Q. What is the difference between "Term and Amortization"?
A. Term refers to the length of time which a specific mortgage agreement covers, generally between 6 months to 5 years. When the term matures, the balance of the mortgage is either paid off or renegotiated for another term at the rates in effect at the time.
Amortization period refers to the actual number of years it will take to repay the entire mortgage typically 25 years.
Q. My goal is to become mortgage free. How can I quickly pay down my mortgage?
A. As previously discussed, the amortization period for a mortgage is typically 25 years. It is possible to reduce that period to 8-12 years. The first and easiest way to accomplish this is to make your mortgage payments bi-weekly (as opposed to monthly payments). This one simple step reduces the amount of time it takes to pay off your mortgage by over 5 1/2 years. Additionally, if you take advantage of annual principal pre-payments privileges (normally 10%-15%) and increase your mortgage payments annually you can quickly and dramatically achieve your goal of becoming mortgage free.
Q. How can I use my RSP to put towards my down payment?
A. The RSP Home Buyers' Plan (HBP) lets a first-time buyer withdraw up to $20,000 from RSPs for a home purchase. The withdrawn amount must be repaid within 15 years, subject to a minimum annual repayment that is 1/15 of the amount withdrawn. If the full $20,000 is withdrawn, the minimum annual repayment is $1,333. If less than the minimum is repaid in any particular year, the balance is added to the taxpayer's income.
Q. What are the advantages of owning over renting a home?
A. This is a decision which many people face, and the decision is not as easy to make as it may sound.
As a homeowner, you can reasonably expect the equity in your home to increase over time as your mortgage is paid down. That, combined with regular appreciation in property values, can be a rapid way to increase your net worth. In contrast, the person renting over the same amount of time is left with no property investment but may have enjoyed lower living expenses and the opportunity to invest in other opportunities.
When comparing owning to renting, you have to add up all of the figures, including the cost of your home, the size of your down payment, utilities, immediate repairs, interest rates and insurance, and compare them with how much you are currently spending on rent.
Of course, you also have to place a value on the enjoyment and satisfaction that you will derive from owning your own home.
Q. How do I find the right home?
A. Owning a home is more than just a financial commitment. When it's your home, you're responsible for all of the upkeep and maintenance, so it's wise to choose one that matches your lifestyle.
Houses versus Condominiums
House
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Pro
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Con
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- Houses require a lot of work, and you are solely responsible for all of the upkeep, repairs and maintenance
- Expenses may vary by month, making it more difficult to budget for your costs.
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Condo
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Pro
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Con
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- One monthly fee usually covers all of your maintenance costs, and you're free from yard work and other outdoor chores
- Steady, predictable expenses make it easier for you to budget for your costs
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- As a condominium owner, you are subject to the rules of your condominium. Plus, you have little control over the amount of your monthly condo fees, which are in addition to your mortgage payments
- Condo fees are subject to change and you may have no choice but to accept increases as they occur.
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New Home versus Resale Home
New Home
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Pro
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Con
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- You may have more flexibility when it comes to upgrading the features in your new home, such as finishing materials, flooring, plumbing and electrical fixtures
- In most provinces, a builder warranty is usually available and covers major household systems like plumbing and heating
- New homes are built to meet modern comfort and safety codes, using the latest building materials and technologies - the result is often greater cost- and energy-efficiency.
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- Homes in a newly developed area may not be completed on schedule and may not have immediate access to amenities such as schools or shopping centres - these are generally built after the residential population is complete
- Noise and dust from ongoing construction may affect the comfort of your new home until the development is complete
- Brand new homes seldom come with landscaping or fencing, which can both be substantial expenses for any homeowner
- Land, labour and material costs are higher as these are based on current costs.
- Lot sizes are smaller than comparable older homes.
- Interior room sizes are smaller compared to older homes.
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Resale Home
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Pro
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Con
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- You are most likely moving into an established neighbourhood, so you can see which amenities and services are already available
- Your property may already have landscaping, fencing and mature trees
- It may already have some upgraded features, such as a finished basement
- Lot sizes are usually larger in comparison to newer homes.
- Interior sizes of rooms are generous compared to newer homes.
- Compared to new home prices resale homes are cheaper and often can be better value.
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- An older home could mean higher maintenance costs in the short term, especially on major systems such as heating, electrical and plumbing.
- Resale homes come as they are, and you may have the added expense of changing wall colours, flooring or other interior design elements that don't suit your taste.
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Community checklist
Your home is the place where you're going to live for a long time, so make sure that the neighbourhood you choose provides the right combination of services and amenities to meet your long-term needs. Here are some of the lifestyle and financial considerations you'll want to think about --
- Proximity to schools and public transportation
- Real estate taxes
- Recreational facilities
- Distance of commute to and from work
- Traffic flow and availability of parking
- Planning and zoning laws that may limit your long-term plans (for example, building an addition)
Q. What are the other costs associated with buying a home?
Here are some of the costs you'll face when buying a home.
Closing Costs
Closing costs are the legal and administrative fees and disbursements associated with buying your home. Understanding each one will help you budget more accurately and lead to a more comfortable home-buying experience.
Land transfer taxes
Most provinces levy a one-time tax when you buy a home (subject to change). The tax is based on a percentage of the purchase price of the property, and varies from province to province. In Ontario, for example, the rate is _% on the first $55,000 of the purchase price, 1% on the next $195,000, 1.5% on the next $150,000 and 2% on the remainder. In new Land Transfer Tax was implemented in 2008 which increased the amount. This does not affect the 905 area codes yet. However, a rebate is offered to first time buyers now even for resale homes.This to some extent off sets the additional costs to some degree.
Legal fees
You should be represented by a lawyer or notary during the purchase and mortgaging of the property, and you are responsible for paying the lawyer's or notary's fees and disbursements.
Insuring your high-ratio mortgage
This is only applicable when the down payment for the new purchase is less than 25%.
CMHC or GEMICO may insure a mortgage for up to 95% of the lending value of the house. Therefore, purchasers only need a 5% down payment. Eligible borrowers include anyone who buys a home in Canada intending to occupy it as their principal residence.
Purchasers can use up to 32% of their gross family income for payments of mortgage principal and interest, property taxes and heating. A buyer's total debt load (including consumer loans, etc.) cannot exceed 40% of the gross family income.
People who insure a mortgage loan with CMHC or GEMICO pay an application fee and a premium. The application fee ($75 - $235) covers the costs incurred by the insurer to review the application. The premium is based on the down payment and loan amount. Typical fees range from 1.00% to 3.25% of the principal amount of your mortgage.
Fire insurance
You are required by the mortgage lender to have fire insurance effective at the time you legally take possession of your new home. Some insurance companies may demand proof of a home inspection or may not insure certain types of dwellings. Make sure that you enlist your insurance agent early.
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There's nothing like the feeling of pride that working on your own home brings. |
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