Questions and Answers
Mortgage and Buying Property. Q & A
What mortgage amount can be obtained with your household income level?
What monthly payments can you expect on a specific mortgage amount?
What expenses can I expect with a real estate purchase, besides the down payment? What are “closing costs”?
How to accumulate a down payment, for your real estate purchase, over one third more than was originally planned?
Two types of Mortgage Insurance and which of these coverages can I refuse?
We have just made an offer to buy real estate and only now realized that we qualify for Home Buyer’s Plan program. Is it too late?
Can I withdraw money more than once from the RRSPs while purchasing real estate?
What are “closing costs”?
What is the cost of legal service at the moment of drawing up the transaction papers?
In an advertisement about the cost of the lawyer’s service I found a price of $599, even though my friends tell me this kind of service is approximately $1,500 and more. Is the advertisement lying?
What is a Land Transfer Tax and what is the real cost of this tax for the buyer?
What mortgage should I take, fixed or variable?
What is the Prime Rate today and how has it changed recently?
Is it possible to buy a house while not having any money?
Is it possible to buy real estate having just found a job?
Is it possible to pay more, than my monthly payments on mortgage?
I have heard that making bi-weekly payments greatly reduces the amortization period. Is this true and how does it work?
Is there a difference between bi-weekly and weekly payments?
What’s the difference between bi-weekly accelerated and bi-weekly regular payments?
Why does the bank want the buyer to confirm that the money going towards down payment is his/her and not borrowed? Moreover, why does the bank request a confirmation that the money has been in account for a while?
Why is it preferable that the money lay in the account at the bank, instead of under the pillow, as you begin seriously considering a real estate purchase?
I have requested a mortgage. The bank demands that the money has been on my accounts for 3 months. Why do they raise these demands? Is it not enough that the money is on my accounts?
Is it possible to refinance the house three months after the purchase date, to get rid of the debts that have occurred because of extensive house repairs?
How much must I pay initially upon purchasing real estate in order to avoid proving and confirming my income?
What documents are accepted for income verification?
How can we purchase a house if we are unable to show the required income? We are both self-employed and are unable to save the necessary sum of money.
We have a decent down payment – 50%. We have a business that works. We want to buy a house but cannot show taxable income, as almost all of the expenses are written off.
What documents are required upon real estate purchase?
What documents are required upon refinancing?
What documents are required upon mortgage renewal?
What documents must be presented to the bank for future real estate purchase (pre-approval)?
How long is “pre-approval” valid?
Is there a difference between visiting a few banks trying to receive a better rate on a mortgage and simply going to a mortgage agent?
Why does the bank have to check the price of the house? I remember that when I took a mortgage for the first time (15% down payment) nobody asked me to estimate the value (Appraisal). Now, the bank asks to pay for the appraisal $250 plus tax. In my opinion the bank isn’t risking too much, as now, it’s lending only 70% of the house cost.
If I put in some large amount of money, thus partially paying off the mortgage, will my payments decrease?
How far in advance should you start working on your mortgage renewal?
If I make additional payments on the mortgage, on top of the required monthly payments, will my monthly interest decrease?
On the last few days before closing the deal, the lawyer informs me of unexpected turn of events – I have to invest a considerable sum of money, otherwise the transaction will not go through. This would not have been a problem, had we known in advance. What happened?
I have heard that it’s possible to avoid mortgage insurance when the down payment is 20%. I go to the bank and they tell me that insurance is necessary. Who is right?
When I bought the house I didn’t have 25% down payment, so I had to be insured through CMHC insurance program. Then, I have redone the mortgage in another bank and was forced to pay for the same insurance program again. That’s unfair. Is that really necessary?
What is Top-Up Premium?
If the mortgage has already been issued and I have questions, whom should I call: mortgage broker or the bank?
What is the longest amortization period today?
What is the benefit of taking a long amortization period? Who can it be beneficial to? After all, a lot of money goes into interest.
If I choose a 30-year amortization period, instead of the 25-year, and immediately start paying more than the minimum requirements of the mortgage, will I pay the bank more money in the form of the interest?
My bank has requested my last Notice of Assessment, even though I warned that I am self-employed. I have been told that my income doesn’t matter, so why do I have to show this document?
Can a non-resident (the person who has no status) purchase real estate in Canada?
Is it possible to avoid paying the bank for the mortgage? There is just no opportunity for me to pay this month. What are the consequences?
We have decided to purchase a new house which will be constructed only next year. Can we withdraw funds today, from our RRSP for down payment?
What is the interest adjustment date? When do I really begin paying for the mortgage?
What is the first, the second and the third mortgage? Why is the interest usually higher on the second mortgage, in comparison to the first?
I want to buy a second property, let’s say for investment. I have requested a second mortgage, which I’ve been told will be at a higher interest. I don’t understand, why? I have never heard before that the interest on the second property has to be higher.
What mortgage amount can be obtained with your household income level?
Of course, it’s best to meet with a mortgage specialist so he/she can check your personal financial situation, recommend suitable products and calculate your monthly payments. However, you can approximate yourself the sum you can apply for using a specially developed calculator – Mortgage Qualifier. ▲
What monthly payments can you expect on a specific mortgage amount?
You can get information about monthly payments here. ▲
What expenses can I expect with a real estate purchase, besides the down payment?
What are “closing costs”?
“Closing costs” are your expenses at the moment of registration of real estate with the lawyer. It includes Land Transfer Tax (a State tax taken during the transfer of the property from one owner to another); lawyer’s fee; if the down payment is less then 20-35%, there is the provincial tax, PST (8%) that is paid on the mandatory mortgage insurance on CMHC, Genworth or Canada Guarantee, as well as some other non-essential expenses. One of such expenses might be a property tax (the tax on the real estate). If the previous owner has paid for the taxes in full, this amount must be returned to him/her. The bank considers the services on the closing cost to be equal to 1.5% of the real estate cost and demands that the buyer shows that he/she has an amount at the time of the deal registration. By the way, to confirm that it is his/her own money and not borrowed, the buyer has to give some evidence showing that the money has been on the accounts (chequing, investment, savings, RRSP) no less then 3 months. ▲
How to accumulate a down payment, for your real estate purchase, over one third more than was originally planned?
Let’s assume that your goal is to save $20,000 during the period of two years for the down payment. If you accumulate money in a bank account you will have only the saved amount. If you invest into the pension plan, at the moment of purchasing of the real estate, you will have $20,000 plus $6,200 of return tax; thus, you have saved not $20,000 but $26,200 (if your income from $45k to $90k – $6,200 = 31% of $20,000). It seems to me that $6,200 will not be superfluous when buying real estate; this amount will comprise 1/3 of your savings. You will have this opportunity if you use RSSP program to save money for the down payment when purchasing real estate. You need the consultation of a specialist to understand how RRSP is used and whether you need it or not. ▲
Two types of Mortgage Insurance and which of these coverages can I refuse?
There are two types of mortgage insurance in Canada:
- mortgage insurance with a small initial payment (down payment);
- individual mortgage insurance from the bank that has been offered to you at the moment of signing the contract for the loan.
You don’t have the right to refuse the first type of insurance because it is used to protect the bank system. The obligatory insurance (let’s call it so) is required when the down payment is less than 20% of the real estate’s cost. Today this new condition is extended to those who work and immediately pay the taxes – full time position, and for those who are self-employed, taking into account that after deduction of business expenses they show good taxable income. If a person is self-employed, owns a business and is not showing the necessary income, it is possible to avoid this insurance with a down payment of over 35% of purchase price.
The second insurance appears unexpectedly at the moment of contract signing. The manager in the bank, while signing a contract, asks, “If you want to protect your family, so that in case of spouse’s death, disability or dismemberment the unpaid balance left on the mortgage will be fully paid for, please put a check mark here”. Any sensible person who loves his family does not want to leave any debts to his family in case of his death. However, you have the right not to sign this insurance; it is your personal choice. In any case, the protection is really useful! There is an opportunity to protect your family more favourably than the bank offers. There are insurance programs that are more favourable for a family than what the bank offers. They are cheaper and protect the family better. You can look at the comparison of mortgage insurance programs that are offered by the banks and the insurance companies in the section “Mortgage Insurance”. ▲
We have just made an offer to buy real estate and only now realized that we qualify for Home Buyer’s Plan program. Is it too late?
It might be or not. Everything depends on the closing date. For you to understand who can use the HBP (Home Buyers’ Plan) program I will mention the conditions that are necessary to fulfill while registering for HBP. First of all, this program is for those who are purchasing their first real estate (there are some exceptions but it’s better to speak to a financial consultant about them). The HBP program implies that the money has to be in RRSP for 90 days, only then the whole process will work. However, the government allows withdrawal of money from RRSP after the real estate is bought and considers this a HBP withdrawal, if the money has been withdrawn within 30 days after the closing date. So if there are 60-90 days before the closing date, theoretically it is possible to have the time to register everything. In practice, it is necessary to consider that certain time is necessary for paper registration, thus it’s not practical to speak about 60 days, you need to have some days in reserve. The best thing is to consult a specialist as there are lots of essential nuances. For example, who of the spouses will make the payments, to register spousal or usual RRSP, etc? ▲
Can I withdraw money more than once from my RRSPs while purchasing real estate?
Yes, you can. You can withdraw money from the RRSP program to purchase a real estate in several stages but you have to do it within one calendar year. At the best, you can consider that you will be allowed to take the money in January of the following year and it will be counted as part of the previous year. If the money will be taken within two years or after January of the upcoming year, then the money taken after January 31st of upcoming year will be added to the income of the previous year and will be taxed. ▲
Closing cost includes: Land Transfer Tax (it is a state tax which is taken during the transfer of the property from one owner to another); lawyer’s fee; if the initial payment is less then 20-35% there is provincial tax PST (8%) that is paid on the mandatory mortgage insurance on CMHC, Genworth or Canada Guarantee and some other non essential expenses. One of such expenses might be a property tax (the tax on the real estate). If the previous owner has paid for the taxes in full, this amount must be returned to him/her. The bank considers the services on the closing cost to be equal to 1.5% of the real estate cost and demands that the buyer shows that he/she has an amount at the time of the deal registration. By the way, to confirm that it is his/her own money and not borrowed, the buyer has to give some evidence showing that the money has been on the accounts (chequing, investment, savings, RRSP) no less then 3 months. ▲
What is the cost of legal service at the moment of drawing up the transaction papers?
We often see in commercials that lawyers charge $500-600 plus HST for their services. In practice the cost is higher, as besides the professional fee (legal fee) the lawyer often encounters additional expenses. Let’s talk about them.
PURCHASE
Professional fee – usually $500-600 plus HST for lawyer’s services. This is the amount that the lawyer considers his earning. When a new apartment (condo) is bought, there is intermediate work for the lawyer – Interim Closing. What is it? Moving in and living in the new residence is already possible, even though the building is not handed over and there was no real Closing. In such a situation there is additional work for the lawyer and during this temporary moving in, the lawyer charges additionally approximately $200 plus HST.
Very often in clarification of lawyer’s services Disbursement is mentioned – $500. This is the cost of the office operation, preparation of the documents, sending faxes, composing of inquiries, registration, etc. We pay for these services.
When we speak about closing cost we are talking about the payment for lawyer’s services and Land Transfer Tax. However, at the moment of signing the documents with the lawyer we find out that we have to pay for Title Insurance. This insurance is mandatory and protects both, the bank and the purchaser. Since the lawyer is responsible for it, I will write out the cost of this insurance. Usually, Title Insurance costs $400 if the property is less than $500,000. Every additional thousand dollar increase in real estate price increases the cost of Title Insurance by 90%.
RENEWAL of terminated mortgage (Switch or Assignment)
Professional fee of a lawyer is $500-600 plus HST.
Disbursement cost is $100-200.
SALE
Legal fee is $400-500 plus HST, if there is simultaneous real estate purchase or you have consulted this lawyer several times already. If it is a single operation with this lawyer you will be charged the usual amount ($500-$600).
Disbursement is $200-300.
REFINANCING with the transfer to another bank
Professional fee and Disbursement is $750-800 plus HST. This includes a payment to the previous bank – discharge fee of $200-250. This money is paid to cover document preparation when the present mortgage is terminated.
Title Insurance costs $130-140 if the real estate’s price is up to $750,000. For every additional $1,000 increase in real estate price, Title Insurance cost increases 90%.
Do not forget that all existing debts are closed at refinancing. For each debt closure the lawyer charges $50. If you know how many debts need to be closed, you can calculate the total amount for this process.
REFINANCING at your bank
If conditions of the mortgage have not sufficiently changed, the discharge fee is not paid. All the other expenses are left the same, as they are registered through the lawyer. ▲
In an advertisement about the cost of the lawyer’s service I found a price of $599, even though my friends tell me this kind of service is approximately $1,500. Is the advertisement lying?
Certainly not, nobody publishes a lie. This amount is paid for the services of the lawyer him/her self. The other, larger amount includes office expenses for documents’ preparation, copying and other administrative work, as well as payment of registration fee and title insurance, etc. As a result, the lawyer’s cheque is much larger. ▲
What is a Land Transfer Tax and what is the real cost of this tax for the buyer?
Land Transfer Tax is charged by the government when real estate is transferred from one owner to another. The tax is paid every time a real estate is purchased, with the exception of the purchase of the first property. In this case the government gives a loan on the first $200,000, the rest is taxed.
To calculate Ontario Land Transfer Tax you need to add the following:
- 0.5% for the first $55,000 from the house cost
- 1.0% for the amount from $55,001 to $250,000
- 1.5% for the amount from $250,001 to $400,000
- 2.0% for the amount above $400,000
Or use the table.
| Purchase Price, $ | Calculation of Land Transfer Tax, $ |
| 0 – 55,000 | 0.005 x Amount |
| 55,001 – 250,000 | (0.01 x Amount) minus 275 |
| 250,001 – 400,000 | (0.015 x Amount) minus 1,525 |
| 400,000 + | (0.02 x Amount) minus 3,525 |
If you want an even easier method, click on the links to the appropriate tables and you’ll see how much tax you have to pay upon closing.
Table 1: Price from $100,000 to $264,000
Table 2: Price from $265,000 to $384,000
Table 3: Price from $385,000 to $528,000
Table 4: Price from $529,000 to $648,000
Table 5: Price from $649,000 to $768,000
Table 6: Price from $769,000 to $888,000
Table 7: Price from $889,000 to $1,008,000
Table 8: Price from $1,009,000 to $1,039,000
What mortgage should I take, fixed or variable?
Answering this question unambiguously is very difficult. Everything is clear with a fixed mortgage – you need to go and stake out the smallest interest. The problem is that it is difficult to foresee how the rates will change during the entire period of existence of the mortgage term. The interest can both fall and rise and you need to be calm about it. Perhaps today the fixed interest is 2.69%, which is good. In 2 years the fixed interest might be less, yet the term is 5 years – you should be prepared for such a situation. Variable rate of a mortgage is less predictable, but statistically, people who have such mortgages win. Why? Because it takes into account the condition, bad or good, of the current market. If the person clearly understands the factors that influence variable mortgage, it is possible to make up one’s mind and take a loan based on the situation. Below I would like to explain what factors influence interest fluctuation.
If country’s economy is doing well that means businesses are doing well and produce goods, Gross Domestic Product grows, unemployment decreases, wages go up. If the businesses’ goods are being actively bought, because the wages are up and etc, then businesses raise the price and produce new and improved goods at higher prices, and as a result there is an increased inflation. The government tries to restrict inflation to 2% (allowing a fluctuation of 1 to 3%). If the inflation creeps up to 3%, the government introduces appropriate steps in an attempt to return to the desired 2%. To slow down the economy, it’s sufficient to increase the interest on borrowed money, which businesses always use for development purposes. Overtime, business’ development will slow down and as a result the inflation will drop. All of this works the other way as well. Since the introduction of the terrorist acts of 2001 and the financial crisis of 2008, the government gradually lowered the discount rate to stimulate the businesses and economy.
You have to remember that high mortgage interest and high level of inflation go hand in hand – 20% Prime Rate was in affect at the time when the inflation was 15%. ▲
What is the Prime Rate today and how has it changed recently?
The table below illustrates the recent changes in Prime Rate.
Prime Rate Changes 1993 – 2018
| Effective Date | Prime Rate | Effective Date | Prime Rate | Effective Date | Prime Rate | Effective Date | Prime Rate | Effective Date | Prime Rate | Effective Date | Prime Rate |
| Oct 24, 2018 | 3.95% | May 25, 2006 | 6.00% | Oct 23, 2001 | 4.50% | Oct 2, 1997 | 5.25% | Mar 1, 1995 | 9.25% | ||
| Jul 11, 2018 | 3.70% | Apr 26, 2006 | 5.75% | Sep 18, 2001 | 5.25% | Nov 12, 1996 | 4.75% | Feb 22, 1995 | 9.50% | ||
| Jan 17, 2018 | 3.45% | Mar 8, 2006 | 5.50% | Aug 29, 2001 | 5.75% | Oct 29, 1996 | 5.00% | Jan 18, 1995 | 9.25% | ||
| Sep 6, 2017 | 3.20% | Jan 25, 2006 | 5.25% | Jul 18, 2001 | 6.00% | Oct 17, 1996 | 5.25% | Jan 13, 1995 | 8.50% | ||
| Jul 12, 2017 | 2.95% | Dec 7, 2005 | 5.00% | May 30, 2001 | 6.25% | Oct 3, 1996 | 5.50% | Dec 14, 1994 | 8.00% | ||
| Jul 15, 2015 | 2.70% | Oct 19, 2005 | 4.75% | Apr 19, 2001 | 6.50% | Aug 23, 1996 | 5.75% | Dec 5, 1994 | 7.50% | ||
| Jan 21, 2015 | 2.85% | Sep 8, 2005 | 4.50% | Mar 7, 2001 | 6.75% | Aug 12, 1996 | 6.00% | Sep 14, 1994 | 7.00% | ||
| Sep 8, 2010 | 3.00% | Oct 20, 2004 | 4.25% | Jan 24, 2001 | 7.25% | Jul 23, 1996 | 6.25% | Aug 2, 1994 | 7.25% | ||
| Jul 22, 2010 | 2.75% | Sep 9, 2004 | 4.00% | May 18, 2000 | 7.50% | Apr 19, 1996 | 6.50% | Jul 19, 1994 | 7.50% | ||
| Jun 1, 2010 | 2.50% | Apr 14, 2004 | 3.75% | Mar 23, 2000 | 7.00% | Mar 25, 1996 | 6.75% | Jul 13, 1994 | 7.75% | ||
| Apr 21, 2009 | 2.25% | Mar 3, 2004 | 4.00% | Feb 7, 2000 | 6.75% | Feb 1, 1996 | 7.00% | Jun 22, 1994 | 8.00% | ||
| Mar 3, 2009 | 2.50% | Jan 21, 2004 | 4.25% | Nov 18, 1999 | 6.50% | Jan 29, 1996 | 7.25% | Jun 15, 1994 | 7.25% | ||
| Jan 20, 2009 | 3.00% | Sep 4, 2003 | 4.50% | May 5, 1999 | 6.25% | Dec 20, 1995 | 7.50% | Mar 31, 1994 | 6.75% | ||
| Dec 8, 2008 | 3.50% | Jul 16, 2003 | 4.75% | Mar 31, 1999 | 6.50% | Nov 1, 1995 | 7.75% | Mar 25, 1994 | 6.25% | ||
| Oct 23, 2008 | 4.00% | Apr 16, 2003 | 5.00% | Nov 19, 1998 | 6.75% | Aug 28, 1995 | 8.00% | Nov 9, 1993 | 5.50% | ||
| Oct 10, 2008 | 4.25% | Mar 5, 2003 | 4.75% | Oct 19, 1998 | 7.00% | Jul 12, 1995 | 8.25% | Jul 12, 1993 | 5.75% | ||
| Apr 22, 2008 | 4.75% | Jul 17, 2002 | 4.50% | Oct 1, 1998 | 7.25% | Jul 7, 1995 | 8.50% | Mar 22, 1993 | 6.00% | ||
| Mar 4, 2008 | 5.25% | Jun 5, 2002 | 4.25% | Aug 28, 1998 | 6.50% | Jun 14, 1995 | 8.75% | Mar 4, 1993 | 6.25% | ||
| Jan 22, 2008 | 5.75% | Apr 17, 2002 | 4.00% | Feb 2, 1998 | 6.50% | Jun 5, 1995 | 9.00% | Feb 22, 1993 | 6.50% | ||
| Mar 13, 2020 | 2.95% | Dec 4, 2007 | 6.00% | Jan 16, 2002 | 3.75% | Dec 15, 1997 | 6.00% | May 8, 1995 | 9.25% | Jan 15, 1993 | 6.75% |
| Mar 4, 2020 | 3.45% | Jul 10, 2007 | 6.25% | Nov 28, 2001 | 4.00% | Nov 26, 1997 | 5.50% | Mar 8, 1995 | 9.75% | Jan 12, 1993 | 7.00% |
The numbers were taken from this website – moneycafe.com/personal-finance/prime-rate-history/.
Is it possible to buy a house while not having any money?
Of course it’s possible, but it’s always better to have some saved up. Today, buying a property without a down payment is still possible. In general, most banks no longer offer such option. But, there are still credit unions, that would be able to help you with such situation. However, even these institutions still need to see some small amount of savings on your accounts for closing cost expenses. The Closing cost includes: Land Transfer Tax (a tax that is applicable when ever real estate is transfer from one owner to the other); lawyer’s fee; if the down payment is less then 20-25% there is the provincial tax, PST (8%) that is paid on the mandatory mortgage insurance with CMHC, Genworth or Canada Guarantee, as well as some other non essential expenses. The bank considers the expenses of the closing cost to be about 1.5% of the real estate cost and thus demands that the buyer owns this amount at the moment of deal registration. Thus, an amount of 1.5% of the real estate cost should be in your possession. There are other conditions, for example, insurance companies that insure mortgage for the banks refuse contracts where there is no down payment and the person is self-employed and unable to show the desired taxable income. Such a person must pay a minimum of 5%. As well, let’s not forget that credit history plays a considerable role. If the credit score is below 680, then, unfortunately, it is impossible to buy real estate without a down payment. Additionally, the person must have a credit history for over 2 years. But it’s best to consult a specialist in regard to your specific situation. ▲
Is it possible to buy real estate having just found a job?
It’s possible, but a little bit harder, since the banks are cautions about people with recent jobs who are still on probation period. The bank may approve the application for the mortgage, but will definitely request the disbursement, the closing date, to be after the probation period. ▲
Is it possible to pay more than monthly payments on the mortgage?
Yes, it’s possible. Make sure to carefully study the contract details, as it’s usually allowed to increase monthly payments by 10-25% and, on top of that, make yearly instalments of 10-25% of the total mortgage amount. Moreover, there are certain conditions on supplementary payments – some allow payments to be made only once a year, the majority however will accept through out the year during the usual payment deadlines. There are also completely open mortgages that allow supplementary payments of any amount at any time. Carefully study the contract guidelines to find out all conditions of supplementary payments and to avoid punitive sanctions. ▲
I have heard that making bi-weekly payments greatly reduces the amortization period. Is this true and how does it work?
It is true, bi-weekly payments shorten a 25-year amortization period by about 4 years. I want to explain why this is the case. For example, monthly payments are $2,000. You half this amount and pay $1,000 bi-weekly. This “magical” 4 year reduction in amortization period comes from the fact that we are used to thinking of a month as strictly 4 weeks. This is not true, as there are usually some days left over. For example, if you have already made two bi-weekly payments this month, 28 days have passed, yet there are 31 days. Divide $1,000 by 14 days (2 weeks) and we get $71.43 – an amount we pay per day. Now, multiple this amount by 3 (number of days left in this month after the 28-day period) and we get $214.29. This amount, almost $215, is your supplementary payment amount that goes towards repaying your mortgage, thus shortening the amortization period. Here is another example: paying $2,000 monthly, we end up giving the bank $24,000 per year ($2,000 times 12 weeks). If we are paying bi-weekly, we will end up giving the bank $26,000, since there are 52 weeks in a year. This additional $2,000 is what makes the difference.
There are some differences to be remembered: bi-weekly accelerated and bi-weekly regular (not accelerated). Bi-weekly accelerated presumes division of the monthly amount into half – this is what was explained above. If you want to pay bi-weekly (let’s say, this coincides with the timing of your pay checks), but don’t want to over pay the bank, then bi-weekly regular is your option. In this situation, the required yearly amount of $24,000 is divided by 26 weeks and what we get is $923.08 bi-weekly. This way you pay bi-weekly without overpaying.
By the way, some families loose a lot of money using bi-weekly accelerated option. For example, a few years ago a family took a mortgage and following the recommendation of a bank’s employee, a bi-weekly accelerated option was chosen. It’s not always the case that the person who’s making the payments clearly sees through the repayment process, he or she simply agrees with the recommendations of the professional. That is normal, however if the circumstances change one should act appropriately. For example, with existing credit card debts one should not hurry to repay the mortgage with 2-3% interest, when the credit card debts are under 18-20%. It’s better to contribute those additional $215 from the family budget toward repaying the credit card debt. ▲
Is there a difference between bi-weekly and weekly payments?
You choose the bank payment’s schedule that suits you: monthly, bi-weekly, weekly. The difference between bi-weekly and weekly payments is minimal. If you have to pay $2,000 per month, then bi-weekly accelerated payments will be $1,000 and weekly accelerated – $500. Both bi-weekly accelerated and weekly accelerated result in the same annual amount – $26,000. ▲
What’s the difference between bi-weekly accelerated and bi-weekly regular payments?
There is a difference and it’s quite big. Bi-weekly accelerated – a mode of payment where your monthly instalment amount is divided into two and you pay this amount bi-weekly. Bi-weekly payments shorten a 25-year amortization period by about 4 years. For example, your monthly payments are $2,000. You half this amount and pay $1,000 bi-weekly. This “magical” 4 year reduction in amortization period comes from the fact that we are used to thinking of a month as strictly 4 weeks. This is not true, as there are usually some days left over. For example, if you have already made two bi-weekly payments this month, 28 days have passed, yet there are 31 days. Divide $1,000 by 14 days (2 weeks) and we get $71.43 – an amount we pay per day. Now, multiple this amount by 3 (number of days left in this month after the 28-day period) and we get $214.29. This amount, almost $215, is your supplementary payment amount that goes towards repaying your mortgage, thus shortening the amortization period. Here is another example: paying $2,000 monthly, we end up giving the bank $24,000 per year ($2,000 times 12 weeks). If we are paying bi-weekly, we will end up giving the bank $26,000, since there are 52 weeks in a year. This additional $2,000 is what makes the difference. If you choose the bi-weekly regular (not accelerated) option then the yearly payment amount of $24,000 is divided by 26 weeks and we get $923.08. This way you pay the bank bi-weekly without having to overpay the bank, and accordingly, amortization period is of the same length. Bi-weekly regular does not shorten amortization period. ▲
Why does the bank want the buyer to confirm that the money going towards down payment is his/her and not borrowed? Moreover, why does the bank request a confirmation that the money has been in account for a while?
The banks set the following condition: buyer, paying for the down payment, has to own the money, as opposed to acquiring it from a loan. Let’s think about where this is coming from. A simple example: a family notifies the bank that they are planning on buying a $400,000 real estate with 5% down payment, while in reality they have borrowed the money for the down payment under certain interest. The bank evaluates family’s financial situation, ability to pay mortgage and other existing debts, without taking into account the debt for the down payment and closing cost ($26,000). This way, the probability that the family will not be able to repay its mortgage and other debts sharply increases. It’s understandable that banks don’t want to risk; therefore, before giving out a mortgage financial institution will count all debts, including those taken for the down payment. Now, the story is different – price on mortgage insurance will change along with other corrections. Financial institution wants to know that the down payment and the closing cost will not force you into additional debts. Closing cost amounts to approximately 1.5% of the real estate price. In addition, to prove that the money is owned and not taken through a loan the buyer needs to provide confirmation that the money is located on his or her accounts (chequing, investment, savings, RRSP) for no less than 3 months. ▲
Why is it preferable that the money lay in the account at the bank, instead of under the pillow, as you begin seriously considering a real estate purchase?
When buying real estate, banks make the following condition: the buyer paying for the mortgage has to own the money, as apposed to have taken it through a loan. Furthermore, the buyer must prove that this money has been on his or her account for no less than 3 months (in certain programs such as RRSP and etc, it’s enough to just show the money). The bank will be interested in the source of any amount you have in your accounts. First of all, let’s not forget that in Canada, like everywhere around the world, money laundering is being actively fought; secondly, the bank’s employee has an enumeration of rules and guidelines to put a checkmark beside – done! A confirmation is necessary that the money belongs to the buyer and has been on his or her account for no less than 3 months, excellent. In certain circumstances other documents are accepted, for example: international real estate sold and consecutive transfer of money to Canada and etc. That’s why if you have money but keep them at home or in a “safety deposit box”, you should put them in an account. ▲
I have requested a mortgage. The bank demands that the money has been on my accounts for 3 months. Why do they raise these demands? Is it not enough that the money is on my accounts?
The banks set the following condition: buyer, paying for the down payment, has to own the money, as opposed to acquiring it from a loan. Let’s think about where this is coming from. A simple example: a family notifies the bank that they are planning on buying a $400,000 real estate with 5% down payment, while in reality they have borrowed the money for the down payment under certain interest. The bank evaluates family’s financial situation, ability to pay mortgage and other existing debts, without taking into account the debt for the down payment and closing cost ($26,000). This way, the probability that the family will not be able to repay its mortgage and other debts sharply increases. It’s understandable that banks don’t want to risk; therefore, before giving out a mortgage financial institution will count all debts, including those taken for the down payment. Now, the story is different – price on mortgage insurance will change along with other corrections. Financial institution wants to know that the down payment and the closing cost will not force you into additional debts. Closing cost amounts to approximately 1.5% of the real estate price. In addition, to prove that the money is owned and not taken through a loan the buyer needs to provide confirmation that the money is located on his or her accounts (chequing, investment, savings, RRSP) for no less than 3 months. ▲
Is it possible to refinance the house three months after the purchase date, to get rid of the debts that have occurred because of extensive house repairs?
It depends on the bank. However, to avoid unpleased surprises, it’s better to find out ahead of time. Condition most often set in place – refinancing is possible only after 6 months or 1 year after the purchase of real estate. If you don’t want to call the bank personally, ask us and we will find out this information for you. ▲
How much must I pay initially upon purchasing real estate in order to avoid proving and confirming my income?
Such mortgage is referred to as “Equity Deal”. Practically, these mortgages don’t really exist anymore, however, a few banks still offer this option. The bank will input all the numbers necessary to assess affordability, but will definitely request a recent Notice of Assessment, the document you receive from Canada Revenue Agency after you file your taxes. The bank requires to see this document to ensure that the individual does not owe any taxes. It is not important if you are only showing a couple thousand dollars income, the bank is only concerned with taxes being fully paid. ▲
What documents are accepted for income verification?
Usually, income is confirmed via a letter from work and a pay stub (this document is given to employees and shows the earned amount as well as for what and how much a certain amount is deducted). The letter may be informal, however it must contain information about the date your started working, your position and your annual income. Why is it necessary to show both documents? The letter fully satisfies the bank’s need for income information, and must be written on a blank, company letterhead – pay stub by it self does not reflect all the needs of the bank. Let’s say the person asking for a mortgage has started working on 1st of January, the current year, but presents a pay stub dated March 1-st. Yes, he is paying taxes, however in one month he might be out of work because the 3-months probation period has ended. Only the letter carries this kind of information, and precisely because of this the banks will not place importance on the letter that mentions “subject to probation period”. Similarly, T-4 document is not good enough, the person might have received this form and quit by now. Furthermore, bank’s employees use information provided on the company’s letterhead – work phone number, for validating employment and checking existence of the company through search engines www.411.ca and www.canada411.ca ▲
How can we purchase a house if we are unable to show the required income? We are both self-employed and are unable to save the necessary sum of money.
This is possible if the members of the family are self-employed or own a business for no less than 2 years. In these situations the bank will not be requiring income verification, instead it will place all the responsibility on an insurance company, which insures the deal. CMHC (Canada Housing and Mortgage Corporation) no longer insures such deals, but Genworth Financial First and Canada Guarantee still insure deals such as this but charge a premium a few times higher than in a normal scenario. Often, this is the only solution and its good that we still do have such option available. Recently, there have been some major changes in mortgage insurance towards stricter rules in obtaining mortgage for self-employed during a property purchase. You have to remember and pay attention to the fact that you will need at least 10% down payment and, of course, the credit score has to be good (beacon score over 680). ▲
We have a decent down payment – 50%. We have a business that works. We want to buy a house, but can’t show taxable income, as the large expenses are all written off.
In this situation everything is clear – you need to find financial institution that offers an equity deal. Equity deal presumes giving a mortgage without asking for income proof. For this kind of deal it is necessary that the buyer owns a business or be self-employed for a minimum of 2-3 years, as well as has a good credit history (beacon score above 680). The down payment must be no less than 50%. Unfortunately, this product is offered by very few institutions. Please note, the bank will make sure to ask you for the last Notice of Assessment – the document that you receive from taxation authority upon filling out tax return (T-1 General). This document is necessary to make sure the family doesn’t have any outstanding tax obligations. It doesn’t matter that your income is a couple hundred thousand dollars, the real estate is half a million and for the bank it’s most important to know that all the taxes have been paid off. If this document says that you owe (this happens sometimes when we pay on the last days of April), then an appropriate document must be provided validating fulfillment of your tax obligations. ▲
What documents are required upon real estate purchase?
- MLS Listing
- Agreement of Purchase and Sale
- Income verification*
- Mortgage Application
- Void Cheque
- Down payment
Type of documents confirming income depends on the kind of employment you are in:
Full Time Employee
- Letter of employment (on company letterhead, dated and signed by appropriate authority, contain date of hire and position, the amount received annually or the hourly rate and guaranteed hours worked per week, bonus)
- Most recent pay stubs
Self Employed
- Notice of Assessment (2 years)
- T1 General (papers from the accountant)
Business Owner
- Notice of Assessment
- Business registration (2 years)
What documents are required upon refinancing?
- Most recent Mortgage Statement
- Property Tax Statement
- Income verification* (see the question, “What documents are required upon real estate purchase?”)
- Mortgage Application
- Home Insurance
- Copy of the most recent Charge/Mortgage registered against the property. Legal size document received from the lawyer on day of closing
- Listing of debts being paid as a result of refinancing
- Void cheque
What documents are required upon mortgage renewal?
- Most recent Mortgage Statement
- Property Tax Statement
- Home Insurance
- Income verification* (see the question, “What documents are required upon real estate purchase?”)
- Mortgage Application
- Copy of the most recent Charge/Mortgage registered against the property. (Legal size document received from the lawyer on day of closing)
- Void cheque
What documents must be presented to the bank for future real estate purchase (pre-approval)?
In order to receive a pre-approval, it’s necessary to show documentation regarding income and give permission to check your Credit History, in other words, to sign Mortgage Application. Usually this is sufficient. ▲
How long is “pre-approval” valid?
Usually, a pre-approval, just like an approval, is valid for 4 months – 120 days. ▲
Is there a difference between visiting a few banks trying to receive a better rate on a mortgage and simply going to a mortgage agent?
When trying to get a mortgage, banks first look at your credit history and your present income. Income part is easy – you either have it or not. If you don’t – bad – you need to consult a specialist to see if there are any options available for you. If you do, excellent, but there is still an issue of whether it would be enough to buy the desired house and etc. The credit history part is more complex.
First of all, the person might not know his/her real credit history. He or she might think that it’s good, since the bills are always paid on time. Yes, there are debts, but no due dates are missed and there are always new offers coming in the mail, which the person simply ignores. So this person probably doesn’t have a bad credit history, but the score may be lower or higher. Be careful – practically every time your credit history is checked, your score is lowered. Any kind of check, and every bank you turn to will surely check your Credit History, results in your score being changed.
For example, someone owns a business with moderate taxable income and wants to make a large down payment of 35%; credit rating is also not bad – 685. After turning to the first bank, the person is rejected as his income is not high enough. They might not have a program for self-employed. Yes, there is a large down payment, but at the next bank, to receive approval without taxable income verification – “self-employed” client might need a minimum score of 680. The new bank may refuse to approve the mortgage citing a lower credit score of 679. Previous credit check has lowered the score and…
Secondly, credit history may sometimes have errors; the process of entering information into database is performed by people. From time to time I check my credit history online just to know what is going on there. Picture this, I have discovered that my wife’s credit rating greatly lowered in a very short time, yet we were expecting an increase, since we have paid off and closed a credit card. The credit bureau showed the following information: R9, Bad debts, Unable to locate. Meaning, I’m practically bankrupt, they keep trying and can’t get the money from me and I’m not answering their phone calls. Of course, in a little while everything was fixed, however I know of incidents where it took months to fix the mistakes and etc. Image if at that moment my wife went to the bank and asked for credit – she’ll surely be declined. She is surprised, yet the bank employee has no right to share the information and tell her about the credit score.
So, what does the mortgage broker do? He checks the credit history and with this information applies to various financial institutions. If for some reason you want to switch the current bank, you can do so in most cases without additional credit history check. In general, it is easier to reason with the broker, since he/she has access to more information, than a bank employee. It is worth while to listen to what the broker has to say – he/she knows how to better present the client and which bank to turn to in every specific situation.
It might also be the case that everything is ideal – employment, income, credit score and etc. Just remember, for a mortgage broker getting you what you want is his/her only source of income, where as for a bank employee income comes either way. For that reason, the broker is more interested in closing a deal and tries to provide you with solution with the best available rate. In most cases, brokers are able to offer rates lower than major banks. This is usually possible by forgoing some commission but also due to the knowledge of what institutions currently offer the best rate.
Additionally, it is important to read the fine print. If for some reason, you have to switch from variable to fixed rate, with the large banks, you will never get a good rate. What if you need to break a contract with a fixed rate, the penalties at the large banks can be as much as 5 times higher than smaller institutions. ▲
Why does the bank have to check the price of the house? I remember that when I took a mortgage for the first time (15% down payment) nobody asked me to estimate the value (Appraisal). Now, the bank asks to pay for the appraisal $250 plus tax. In my opinion the bank isn’t risking too much, as now, it’s lending only 70% of the house cost.
Unfortunately, people are very ingenious when it comes to swindling. Recently I heard a story where a dwelling was sold in Moscow. The buyers received a mortgage of $800,000 for a dwelling that cost only $400,000. Sellers were very surprised, buyers dodged the questions – it’s not your problem, we’ll figure this out. In Canada with its stable market and concrete rules, established and verified over time, this is not possible – during each purchase there is property appraisal. If the down payment on purchase is less than 20%, mortgage is insured with appropriate appraisal of the property made. Appraisal is usually performed via computer database, however if the database is not enough for the insurance company to make a reliable estimate of the dwelling in a certain region, the insurance company sends an appraiser, the cost of whom goes into the mortgage insurance amount.
Accordingly, when a down payment of 20% or above is made insurance company is not included in the process and the bank employees themselves make a decision on mortgage offer and amount. In order to minimize the risk, it is absolutely necessary for the bank to know the type of real estate and its real cost. That’s why the appraisal will always be part of the process and you will have to pay for this service. Upon buying and refinancing you will have to pay for the appraisal, but when transferring banks upon mortgage renewal, the new mortgage lender partially pays for this. ▲
If I put in some large amount of money, thus partially paying off the mortgage, will my payments decrease?
No!!! Mortgage payments will not decrease a dollar, because in the contract it states that in the following 5 years fixed mortgage payments will be permanently set at, let’s say, $1,500 a month and variable mortgage payments are determined using a specific formula. If you put in some additional amount to pay off the mortgage, then the relationship between interest and principle will change with regard to your monthly payments – more money will go towards paying off principal, since the debt amount has decreased. However, this does not affect the size of mortgage payments; amortization period will in turn shorten. Therefore, be attentive when deciding to put in a large amount to pay off the mortgage. ▲
How far in advance should you start working on your mortgage renewal?
It’s better to start looking for a new mortgage 3-4 months prior to the ending date of the old mortgage. A simple example – at the end of May 2007, fixed mortgage interest rates started rapidly growing, changing in two weeks from 5.19% to 5.69%; in the following few weeks the banks raised the interest to 5.89% – in one month mortgage market has drastically changed. It’s better to fix the interest and wait to see what happens in the following months. In my opinion that is the most reasonable way. Besides that, our office suggests that you sign up for a special program, “Manage Your Mortgage”. Once part of this program, we will start 3-4 months in advance looking for the best interest. You can read the conditions and sign up for “Manage Your Mortgage” program in the section “Mortgage and Buying Property”. ▲
If I make additional payments on the mortgage, on top of the required monthly payments, will my monthly interest decrease?
Yes, it will! If you put in any amount on top of your minimum, monthly payments, the relationship between interest and principal will change immediately. Interest that you have to pay back will decrease, since the debt will decrease, and the amount going strait towards paying back your principle will increase. The monthly payments will not change, since fixed payments (fixed mortgage) and specific formula (variable mortgage) are agreed upon in the contract and are set for the duration of the deal – mortgage term (5 years, 4, 3, 2, 1 year, 6 months). That’s why be attentive when considering repaying parts of mortgage with additional funds. ▲
On the last few days before closing the deal, the lawyer informs me of unexpected turn of events – I have to invest a considerable sum of money, otherwise the transaction will not go through. This would not have been a problem, had we known in advance. What happened?
Most often these kinds of situations occur regarding property tax. The government demands that the tax for real estate be paid on time, it’s very important. Some real estate owners pay taxes on the dwelling themselves – instalments are made till September of the current year; others pay along with the mortgage. Money received from property tax is put into special account and gets transferred to the government twice a year – in February and July. Meaning, before July the bank must transfer all the annual taxes to the government. Let’s say, the deal is closing in the second half of the year and the previous owner has already paid taxes on the property for the whole year. The new owner must return appropriate amount to the previous owner. Of course, this happens upon signing the contract with the lawyer. This is where there are unexpected costs that no one predicted. If the monthly payment on property tax is $350, then upon closing the deal in September the lawyer, besides costs of his services and land transfer tax, may ask another $1,050 ($350×3 months). ▲
I have heard that it’s possible to avoid mortgage insurance when the down payment is 20%. I go to the bank and they tell me that insurance is necessary. Who is right?
Almost everyone knows the following condition on buying mortgage: if the buyer’s down payment is less than 20%, then the bank will register mortgage insurance. This insurance is necessary and there are no ways to avoid it. In the recent years this program has went through major changes. Beginning end of April of 2007, those, that have 20% down payment and are full time employees or are self-employed and are showing a high income (i.e. after tax write offs) also have the option to receive a mortgage without this mandatory insurance. Those not showing sufficient taxable income, the required down payment to obtain a mortgage without insurance is 35% of the purchase price. So to answer, you may simply be not qualified under those conditions. ▲
When I bought the house I didn’t have 25% down payment, so I had to be insured through CMHC insurance program. Then, I have redone the mortgage in another bank and was forced to pay for the same insurance program again. That’s unfair. Is that really necessary?
Unfortunately this does happen. A lot depends on mortgage broker and his/her attentiveness to the current situation. The bank doesn’t care too much about what happens with your insurance, whether you are paying for the new one or not – it’s not the bank’s money at stake, but its clients. It’s important for the bank that the deal goes through and the insurance company gives go-ahead. Contrary to the bank, the buyer does care about the amount, time and cause of the costs. The only specialist with whom this question should be dealt with is the mortgage broker. The question is fairly complex, but I will try to explain some of the conditions.
If you have bought real estate, took mortgage for 25 years, lived in the house for 3 years and want to refinance or simply transfer the mortgage to another bank, or if you have sold and immediately bought a new property and have redone the amortization period for another 25 years, the insurance will have to be paid again for the full, new amount… Alternatively, if you are shortening the amortization period by number of years that have already passed (3 years), that is, taking the mortgage for 22 years, then the insurance will be taken for the money that you are taking on top of your original mortgage amount – Top-Up Premium.
If you want to increase existing mortgage amount (refinancing), then remember that Top-Up Premium is for the difference between new and old loan. Since with Top-Up Premium the rates are higher than with original insurance, a decision should be made each time – whether to take the new insurance all over again or pay only for Top-Up Premium.
Top-Up Premium
| LTV Ratio | Total Loan Amount | Top-Up Premium |
| Up to 65% | 0.50% | 0.50% |
| 65.01% – 75% | 0.65% | 2.25% |
| 75.01% – 80% | 1.00% | 2.75% |
| 80.01% – 85% | 1.75% | 3.50% |
| 85.01% – 90%** | 2.00% | 4.25% |
| 90.01% – 95%*** | 2.75% | 4.25% |
| 95.01% – 100% | 3.10% | 4.80% |
| * A .20% premium surcharge will be applied to the above premium rates for every 5 years of amortization beyond the traditional 25-year mortgage amortization period. ** Maximum unless original LTV was greater. *** Add .15% premium surcharge to above rates for Cashback Equity. |
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Everyone knows that with real estate purchase and a small down payment, mortgage insurance is necessary. If in the future, one is to refinance the property with an objective to increase mortgage amount, in this situation, instead of paying the insurance all over, one would pay an additional amount known as top-up insurance premium.
Top-Up Premium – additional insurance payments that are charged by insurance companies for, so called, high ratio mortgages upon refinancing (increasing total mortgage amount) so that insurance premium doesn’t have to be paid in full once again for the whole mortgage amount.
To make the above clear, here are a few examples.
If you have bought real estate, took mortgage for 25 years, lived in the house for 3 years and want to refinance or simply transfer the mortgage to another bank, or if you have sold and immediately bought a new property and have redone the amortization period for another 25 years, the insurance will have to be paid again for the full, new amount… Alternatively, if you are shortening the amortization period by number of years that have already passed (3 years), that is, taking the mortgage for 22 years, then the insurance will be taken from the money that you are borrowing on top of your original mortgage amount – Top-Up Premium.
If you want to increase existing mortgage amount (refinancing), then remember that Top-Up Premium is for the difference between the new and old loan. Since with Top-Up Premium the rates are higher than with original insurance, a decision should be made each time – whether to take the new insurance all over again or pay only for Top-Up Premium.
Top-Up Premium
| LTV Ratio | Total Loan Amount | Top-Up Premium |
| Up to 65% | 0.50% | 0.50% |
| 65.01% – 75% | 0.65% | 2.25% |
| 75.01% – 80% | 1.00% | 2.75% |
| 80.01% – 85% | 1.75% | 3.50% |
| 85.01% – 90%** | 2.00% | 4.25% |
| 90.01% – 95%*** | 2.75% | 4.25% |
| 95.01% – 100% | 3.10% | 4.80% |
| * A .20% premium surcharge will be applied to the above premium rates for every 5 years of amortization beyond the traditional 25-year mortgage amortization period. ** Maximum unless original LTV was greater. *** Add .15% premium surcharge to above rates for Cashback Equity. |
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If the mortgage has already been issued and I have questions, whom should I call: mortgage broker or the bank?
As soon as a mortgage is registered, neither mortgage broker nor the bank employee, who made the decision about giving credit (mortgage underwriter), have the a chance to find out anything for the client nor ask something the bank on behalf of the client. For example, if you have decided to change payment frequency, to transfer from monthly to weekly payments and etc, we will gladly suggest what you should do and guide you in the right direction, but normally we won’t be able to help you beyond that. ▲
What is the longest amortization period today?
Today, most bank are able to offer a maximum amortization period of 30 years, if your down payment is 20% or higher. If the mortgage insurance is involved, the maximum amortization period is 25 years. But, if needed, there are financial institutions, that offer 35-year amortization with a condition of a down payment over 20%. ▲
What is the benefit of taking a long amortization period? For whom can it be beneficial? After all, a lot of money is repaid as the interest?
Let’s estimate. For example, a family has bought a property for the first time. The property costs $400,000 and the family’s own money is enough to cover 25% down payment. As a result, monthly payments are $1,370.15 (at, let’s say, 2.69% interest). The numbers are derived from a 25-year amortization period. If the family takes the mortgage for 35 years, then monthly payments will decrease to $1,098.39 – $271.77 lower than before. Amazing!!!??? But… the interest paid over 35 years to the bank will be significantly higher than with a 25-year amortization, which is very unprofitable.
If, however, you decide to pay $1,370.15 a month, instead of $1,098.39, and you have the right to increase your payments, and you are not changing the amortization period from 35 years, you will end up paying the bank the same as you would with a 25-year amortization period. Than why go through all the hassle, getting a mortgage for a longer period of time and paying more! You have the choice! If you chose to, you can pay the $1,370.50, or, you can keep the payments at $1,098.39, there are all sorts possible, unexpected, financial events. Maybe you knowingly want to have smaller payments today, to use the money for something else…At the end of your mortgage term, you can change all the conditions -pay full amount without penalty or lower your amortization period to any length.
There are other factors that can and should be taken into account. Advantageous – very few plan to own the same property for the whole 30-35 years. Old property is sold – done, this mortgage ceases to exist along with all its conditions. Thus, if today you want to own a property of choice, but pay for it as less as possible, then a long amortization period might be the choice for you.
Call, consult and choose what fits you best today. ▲
If I choose a 35-year amortization period, instead of the 25-year, and immediately start paying more than the minimum requirements of the mortgage, will I pay the bank more money in the form of the interest?
If a 35-year amortization period is chosen, but right away the monthly payments are as high as with a 25-year amortization period, no additional interest will be paid to the bank.
Thus, if the buyer found a property for $400,000, then with a $300,000 mortgage and 25-year amortization period, monthly payments will be $1,370.15 (2.69% interest). This amount goes towards paying off interest and principle, $672.50 goes towards interest and $697.65 goes towards principle. The last two values change from month to month, since mortgage decreases and more money goes towards paying off the principle and less towards the interest. This applies to every month (see the table below). In 5 years (60 months) bank will be paid $77,433 in interest, while the loan will shrink by $32,437.
Amortization Schedule 1
| Mortgage Amount: $300,000.00. Term: 5 yrs. Interest Rate: 5.50. Amortization: 25 yrs. Payments made: Monthly of $1,831.17. Compounded: Semi-Annual. |
| Payment # | Date | Interest | Principal | Balance | Total Interest |
| 1 | 08/01/2007 | 1,359.50 | 471.67 | 299,528.33 | 1,359.50 |
| 2 | 09/01/2007 | 1,357.37 | 473.80 | 299,054.53 | 2,716.87 |
| 3 | 10/01/2007 | 1,355.22 | 475.95 | 298,578.58 | 4,072.09 |
| 4 | 11/01/2007 | 1,353.06 | 478.11 | 298,100.47 | 5,425.15 |
| 5 | 12/01/2007 | 1,350.90 | 480.27 | 297,620.20 | 6,776.05 |
| … | … | … | … | … | … |
| 59 | 06/01/2012 | 1,218.08 | 613.09 | 268,178.69 | 76,217.72 |
| 60 | 07/01/2012 | 1,215.30 | 615.87 | 267,562.82 | 77,433.02 |
Grand Total: Interest – $77,433.02 Principal – $32,437.18
If a 35-year amortization period is taken, instead of the 25-year, then monthly payments may be $1,098.39, instead of $1,370.15. The difference is $271.77. Within our monthly payments, $672.50 goes towards interest and only $425.89 goes towards principle. Thus, what we put towards principle is less by $271.77 – the difference in payments between 25 and 35-year amortization period. Please note, the bank took exactly the same interest as if we were registered under the 25-year amortization period. This makes sense, since we own the bank exactly the same amount.
Mortgage amount is the same, however starting from the first month we decrease this total by a smaller amount – the mortgage amount that we still own after each month is a little bit larger than with the 25-year amortization period, thus in the second month our interest will be a little higher. This happens every month and as a result, with the 35-year amortization period, over 5 years (60 months) the interest will be $80,033.72, which is $2,600 more than in the first table, and the principle will be lowered only by $12,047.08. This difference of $2,600 is not that large once we take it apart. Divided by 5 years (60 months), it turns out that on average we over pay the bank by $43, at the same time avoiding $296 that go with the larger monthly payments.
Amortization Schedule 2
| Mortgage Amount: $300,000.00. Term: 5 yrs. Interest Rate: 5.50. Amortization: 40 yrs. Payments made: Monthly of $1,534.68. Compounded: Semi-Annual. |
| Payment # | Date | Interest | Principal | Balance | Total Interest |
| 1 | 08/01/2007 | 1,359.50 | 175.18 | 299,824.82 | 1,359.50 |
| 2 | 09/01/2007 | 1,358.71 | 175.97 | 299,648.85 | 2,718.21 |
| 3 | 10/01/2007 | 1,357.91 | 176.77 | 299,472.08 | 4,076.12 |
| 4 | 11/01/2007 | 1,357.11 | 177.57 | 299,294.51 | 5,433.23 |
| 5 | 12/01/2007 | 1,356.31 | 178.37 | 299,116.14 | 6,789.54 |
| … | … | … | … | … | … |
| 59 | 06/01/2012 | 1,306.98 | 227.70 | 288,181.65 | 78,727.77 |
| 60 | 07/01/2012 | 1,305.95 | 228.73 | 287,952.92 | 80,033.72 |
Grand Total: Interest – $80,033.72 Principal – $12,047.08
If you pay $1,831.17 a month, instead of $1,534.68, then automatically your amortization period will shorten to 25 years, even though in your mortgage contract it says 40 years for paying off the debt. This happens because you pay off the loan following exactly the 25-year amortization period; consequently the interest will be the same as with a 25-year amortization period. See Schedule 1. ▲
My bank has requested my last Notice of Assessment, even though I warned that I am self-employed. I have been told that my income doesn’t matter, then why do I have to show this document?
This happens and you should not be afraid to show your Notice of Assessment, this has nothing to do with checking your income. There are special programs for those who are self-employed, where there is no need for proof of income, but some banks request that you send them a copy of NOA, just to make sure the buyer does not have any outstanding tax obligations. ▲
Can a non-resident (the person who has no status) purchase real estate in Canada?
Yes, any person or family without a status in Canada has the right to buy real estate. A lot of banks don’t offer such an option and there are special conditions that must be fulfilled. For example, down payment must be no less than 35% plus some other nuances. Specific circumstances should be discussed with a mortgage specialist. ▲
Is it possible to avoid paying the bank for the mortgage? There is just no opportunity for me to pay this month. What are the consequences?
Some banks allow one missing payment a month. It’s necessary to read the contract to make sure that this is allowed. ▲
We have decided to purchase a new house that will be constructed only next year. Can we withdraw funds today, from our RRSP for down payment?
Yes, you can, but after taking the loan the house must be build no later than October 1st of the following year. At the least, the moving in date must be recorded as prior to October 1st. It’s often the case that construction gets delayed and moving in before October 1st becomes impossible. What then? Everything is fine as long as the moving in date was originally set prior to October 1st of the year following the year the money was borrowed. Even if in practice you move in much later, it’s ok, you will just let the government know about the delay. ▲
What is the interest adjustment date? When do I really begin paying for the mortgage?
This question is often asked by those who make their first purchase. It’s hard to believe, but your mortgage payments are for the time that you have already lived on your property, not a month ahead. Thus, if the closing is on October 10th, November 1st will be interest adjustment date and December 1st you, for the first time, will pay for mortgage. From October 10th to November 1st you will not be living in your house for free, yet you won’t have to pay your mortgage yet. During this period the bank will ask you to pay the interest from the total mortgage amount – this period usually lasts from closing date to the first day of the following month – this latter date is what’s called the Interest Adjustment Date. Turns out that the first full month that you live in your new property – 1st November to 1st December – will be covered by your first instalment. ▲
What is the first, the second and the third mortgage? Why is the interest usually higher on the second mortgage, in comparison to the first?
A single property can have more than one mortgage. If there is more than one property, then there can be only one mortgage per property. If any one of the properties has more than one mortgage, that property won’t be paid for anymore and the property is put for sale. After the sale, the money goes to everyone who has contributed towards mortgage. Who ever gave the money first, will receive it first, then its second lender’s turn, etc. Consequently, bank giving the first mortgage is risking less as compared to the bank giving the second or third mortgage. Accordingly, the interest banks offer is affected by the risk they are taking. ▲
I want to buy a second property, let’s say for investment. I have requested a second mortgage, which I’ve been told will be at a higher interest. I don’t understand, why? I have never heard before that the interest on the second property has to be higher.
As a rule, during discussion of mortgage conditions there are misunderstandings. There are first, second or third mortgage – usually all on one property. Second mortgage has a higher interest than the first, as there is an increase in bank’s risk of loosing money, in case of buyer’s inability to pay back. However, with the second real estate purchase the buyer gets a first loan – first mortgage, and not a second mortgage, as there are no other debts on this property. Accordingly, the interest will be regular and not increased. ▲