Your first mortgage
The biggest single purchase you make in your life is usually a home. Do you know what a mortgage is and how the calculation of what you can afford is made?
Purchasing a home usually requires outside financing from a bank, credit union, trust company or other private funding sources, such as the Bank of Mom and Dad.
When you borrow money, the person or institution lending you the funds requires some proof of your ability to repay the loan or mortgage.
A mortgage is a legal contract and the loan is secured by real property.
If you are borrowing the funds from a bank or credit union, the lender will normally require proof of your income by requesting a copies of your most recent income-tax returns or copies of your T4 slips showing your employment earnings.
Lenders use two different ratios called TDS and GDS.
GDS stands for gross debt service and is a calculation using the total property cost, interest, property taxes, heating and any strata fees.
Canada Mortgage and Housing Corporation (CMHC) indicates this amount cannot exceed 35 per cent of your monthly income.
TDS stands for total debt service and includes GDS, plus any other obligations such as lines of credit, car loans and credit card debt.
According to CMHC, the TDS generally cannot exceed 42 per cent of your total monthly income(s).
In short, lenders use these calculations to determine whether or not you will be able to afford to pay for your prospective new home.
There are many websites that can help you determine what you can potentially afford.
Be prepared to have your current financial information at your finger tips when using a online mortgage calculator.
This includes your annual income, monthly living expenses (property taxes, strata fees, utilities), as well as other debt obligations you might have such as existing credit card debts, car loans, furniture loans or lines of credit.
If you have a down payment of less than 20 per cent of the value of the property, you will require mortgage insurance.
The cost of this insurance is generally combined with your potential mortgage payment, but it is wise to know the cost of this insurance up front.
To make the cost of the mortgage and insurance more manageable, you have a choice.
It may be worthwhile to postpone a purchase until you have a larger down payment or look at less-expensive property.
Prospective purchasers certainly need to do their homework.
Look at your options for making payments, such as weekly or bi-weekly, instead of monthly; length of term; locked in or open.
Start your search for the right home and estimate the extra costs that accompany the home purchase.
Extra costs include property purchase taxes, mortgage registration fees, appraisal costs, insurance, property taxes, mortgage placement fees, strata and legal fees.
The total purchase price includes the down payment, mortgage and some of these extra costs.
What help is available for first- time home buyers?
For your down payment, one source of funding to consider is your own registered retirement savings plan (RRSP).
The home-buyers plan (HBP) is a program allowing you, and your spouse, to withdraw up to $25,000 from your RRSP to buy or build a qualifying home.
A second program available is the first-time home- buyers’ tax credit (FTHB).
The government introduced a non-refundable $5,000 tax credit amount on qualifying homes purchased after Jan. 27, 2009.
This provides $750 of federal tax relief for qualified individuals and is claimed on your personal tax return in the year your qualifying home is purchased.
If you need additional funds for your first-home purchase, using your own RRSP might be one way of completing the deal without any immediate tax consequences or extra borrowing.
Once you have made your home purchase, remember to claim your first-time home-buyers tax credit on your tax return.