Are you buying your first home?
Helpful information for home buyers
Whether you’re buying your first home, upsizing or downsizing to a new home or simply deciding to switch mortgages to save money, you’ll probably experience a range of emotions as you go through the process.
These may include:
- excitement at the prospect of owning a new home;
- anxiety/worry about your finances; and
- frustration/bewilderment over all the information you need to know in order to make an informed decision.
Manulife Bank can help. Our mortgage experts have written a series of short, informative articles that offer practical advice and valuable information on a wide variety of topics surrounding your home purchase and your mortgage.
Just like there are different types of homes there are different types of mortgages to suit the needs of diverse home buyers. To select the right mortgage, it’s important to understand your options. Here are some of the choices available to you:
Conventional vs. high-ratio mortgage
When you buy a property, you have to make a down payment. If your down payment is at least 20% of the value of the property (as calculated by the loan-to-value ratio1), then you can get a conventional mortgage. These mortgages typically do not require mortgage insurance.
With a down payment of less than 20% (as calculated by the loan-to-value ratio), you may be able to get a high-ratio mortgage. In most cases, you’ll have to get mortgage insurance from an approved mortgage insurer such as Canada Mortgage and Housing Corporation (CMHC), Canada Guaranty Mortgage Insurance Company (Canada Guaranty) or Genworth Financial Mortgage Insurance Company Canada (Genworth) to protect the interests of the lender in case you default. The cost of this insurance, usually referred to as the premium, can either be paid up front or added to your regular principal and interest amount to arrive at your total mortgage payment.
TIP - Aim to make a 20% down payment when you apply for your mortgage. If you can put down at least this much, you likely won’t need to get mortgage insurance and won’t have to pay a premium.
Fixed rate vs. variable rate mortgage
A fixed rate mortgage is one where the interest rate is predetermined and does not change throughout the loan term. Your payments will not fluctuate.
- A fixed rate mortgage assures you the same interest rate will be applied to the loan throughout the term of the mortgage, so you know exactly how long it will take you to repay the loan. If you like to plan ahead, you might find this certainty appealing.
- If you have a fixed rate mortgage and interest rates go up, you’re shielded from the increase.
- If you have a fixed rate mortgage and interest rates go down, you’ll continue to be charged the same interest rate and will not receive the lower rate.
A variable rate mortgage, on the other hand, is one where the interest rate may increase or decrease from time to time.
- If interest rates go down, more of your payment will go towards the loan principal so you’ll pay off the mortgage faster.
- If rates go up, more of your payment will be allocated towards interest and it will take you longer to pay off the mortgage. You may have the flexibility to convert to a fixed rate mortgage at any time during the term and lock in your rate, however additional fees may apply.
Open term vs. closed term mortgage
An open term mortgage allows you to pay back the borrowed amount whenever you want, without notice or prepayment penalty.
- If you take advantage of this flexibility and use any extra cash – such as a tax refund or salary increase – to pay down the balance of your mortgage, you could reduce the interest you pay over the life of your mortgage and pay your mortgage off faster.
- Because of their flexibility, open term mortgages generally have higher interest rates than closed term mortgages.
A closed term mortgage cannot be repaid beyond the allowable prepayment privileges, renegotiated or refinanced prior to the end of your selected term without incurring prepayment charges.
- You’ll likely pay lower interest rates with a closed term mortgage.
- You might have various prepayment privileges, including being able to increase your payments and to make lump-sum payments, without incurring a penalty.
- You generally can’t pay down the balance on a closed term mortgage in advance (except where prepayment privileges allow) without being charged a prepayment penalty.
An all-in-one account combines all of your savings and debts into one efficient, flexible account.
By consolidating your debt at a competitive interest rate and using your savings and income to reduce debt faster, you could take years off your mortgage and save thousands in interest costs.
- Could reduce monthly interest costs by consolidating your debt at one lower interest rate.
- Could help you reduce your debt more quickly by allowing you to apply your short-term savings and income directly against your principal.
- You maintain the flexibility to access money you’ve deposited to your account at any time, up to your borrowing limit, if your needs change.
- Allows you to customize your debt by dividing it into various portions with different rates and features.
- Having all of your savings and loans combined in a single account makes it easy to see exactly where you stand financially.
- Requires financial discipline to use the account successfully, since a portion of your home equity remains available to you.
Collateral mortgages vs. Conventional (standard) mortgages
All mortgage loans are secured by real property (such as your house), and that security is recorded in the appropriate provincial or territorial registry office. Some provinces refer to this as the registration of an encumbrance or a "charge" (or “hypothec” in Quebec). There are two types of charges that may be registered: conventional (also known as "standard") or collateral.
Manulife One and Manulife Bank Select are registered as collateral charges, while our Preferred Rate Mortgage is registered as a conventional (standard) charge. Learn more about the similarities and differences between collateral and conventional (standard) charges here or on the Canadian Bankers Association website.
1 The loan-to-value, or LTV, ratio is a calculation of the mortgage amount divided by the appraised value of the property. Here’s an example for a home appraised at $200,000 with a mortgage of $160,000.
• Mortgage amount = $160,000
• Appraised value = $200,000
• LTV = 80%
Therefore, the required down payment is 20%, or $40,000.
This information is for illustrative purposes only.
The down payment is an important part of the home buying process, especially when it comes to first time buyers. It affects everything from how much home you can afford to the size of your mortgage payments. So the more you know about your down payment, the better.
Let’s start with a definition. A down payment is the portion of a home’s purchase price that you pay yourself. The rest of the purchase price is obtained through a mortgage. The larger your down payment, the smaller your mortgage will be. And a smaller mortgage means you’ll likely have lower regular payments and pay less interest in the long run.
So the first rule is have as large a down payment as you can. If your down payment is less than 20% of the appraised value of your home, you will need to get a high-ratio mortgage. This requires that you purchase default insurance, which will increase your mortgage payments.
Tips on how to maximize your down payment:
- Save for your down payment. Consider setting up an automatic savings plan through pre-authorized contributions from your chequing account to a high-interest savings account to conveniently set aside money for your down payment. You’ll be surprised how even small contributions add up over time.
- Use your RRSPs. First time home buyers are allowed to withdraw up to $25,000 each ($50,000/couple) tax-free from your Registered Retirement Savings Plan (RRSP) to use as a down payment towards a qualifying home (NOTE – the withdrawn amount must be repaid in full to your RRSP within 15 years in order to avoid paying taxes on it).
- Consider selling other investments. If you have any investment products such as bonds, mutual funds or shares outside of your RRSP, you may want to sell them to supplement your down payment. (NOTE – the sale of such investment products could have tax implications. Speak to a tax professional before proceeding.)
- Use Monetary Gifts. If your family is planning to help you purchase your new home, use their financial contribution as part of your down payment (NOTE – you may need a letter specifying that these funds are a gift and not a loan).
- Consider selling assets. If you have any valuable assets such as art, antiques, jewelry, etc., you may want to consider selling some or all of them to help augment your down payment.
When it comes to down payments, the sooner you start saving the sooner you can start buying. So start early, save often and you’ll be buying your new home in no time.
When you’re out looking at new homes, it’s important to remember that the purchase price is NOT the final price you pay. There are also things called ‘closing costs’ that need to be factored into the equation; and these could add thousands of dollars to the final price.
This may sound discouraging but it doesn’t have to be. As long as you are aware of these additional costs and plan for them, you should have no trouble buying your new home.
Some examples of closing costs include:
- Appraisal fees. Depending on the type of property you’re purchasing, your lender may require that an independent appraiser determine its value.
- Title Insurance. Title insurance protects you in the event someone challenges the ownership of your property. The cost for this service varies but it can add hundreds of dollars to your closing costs.
- Legal fees. You’ll need the services of a lawyer or notary during the purchase process. Fees for this service can vary so prepare yourself by getting an estimate up front.
- Land Transfer Tax. Most jurisdictions require you to pay a one-time land transfer tax when you assume ownership of the property. The amount of tax is usually based on a percentage of the home’s purchase price. Your real estate agent can give you an estimate of what this will cost in your area.
- Upgrade Charges. If you’re buying a newly constructed home and have changed elements of its design and structure, your builder will charge you for each change. You can pay these costs in advance in cash, or you may be able to add them to your mortgage.
- Home Inspection Fees. If you are buying an older home you may want to consider having a home inspection done beforehand to determine if there are any major structural problems with the home. Your real estate agent should be able to give you an estimate of what this will cost in your area.
- Utility account opening costs. Some utilities and services may ask for a payment to open the account, or may ask for a security deposit. These can be hundreds of dollars, so do some research so you are prepared for these costs.
Get an estimate of these closing costs and use them when calculating the total cost of buying your new home. If you don’t you may need to increase your mortgage amount or take the money out of your down payment in order to cover these costs. But that will probably end up costing you more in the long run. So plan ahead and save.
Buying a new home takes some pre-planning in order to do it properly. You need to save for a down payment, plan for closing costs and get pre-approved for a mortgage. But once that’s all done, you're home free, right? Not quite.
You also need to plan for the ongoing costs of being a homeowner. That means budgeting for things like:
- Mortgage payments – which could be weekly, bi-weekly or monthly.
- Property taxes – charged by your municipality and calculated based on the size of your property. Your real estate agent should be able to tell you what your property taxes will be.
- Home/property insurance – to protect your valuable asset in case of fire, theft or other damage. Costs for this vary depending on the size and location of your home.
- Condo maintenance fees – if you purchase a condominium, you will be required to pay monthly fees for the maintenance of the common areas of the property (lobby, parking, grounds, etc.). Your condo developer should be able to tell you what these fees will be.
- Utilities – including heat, electricity, water, etc.. Usually paid monthly.
- Renovations – if you plan to renovate your new home to suit your needs, you will need to put money aside in savings each month to pay for the renovations. Or, you could take out a loan but the monthly loan payment needs to be considered as part of your budget.
- Property maintenance/repair costs – includes such things as furnace maintenance, possible roof/eaves maintenance, drain repair/maintenance, tree trimming, etc.
- Emergency Funds – to cover the cost of unforeseen expenses.
Taking the time to work out your household budget before you buy your new home means you’re less likely to face unexpected surprises afterwards. And that means you’ll get more enjoyment out of your new home, rather than worrying about how to pay for it.
Getting pre-approved for a mortgage should be one of the first things you do after you decide that it’s time to buy a new home. Doing so gives you a tremendous advantage when you're out shopping for homes because you’ll know:
- exactly how much the bank is willing to lend you;
- exactly how much you can afford when you’re making an offer; and
- what your expected mortgage payments will be.
In addition, being pre-approved for a mortgage also gives you a distinct advantage over other home shoppers who are not pre-approved. That’s because home sellers prefer offers that are not conditional on financing (if the financing doesn’t come through, the offer fails and they need to put their house back on the market). With a pre-approved mortgage you can put in a firm offer that’s more appealing to the seller.
PLUS … with a pre-approved Manulife Bank mortgage, you can request an interest rate commitment. This commitment is usually in place for 90 days (120 days for new construction). If interest rates rise during that time, you’re guaranteed to get the lower locked-in rate. But, if interest rates fall, Manulife Bank gives you the lower rate at the time the deal closes. So you could end up with lower mortgage payments and/or lower overall borrowing costs.
There’s no cost to you for getting a pre-approved Manulife Bank mortgage, nor does it lock you into getting a mortgage with Manulife Bank. So you have every reason in the world for getting pre-approved, and no reason why you shouldn't.
When shopping for a home, begin by determining:
- what you need (number of bedrooms, small yard or big, garage or street parking, etc.);
- what style(s) you like (house or condo, semi-detached or detached, etc.);
- where you would like to live (inner city, suburbs, close to schools, close to work, close to family, etc.)
- and, most importantly, what you can afford.
This determines your wish list for a new home. But you need to understand that each component on your wish list has a cost associated with it. For example, larger homes generally cost more than smaller ones, depending on location. You need to weigh the importance of each component on your wish list against its relative cost, with cost being the critical factor. Because unlike shopping for most other items, paying more for a home than you can afford could have serious financial consequences over a long period of time.
So knowing how much you can afford and staying within your budget when shopping for a new home is very important. There are several factors to consider when calculating how much you can afford. These include:
- your down payment;
- your household income;
- your other monthly debt expenses;
- your estimated housing-related costs; and
- your closing costs.
To help you determine what you can afford, mortgage lenders normally use the following two calculations as a guide:
Gross Debt Service (GDS) Ratio – This is the percentage of your gross household income (that’s the combined income of you and your partner/spouse before taxes) that goes towards housing expenses (mortgage payments, property taxes, heating costs, etc.). Your GDS ratio should not exceed 32% of your gross household income.
Total Debt Service (TDS) Ratio – This is the percentage of your gross (before tax) income that should be used for all your debt payments. This includes:
- housing costs (mortgage payments, property taxes, heating costs, etc.);
- credit card payments;
- car loans; and
- any other personal loans.
In most cases, your TDS ratio should not exceed 40% of your gross household income.
Your mortgage is like any other loan – you need to pay back the full amount that you borrowed (known as the mortgage principal) as well as interest charges. The longer it takes for you to pay back the principal, the more interest you pay. So if you want to lower your borrowing costs, you need to pay back the principal as soon as possible.
There are several options for lowering your overall borrowing costs. These include:
Prepayment privileges – In general, closed term mortgages allow you to:
- make lump-sum principal payments toward your principal; and/or
- increase your regular mortgage payments beyond what’s required by your mortgage agreement.
With an open term mortgage you can generally repay any or all of the mortgage principal at any time.
Amortization – this is the number of years it would take to pay off your entire mortgage with your current mortgage payment. Manulife Bank mortgages offer amortization periods of up to 30 years. Choosing a shorter amortization period can take years off the life of your mortgage. Your payments will be higher but you could save thousands in interest costs.
Payment Frequency – Something as simple as changing the frequency with which you make your mortgage payments can help you lower your borrowing costs. Common mortgage payment frequency options include:
- Monthly – same day each month/12 payments per year
- Semi-Monthly – Two payments each month/24 payments per year
- Bi-Weekly – Payments every 2 weeks/26 payments per year
- Accelerated bi-weekly – same as bi-weekly but with a higher payment/ 26 payments per year
- Weekly – same day each week/52 payments per year
- Accelerated Weekly – same as weekly but with a higher payment/ 52 payments per year
Take a look at the chart below to see how each payment frequency choice affects your overall borrowing costs. This example is based on a $200,000 fixed rate mortgage at 5% interest amortized over 25 years.
As you can see, switching to accelerated weekly or bi-weekly payments could help you save thousands in borrowing costs over the life of your mortgage.
There are many different mortgage types available for you to choose. Each has its advantages and disadvantages. But even with all these choices sometimes no one single mortgage type is the right fit.
That’s why you can split some mortgages into ‘portions’. This allows you to enjoy the advantages of several mortgage types all in one mortgage account.
The benefits of splitting your mortgage across different types and terms include:
- Enjoying the best of both worlds. Often, variable rate mortgages feature lower interest rates than fixed rate mortgages. But you may be uncomfortable with the risk that rates can change during the term of your mortgage. By putting a portion of your mortgage in a variable rate term and keeping a portion in a fixed rate, you could get the best of both worlds – interest savings to lower borrowing costs as well as rate security to help manage your risk around rising interest rates.
- Lowering your effective interest rate. With shorter term mortgages you typically get lower interest rates. But longer term mortgages offer a sense of stability and security. You could enjoy the advantages of both by splitting your mortgage between short and long term portions. The combination would give you an effective interest rate somewhere between the two, rather than settling for a higher long term rate only.
- Tracking a portion of your mortgage for tax purposes. If you work out of your home you could put part of your mortgage (the amount equal to the percentage of your home that you use as your office) in a separate portion. So you can track the costs associated with this portion separately from the rest of your mortgage. This will help simplify things tremendously at tax time.
- Reducing your mortgage renewal risk. No one can predict the future, especially when it comes to interest rates. By splitting your mortgage into portions you can renew it in steps over time, thereby potentially reducing the risk of facing higher rates for the entire mortgage amount when it comes time to renew.
An example of how splitting your Manulife Bank Select mortgage can help save on interest.1
Steve and Melissa have a $250,000 Manulife Bank Select mortgage. They like the low variable mortgage rates that are currently available but they don’t think they’re going to last. They want to take advantage of this low rate now but would like some stability if rates rise.
Their bank representative recommends they split their mortgage into two portions: $150,000 in a 5-year variable rate and $100,000 in a 5-year fixed rate.
By dividing their mortgage into portions, they’re able to take advantage of the lower variable interest rates on part of their mortgage. And, by having a portion of their mortgage in a 5-year fixed term, they’ve reduced the potential increase to their overall payments if interest rates go up.
1 The illustration assumes a 5-year fixed rate of 3.50% and an initial 5-year variable rate of 2.90% which increases 0.25% per year of the term and an amortization period of 25 years.
What will my payments be?
Your mortgage payments are calculated based on a number of factors. These include:
- your interest rate;
- whether you want a fixed rate mortgage or variable rate mortgage;
- the amount of the mortgage you need;
- your payment frequency;
- your term; and
- your amortization period.
Use our online calculator to help you estimate what your payments will be.
With Manulife One, you will have set payments for any debt above 65% of the appraised value of your home, as well as for any debt you’ve allocated to a sub-account with a fixed term. However there are no pre-defined payments for debt in your Main Account. All deposits made to your Main Account automatically reduce your principal.
What’s the difference between short and long term mortgages? What are the benefits of each?
Mortgages are available in terms of different lengths ranging from 6-months to 10 years. Interest rates on shorter-term mortgages are typically lower than those of longer-term mortgages. Short and long-term mortgages each have their own benefits depending on your individual situation, personal preferences and comfort level. If you think rates may drop in the near future, you may choose a short-term mortgage in the hopes of taking advantage of lower rates when your term ends. If you think interest rates are going to rise, you may choose a fixed-rate, longer-term mortgage to ‘lock-in’ this lower rate today. It’s also possible that over the longer term, the fixed rate may end up being lower than the effective interest rate of shorter terms renewing over that time period.
What is mortgage life insurance?
Mortgage life insurance and mortgage disability and job loss insurance (also called Creditor Insurance) is an optional insurance policy that covers your mortgage debt in the event of death, disability or job loss.
What is my credit score and what does it mean?
Your credit score is a numerical rating ranging from 300 to 900 which reflects your ability to repay debts. The higher your credit score, the more likely you are to be approved for a loan.
Factors that affect your credit score include, among others, your payment history on bills and debts, outstanding debt, credit account history, recent inquiries by lenders and the types of credit you have. There are several strategies available to help you improve your credit score. Some of the more common tips are as follows:
- be sure to pay all your bills on time;
- reduce your debt so that your account balances are below 50% of your available credit;
- avoid excessive inquiries by lenders by not applying for frequent loans; and
- review your credit report periodically to ensure there are no inaccuracies.
You can request a copy of your credit report from one of the following credit bureaus - Equifax Canada or TransUnion Canada.
Amortization Period: the number of years it would take to pay off your entire mortgage at your current mortgage payment. This is usually longer than the term of the mortgage. For example, you may have a mortgage with a five-year term and a 25-year amortization period.
Annual Percentage Rate (APR): the annual cost of a mortgage, including interest payments as well as all other fees and costs associated with your mortgage loan. Because the APR includes all the costs, it is usually higher than the interest rate alone. The APR follows a standard formula, which enables you to compare mortgages from different lenders.
Appraisal: the process of estimating the current value of a property. Lenders may get an appraisal done before they approve a mortgage to ensure they are lending on the accurate value of the property.
Appraisal Cost (or Appraisal Fee): fee charged by an expert to estimate the current value of a property.
Appraised Value: an estimate of the current value of a property. The value is generally determined by sale prices of similar properties in the same area and does not include a home inspection. The appraised value of the property may or may not be the same as the purchase price.
Blended Rate: an interest rate you may be offered when you refinance your mortgage. It’s a blend of the previous mortgage rate and the new rate.
Bridge Financing: money lent when the property you are purchasing closes before the property you are selling. Because you haven’t yet received the money from the property you are selling, you may need to apply for a bridge loan in order to finalize the closing on the new property. You then pay back this loan when your current property closes. The cost of bridging varies – in addition to the mortgage payment and interest cost, there may also be a set-up fee.
Canada Guaranty: one of the companies offering mortgage insurance for high-ratio mortgages. In Canada, you are required to insure your mortgage if your down payment is less than 20% of the purchase price of the property.
Canada Mortgage and Housing Corporation (CMHC): one of the companies offering mortgage insurance for high-ratio mortgages. In Canada, you are required to insure your mortgage if your down payment is less than 20% of the purchase price of the property. CMHC is a federal Crown Corporation that administers the National Housing Act and implements all federal housing policies and programs.
Canada Mortgage and Housing Corporation (CMHC) insurance premium: amount added to your mortgage payment to cover the CMHC mortgage insurance. Mortgage insurance is required on all high-ratio mortgages, that is, all mortgages greater than 80% of the purchase price of the property. It insures the lender against loss in the event the client defaults on the mortgage. CMHC is one of the companies offering mortgage insurance for high-ratio mortgages.
Closed Term: a mortgage that is locked for a specific term, during which the mortgage cannot be prepaid beyond a lender’s prepayment privileges, renegotiated or refinanced without incurring a prepayment charge. For example, if you have a mortgage with a 5-year term and you sell your house before the five years is up, you will pay a prepayment charge to the lender in order to close the mortgage. The amount of the prepayment charge can be found in the terms of the mortgage. Interest rates for closed term mortgages are generally lower than those for open term mortgages offering you the ability to save on interest costs.
Closing Costs: costs that must be paid in order to finalize a property purchase or sale. Standard closing costs may include, but are not limited to, legal fees, appraisal fees, title insurance and land transfer taxes. Closing costs are not added to the mortgage and you should budget for approximately 4% of the purchase price to cover them.
Closing Date: the date when a property sale is official and the new owner takes possession. On or before that date, both the buyer and the seller will meet with their lawyers to sign all the documents and finalize the closing costs. On the closing date, the buyer now has the title to the property and the mortgage takes effect.
Conventional Mortgage: a mortgage for up to 80% of the appraised value of the home. If you have a down payment of 20% of the purchase price or more, then you qualify for a conventional mortgage and likely won’t have to obtain mortgage insurance.
Creditor Insurance: an optional insurance policy that pays your mortgage debt in the event of your death, and makes your regular mortgage payments for a period of time in the event of disability or job loss.
Credit Bureau: an organization that provides information on individuals’ borrowing and bill paying habits. Lenders use a credit bureau to determine a person’s ability to pay back a loan.
Credit Report: a record of someone’s payment history and debt load provided by a credit bureau. You can order a copy of your credit report by contacting the credit bureau. You should review your credit report regularly to ensure there are no mistakes.
Credit Score: a numerical rating ranging from 300 to 900 that represents a person’s creditworthiness. The rating is provided by a credit bureau and is determined by that person’s payment history and debt load. When you apply for any type of loan or credit, lenders will use your credit score as a basis for determining whether or not they will extend that credit to you.
Daily Closing Balance: the balance in your bank account, or owing on your mortgage, at the end of the business day.
Default (or Payment Default): usually means not making your mortgage payments. However, you can default on a mortgage if you are no longer meeting the terms of the mortgage, for example, if your home insurance gets cancelled or you don’t pay the property taxes.
Discharge Fee: fee paid to your lender to prepare a mortgage discharge. This fee varies from province to province and from lender to lender.
Discharge of Mortgage (or Mortgage Discharge): process of paying off your mortgage balance in full, switching your mortgage from one lender to another or selling your home and moving your mortgage to another lender. You may be required to pay a discharge fee to your lender for the preparation of your mortgage discharge.
Down Payment: cash portion of the home’s purchase price that you pay for yourself. If the down payment is less than 20% of the purchase price, then the mortgage is considered to be a high-ratio one and you may have to purchase mortgage insurance. This is the initial equity you have in your home.
Equifax Canada: a credit bureau providing information on individuals’ borrowing and bill paying habits. Lenders use a credit bureau like Equifax to determine a person’s ability to pay back a loan. You can contact Equifax to order a copy of your credit report.
Equity (or Home Equity): the value you own in your property above all other claims on the property. This is typically the difference between any outstanding mortgage registered against the property and the market value of the property. For example, if your home is valued at $300,000 and you have a mortgage balance of $200,000, your equity is $100,000 or 33%.
First Mortgage: The first mortgage that is registered against a property that secures the mortgage. A first mortgage has priority over all other claims on the property in the event of sale or default.
Fixed Rate: an interest rate that is predetermined and does not change throughout the term of the mortgage. For example, the mortgage may have a fixed rate of 4% for five years.
Fixed Rate Closed Term: a fixed rate mortgage has a predetermined interest rate that does not change throughout the term of the mortgage. A closed term mortgage cannot be prepaid beyond a lender’s prepayment privileges, renegotiated or refinanced without incurring a prepayment charge. Interest rates for closed term mortgages are generally lower than those for open term mortgages offering you the ability to save on interest costs.
Fixed Rate Open Term: a fixed rate mortgage has a predetermined interest rate that does not change throughout the term of the mortgage. An open term mortgage can be partially or fully prepaid at any time without prepayment charges. Interest rates for open term mortgages are generally higher than those for closed term mortgages because of the pre-payment flexibility.
The Financial Consumer Agency of Canada (FCAC): an independent government body that oversees the conduct of federally regulated financial entities to ensure they comply with federal legislation and regulations. The FCAC also provides consumers with information relating to their rights and responsibilities in their dealings with Canadian financial institutions. For more information from the FCAC regarding mortgages and what you should know, please visit: http://www.fcac-acfc.gc.ca/eng/consumers/mortgages/index-eng.asp
Genworth Financial Canada: one of the companies offering mortgage insurance for high-ratio mortgages. In Canada, you are required to insure your mortgage if your down payment is less than 20% of the purchase price of the property.
Gross Debt Service Ratio (GDS): the percentage of your gross (before-tax) annual income that should be used for housing-related expenses such as mortgage principal and interest, property taxes and heating costs. Your GDS ratio should not exceed 32% of your gross annual income.
High-Ratio Mortgage: a mortgage that exceeds 80% of the home’s purchase price. Mortgage insurance is required on all high-ratio mortgages in Canada. It insures the lender against loss in the event the client defaults on the mortgage.
Home Buyers’ Plan (HBP): a federal program that allows eligible individuals to withdraw up to $25,000 from their Registered Retirement Savings Plan (RRSP) to purchase or build a qualifying home. If you repay the withdrawn amount within 15 years, you won’t pay tax on it. Visit the Canada Revenue Agency website for complete details.
Home Equity: see Equity
Interest: the amount a lender charges for borrowing money.
Interest Rate: a percentage of the amount borrowed which is paid by the borrower to the lender. The interest rate may be fixed or variable. While the interest rate is usually provided as an annual rate, the interest may be calculated monthly, semi-annually or another time period depending on the terms of the contract.
Interest Rate Differential: a penalty that may apply if you prepay more of your mortgage principal than your prepayment privileges permit. It is the difference between your mortgage rate and the rate of a mortgage that is closest to the remainder of your term, multiplied by the outstanding balance of your mortgage for the time that is left on your term. It is calculated on the amount of principal being prepaid.
Interest Rate Commitment: a mortgage interest rate that’s guaranteed for a certain period of time, for example 90 days. Many lenders will guarantee an interest rate when you apply for pre-approval. The guarantee means that if interest rates go up, you will still get the original, lower rate.
Land Transfer Tax: a fee paid to the municipal and/or provincial government for the transfer of property ownership from the seller to the buyer.
Legal Fees: closing fees you will pay to a lawyer or notary for preparing the offer to purchase, your mortgage documents and conducting the title search.
Loan-To-Value Ratio (LTV): the ratio of the loan to the appraised value of the property. For example, the LTV on a mortgage amount of $160,000 for a home with a purchase price of $200,000 is 80%.
Maturity Date: last day of your selected term as outlined in your mortgage agreement. By this date, you must either renew your mortgage for another term or pay your mortgage balance off in full.
Mortgage (or Mortgage Loan): a loan used to purchase or refinance a home. The property is used as security for repayment of the loan.
Mortgage Disability and Job Loss Insurance: see Creditor Insurance
Mortgage Discharge: see Discharge of Mortgage
Mortgage Life Insurance: see Creditor Insurance
Mortgage Loan Insurance: If you have a down payment of less than 20%, you will need to purchase Mortgage Loan Insurance. Mortgage Loan Insurance protects the lender in the unfortunate event that a property forecloses. This insurance is offered by the Canada Mortgage and Housing Corporation (CMHC), Canada Guaranty or Genworth Financial. In some instances, it is required even if the down payment is 20% or more. Those cases can be explained to you by your bank representative. If you do require Mortgage Loan Insurance, we will provide you with a Mortgage Loan Insurance Disclosure form that clearly identifies your premium and all your personalized details in relation to it.
Mortgage Term: see Term
Mortgagee: the lender, who advances the funds to the borrower for the mortgage loan. The repayment of the mortgage loan is secured by the borrower’s property.
Mortgagor: the borrower, who uses their property as security for the mortgage loan provided by the lender.
Offer to Purchase: a formal written document, prepared with your real estate agent, lawyer or notary, that sets out the terms under which you agree to purchase a property from the seller. It can be firm, meaning there are no conditions attached, or conditional, meaning there are certain conditions that must be fulfilled, such as completion of a home inspection or the sale of your existing home. Once accepted by the seller, it’s a legal contract.
Open Term: a mortgage that can be partially or fully prepaid at any time without incurring a prepayment charge. Interest rates for open term mortgages are generally higher than those for closed term mortgages because of the pre-payment flexibility.
Payment Default: see Default
Payment Frequency: according to your mortgage agreement, how often you make your regular mortgage payments. Many mortgage providers have the following payment frequency options: weekly, accelerated weekly, bi-weekly, accelerated bi-weekly, semi-monthly, monthly. By choosing to make more frequent payments, you can pay down your mortgage faster.
Porting a Mortgage: when you move, porting your mortgage is like taking your mortgage with you. The principal and regular payment amount may be different depending upon the balance of your mortgage when you move, the selling price of your existing home and/or the purchase price of the new home. When you port your mortgage you do not have to discharge your existing mortgage and therefore do not have to pay any discharge fees or any prepayment penalties.
Pre-Approval: a process that involves the mortgage company reviewing your credit history and qualifying you for a mortgage before you start shopping for a home. For a set period of time, the interest rate is locked in, protecting you from the potential of rising interest rates. By getting pre-approved for your mortgage, you know exactly how much you can spend on your new home.
Prepayment Charge: in the case of a closed term, a fee for repaying more than your permitted prepayment privileges before the end of the mortgage term. Consult your mortgage agreement to determine what the charge is. Prepayment charges can be avoided by making prepayments within the prepayment privileges or porting your mortgage when you move. For fixed-rate closed terms on Manulife Bank Select, Preferred Rate Mortgage and Manulife One sub-accounts the penalty is the higher of three months interest or the Interest Rate Differential. For the 5-year variable closed rate term on Manulife Bank Select the penalty is three months interest.
Prepayment Privileges: as set out in your mortgage agreement, the right to periodically repay more than your scheduled amount without incurring a prepayment charge. By paying down your mortgage faster, you could save interest and shorten the time it will take you to pay off the loan. Lenders typically offer one or both of these prepayment privileges: a lump-sum payment based on a percentage of the original mortgage principal and/or a percentage increase in the regular mortgage payment. For Manulife Bank Select and the Preferred Rate Mortgage the annual prepayment privileges are: lump-sum payments up to 20% of your original mortgage amount and increasing your regular mortgage payment by up to 25%. With Manulife One fixed rate sub-accounts, the annual prepayment privileges are lump-sum payments up to 20% of your original sub-account borrowing amount.
Prime Interest Rate (or Prime Lending Rate): an interest rate used by banks as an index in calculating rate changes to variable rates. You will often see variable mortgage rates expressed as a percentage above or below prime.
Principal: at any point in time, the balance of the borrowed amount that you owe to the lender. You will likely be charged interest on this outstanding amount.
Property Tax: a tax paid to your municipality for your portion of local resources such as hospitals, schools and waste pickup, as calculated by your property size. All else being equal, the larger your property, the higher your property taxes.
Refinance: the act of renegotiating your current mortgage agreement, perhaps looking for an increased mortgage amount, a better rate or different prepayment terms.
Renewal: at the end of your mortgage term, the act of extending your mortgage agreement with your lender. Your interest rate and other conditions may change. If you don’t renew your mortgage at the end of the term, you will have to repay the mortgage balance in full.
Second Mortgage: a mortgage where there is already an existing mortgage registered against the same property. A second mortgage often has a shorter term and higher interest rate than a first mortgage. A second mortgage has second priority to the first position mortgage on claims on the property in the event of sale or default.
Security: property used as collateral for the mortgage loan, to secure repayment of the loan.
Term (or Mortgage Term): the length of time the mortgage agreement is effective and the interest rate, payment and other conditions are set. At the end of your mortgage’s term, you will have to either repay the balance of the principal in full or renew the mortgage at a possibly different interest rate and terms. A mortgage term is typically six months to ten years.
Title: the right of ownership of a property, or the legal document showing evidence of ownership. If you have title on a property, you own it.
Title Insurance: this insurance, which you obtain through a title insurance company, covers the buyer and lender against any questions about a property’s ownership. If a loss is caused by a mistake in the title search or a dispute over ownership, this insurance will cover you.
Title Search: the process of reviewing title records to ensure that the seller of a property is actually the owner of the property, and that they can legally sell it to you.
Total Debt Service ratio (TDS): the percentage of your gross annual income that should be used for all your debt payments, including housing costs (mortgage payments, property taxes and heating costs), credit cards, car loans and any other personal loans. Your TDS ratio should not exceed 40% of your gross annual income.
TransUnion Canada: a credit bureau providing information on individuals’ borrowing and bill paying habits. Lenders use a credit bureau like TransUnion to determine a person’s ability to pay back a loan. You can contact TransUnion to order a copy of your credit report.
Trigger Interest Rate: the interest rate at which your regular payment is no longer sufficient to pay the required interest. Your lender may automatically increase your regular payment at that time to incorporate the increased interest amount.
Underwriting: the process a mortgage lender uses to assess your eligibility for their mortgage products. Lenders will complete a detailed credit analysis before they agree to loan the mortgage amount to you.
Variable Rate: an interest rate that may fluctuate from time to time throughout the term of the mortgage according to changes in the lender’s prime interest rate. The lender typically has either a variable or a flat mortgage payment. If the mortgage payment changes as the prime interest rate changes (e.g. - a variable mortgage payment), the portion of the payment that goes to interest and to principal continues. If the mortgage payment remains the same throughout the term (e.g. - a flat mortgage payment), the amount of your payment that goes to interest and to principal changes as your interest rate changes.