender or another lender. Otherwise, you may pay a much higher interest rate than you should.
What is a down payment?
It is rare for home buyers to have cash available to buy a home outright, especially if they are first-time home buyers. Instead, most Fort McMurray home buyers borrow money from a lender to cover the majority of the cost. Even with a mortgage, you will still need to raise money for a down payment.
The down payment is the portion of the purchase price that you pay for yourself, with your own funds, up front. The down payment represents your financial stake or equity in the home. This amount should be determined before you begin the home buying process.
With a larger down payment, your home will cost less in the long run. You will require a smaller mortgage, which means interest costs will be lower. Over the years, this will add up to significant savings. With a down payment of 20% or more, you may not need mortgage insurance, which will save you money in premiums as well.
How can you pay off your mortgage sooner?
Paying off your mortgage sooner saves you money on interest and frees up funds to go toward savings, education, retirement, vacations, home improvement projects, and more.
What steps can you take to pay off your mortgage faster?
- Select an accelerated payment schedule
- Increase your payment frequency schedule
- Make principal prepayments
- Make double-up prepayments
- Increase the payment
- Select a shorter amortization at renewal
How can you use your RRSP to help you buy your first home?
If you are a first-time home buyer in Fort McMurray, you can take advantage of the Home Buyers Plan (HBP) administered by the Canada Revenue Agency (CRA). The HBP allows you to withdraw money from your Registered Retirement Savings Plan (RRSP) tax-free to use a down payment. About 50% of first-time home buyers today use this method.
Some conditions and eligibility criteria apply if you wish to participate in the HBP. Contact CRA for more information.
How much can you withdraw?
- Up to $25,000.00 per person
- If you are purchasing a home with your spouse, partner, or another individual, you can each withdraw up to $25,000.00 for a total of up to $50,000.00
- The withdrawal amount is tax-free and does not need to be included on your income on your annual income tax return
What is the payback period?
- You must begin paying back to your RRSP the second year after the initial withdrawal
- All withdrawals must be paid back to your RRSP within 15 years
- CRA will determine your minimum yearly repayment amount and notify you
- If you fail to remain the amount due in a given year, it is included in your taxable income for that year. You will have to pay income tax on this amount.source: Financial Consumer Agency of Canada
What are the costs associated with buying a home?
The most major up-front cost is a down payment furnished from your own funds, or a true gift from a family member.
Conventional mortgages require a down payment of 20% or more. A low down payment insured mortgage can be acquired upon qualification with a down payment as low as 5%.
You will also require money for closing costs, such as legal fees and appraisal fees. As a general rule, set aside 1% of the basic purchase price to account for these costs.
A home inspection by a professional building inspector will require payment of an inspection fee. This is highly recommended as it can reveal structural issues and help you make an informed negotiation or purchase.
You will also be responsible for paying the fees and disbursement for the lawyer or notary representing you during the home purchase process. Fees for these services may vary significantly, so shop around or ask for recommendations.
You will also be responsible for closing and adjustment costs and interest adjustment costs between buyer and seller. There is no land transfer tax in the province of Alberta, but land transfer registration fees may apply.
Finally, you must have property insurance in place by the closing date. You will also be responsible for your moving costs, in addition to the necessities you will need to purchase for a smooth start in your new home, such as appliances, furniture, cleaning materials, and lawn care equipment.
What should the length of my mortgage term be?
Mortgage terms can vary widely in length, from six months to ten years. As a general rule, shorter terms have the advantage of lower interest rates. Long-term mortgages usually come with higher rates.
Most home buyers will opt for a four- or five-year mortgage, but that is not the only option. You may consider a short-term mortgage if you have a higher tolerance for risk, if you are interested in monitoring rates, or if you are not prepared to make a long-term commitment at this point in time.
When deciding on the right mortgage term, weigh the following questions:
- Do you expect to sell your house in the near future? In that case, a short-term mortgage may be the best option.
- Do you suspect that interest rates are not likely to drop further? In such a case, a mortgage with a longer term may be the right fit. If you think rates have peaked and are likely to drop, a short or medium mortgage term may be a good fit, in the hope that rates drop by the time your term expires.
- Is security a priority? A longer mortgage term will allow you to more accurately budget and manage your monthly expenses.
- Do you have the time to closely follow interest rates and risk increased mortgage payments upon renewal? In such a case, a short mortgage term may be the right fit.
What are the monthly costs of homeownership?
As a homeowner, there are many financial responsibilities you will need to fulfill.
Some costs, such as taxes, are not billed monthly. You will need to do the calculations to evaluate them as monthly costs. Here are some expenses required of homeowners:
This is the most significant monthly expense for most homeowners. The amount of your mortgage payment will be determined by the mortgage term, amortization, payment schedule, and loan insurance premiums, if applicable.
You can remit property tax directly to the municipality (OAC), in which case you may be required to show proof of payment to your financial institution periodically. Alternatively, it can be folded into your monthly mortgage payment.
In some municipalities, school taxes are collected and payable in a single lump sum, often due at the end of the school year. In other municipalities, they are integrated into the property taxes.
You will responsible for all utility bills associated with your home, including heating, gas, electricity, water, telephone, cable, and internet.
Maintenance and Upkeep
As a homeowner, you are responsible for all costs associated with the maintenance and upkeep your home. This includes roof repairs, electrical and plumbing maintenance, lawn care, snow removal, pool maintenance if applicable, and so on. Preventative maintenance will help keep your home in good condition and avoid costly repairs down the road. Keeping your home in good condition will also help it grow in value over the years, and remain desirable to potential buyers should you decide to sell in the future.
Should you go with a short or long-term mortgage?
The answer depends on your lifestyle, risk aversion, and short- and long-term financial goals. If you have a busy life and cannot monitor mortgage rates, a longer-term mortgage is worth considering. Many homeowners choose 4, 5, and 7-year mortgages to take advantage of today’s rates while enjoying long-term security knowing that your rate is locked in.
If you prefer mortgage flexibility and are interested in monitoring rates, explore short-term mortgage options.
What is a fixed rate mortgage?
Fixed-rate mortgages have interest rates locked in for a pre-determined term, generally between 6 months to 10 years. A fixed-rate mortgage offers security in knowing what you will be paying for the term.
What is a variable rate mortgage?
Variable-rate mortgages are availabe for three to five years, depending on the lender. Rates fluctuate with the marker prime lending rate during the term. When interest rates decline, more of the payment goes toward the principal. When interest rates increase, more of the payment goes toward the interest. Open variable-rate mortgages allow prepayment of any amount on any payment date, with certain minimums.
For more information or any questions you may have about mortgage pre-approval, give me a call at 780-370-1490 or contact me to discuss further or fill out the form below to get in touch with me about your mortgage solutions: