Home Buyers Mortgage Guide

Transcription

1 Section for Non-Residents NEW! Construction Financing Step by Step Guide the complete Construction Financing Step by Step Guide Home Buyers Mortgage Guide garibaldimortgage.com On-line Application Rate Alert International Currency Converter Amortization Schedule Home Buyers Mortgage Guide Sign up for our Mortgage Monitor A complimentary service for you to track your payments, play around with different rates, and see how your mortgage can be paid off faster! In Whistler Phone fax In squamish Phone fax Toll Free in Canada & USA Phone fax

2 table of contents A. Introduction B. Mortgage Qualification Procedures B1. General Information B2. Job Stability B3. Sources Of Income B4. Employment Income Verification B5. Other Sources Of Income B6. Credit History B7. Source Of Down Payment B8. Income And Expenses (GDS/ TDS Ratios) B9. Property Information And Documentation C. Mortgage And Property Definitions C1. Conventional C2. High Ratio C3. Freehold Ownership C4. Leasehold C5. Condominium C6. Co-operative C7. Joint Tenancy C8. Tenants In Common Or Undivided Owner Ship C9. Fractional Interest Properties D. Mortgage Options D1. Closed Mortgage D2. Open Mortgage D3. Convertible Mortgage D4. Fixed Rate Mortgage D5. Variable Rate Mortgage D6. Payment Options D7. Amortization And Payment Frequency Comparisons D8. Portable & Assumable Mortgage

3 table of contents E. Cmhc Policies & Procedures E1. What Is CMHC s Role? E2. CMHC Fees & Premiums E3. Extended Amortization Options E4. CMHC s 1-4 Unit Rental Program E5. High Ratio Financing For Self Employed Applicants E6. CMHC Second Home Lending Program F. Other Government Incentives F1. Using Your RRSP For Down Payment F2. Property Transfer Tax Information F3. First-time Home Buyers Tax Credit G. Closing The Deal G1. Estimated Costs H. Mortgage payment calculator I. Non-residenT lending I1. Non-resident Lending I2. Whistler Condo Financing I3. How Canadian Mortgages Work J. construction financing J1. Understanding the Construction Financing Process J2. Construction Financing Example Sheets K. Glossary of mortgage & real estate terms

4 A. INTRODUCTION For most people, buying a home will be the largest purchase they will ever make. Besides being a necessary source of shelter for you and your family, it may also be an important investment for your future. As mortgage brokers it is our job to find you the best possible mortgage financing for your own unique situation. The following is a list of just a few of the lenders we work with on your behalf: CIBC Citizen s Bank (owned by Vancity) Concentra First National FirstLine Mortgages HSBC Home Trust ING Macquarie Financial MCAP Merix Financial National Bank of Canada North Shore Credit Union President s Choice Financial Scotiabank Squamish Savings (owned by Vancity) TD/Canada Trust We would be pleased to assist you with your home purchase. Application can be made by telephone, fax, or on-line. We even do house calls. This guide has been developed to assist and guide you through the home buying and financing processes. It will provide you with the information necessary to make an informed decision about purchasing and financing your new home. We are able to arrange 1st / 2nd mortgages for purchases and/or refinance for both residential and commercial property. Construction financing, transfers/switches, & lines of credit are also provided. In some cases broker / lender fees may be charged, but not without your consent.

5 B. MORTGAGE QUALIFICATION PROCEDURES B1. General Information There are many factors taken into consideration when a lender is qualifying you for a mortgage. Among the deciding factors are: family income and job stability, past credit history, net worth (assets minus liabilities), source of down payment, the amount of the mortgage and its percentage of the value, and finally your debt service ratios. You will be asked to fill out a mortgage application and authorize the institution to perform a credit investigation (also called a Credit Bureau or Bureau for short). There are many sources of funds for financing: banks, trust companies, life insurance companies, other finance companies and private lenders. B2. Job Stability Lenders like to see the progression of your employment over a two to five year period. Generally speaking, the minimum length of time on your current job that is considered acceptable is 1 year. If you have been employed less than 1 year in your current job, the lender may make an exception provided your current job is related to your previous one (i.e. in the same industry) or you were previously in school. B3. Sources of Income Whether you are a salaried, hourly or commission-based employee, the lender will require proof of your income. In order to use your income for qualification purposes, the lender must be confident that it is: a) Stable and likely to continue over a reasonable period of time, and b) Declared to the government on your income tax return. Any income that is earned as cash or under the table cannot be used to qualify you for a mortgage. It is up to the lender to decide what is appropriate in each case. If you are self-employed, the income verification process is a bit more complicated in that you will have to provide a minimum of 2 years worth of business financial statements and tax returns. B4. Employment Income Verification

6 B. MORTGAGE QUALIFICATION PROCEDURES B5. Other Sources of Income As with employment income, you will also have to provide proof of any other sources of income you may have. Below are some of the most common sources of income and the documentation required: In all of the above cases, the lender may request 2-3 years copies of your Canada Revenue Agency Notice of Assessment to confirm the amount of these incomes. B6. Credit History Since your past credit activity is considered to be the best indicator of your future ability and/or willingness to repay debt, the lender will rely heavily on your credit rating to make a lending decision. They will request a credit report from your local credit bureau. This report is referred to in the industry simply as a bureau. The bureau will show all your past credit activity including loans, credit cards, lines of credit, collections, judgments, and bankruptcies for the past 7 years. Each item on the bureau is given a rating from 0 to 9. Zero represents an inactive account and 9 represents a written off or bad debt. The best rating is a 1. You will hear terms such as I2 or R9 which are the codes given to evaluate each debt reported on the bureau. The rating will start with either an R, I, or O depending on the type of debt, but the number of ratings all mean the same thing. To avoid surprises or misunderstanding, it is best to be up front about any past credit problems you may have had. As long as your past credit problems are supported by a valid explanation, they will be considered to be part of your past and you may still be approved for a mortgage. There are two credit bureau reporting agencies, Equifax and Trans Union. Their web sites are as follows:

7 B. MORTGAGE QUALIFICATION PROCEDURES B7. Source of Down Payment The lender will also want to know where your down payment is coming from. That is, have you saved the funds yourself over a period of time? Do you have stocks, bonds, RRSPs, mutual funds or other investments that you are cashing? Are you receiving a gift from a relative? Are you selling an asset you already own? Are you refinancing an existing property? The amount of down payment relative to the purchase price will also be evaluated. A lender s decision to approve the mortgage application will also take into account what percentage of equity you will have in the property. For example, are you putting down 25% of the purchase price from your own savings or will you be receiving a gift for 5% of the purchase price? The more equity you have from your own funds, the stronger your application is considered to be. Wherever your down payment is coming from, the lender will require documented proof of its source:

8 B. MORTGAGE QUALIFICATION PROCEDURES B8. Income and Expenses (GDS/TDS Ratios) Historically, lenders and high ratio insurance providers (CMHC, Genworth) maintained the qualifying formula shown below as a guide for income to debt ratios. Recently, in the last couple of years, this formula has been relaxed. Depending on your credit history (a minimum beacon score of 680 is required) and your level of downpayment, you may be eligible for no GDS and a TDS of up to 44%. What does this mean for you? It means that your income is recognized to carry more for a mortgage which may help you purchase the property that you really wish for. GDS (Gross Debt Service) and TDS (Total Debt Service) ratios are the two factors that lenders and CMHC take into consideration when they are determining how much of a mortgage you qualify for. These ratios take into account your gross family income (before taxes) and divide that into your expenses. The maximum GDS ratio is 32% and the maximum TDS is 40%. These are the accepted industry guidelines. GDS and TDS are calculated as follows: GDS = (Max 32%) Mortgage Payment + Property Taxes + Basic Heat Condo Maint Fee Gross Family Income TDS = Mortgage Payment + Property Taxes + Basic Heat Condo Maint Fee + Other Exp* (Max 40%) Gross Family Income *includes loan, credit card, and other monthly obligation B9. Property Information and Documentation After evaluating you as a mortgage applicant, the second part of the mortgage approval process looks at the property you are purchasing. As mortgagee, the lender will be concerned with the property they will be using as security for their mortgage. They will want to know the specifics of the property, namely, the purchase price, location, and size. Your lender may require some or all of the following documents: 1. A fully executed copy of the Agreement of Purchase and Sale along with all the attached schedules, amendments and waivers. Fully executed means that all the pages, additions, and changes have been signed and/or initialed by all parties. 2. An MLS listing or feature sheet and picture of the property. Among other things, this contains details of the location, condition, asking price and features of the home. 3. A recent appraisal of the property to determine the lending/market value.

9 C. MORTGAGE AND PROPERTY DEFINITIONS Below are the definitions of some of the more common terms you will hear with respect to your home purchase and financing. C1. Conventional The conventional mortgage is one that is offered on new and existing homes for up to 80% of the purchase price. This means that the home buyer must have at least 20% of the purchase price available for a down payment. Conventional mortgages do not normally have to be insured through CMHC or Genworth. C2. High Ratio The term high ratio refers to mortgages that represent more than 80% of the value of the purchased property. High ratio mortgages must be insured through CMHC (Canada Mortgage & Housing Corporation), or Genworth. The insurance premium that is paid to CMHC is to protect the lender in the event that the mortgage is not paid and the bank has to take back the property. This is not the same as mortgage life insurance. The benefit to the borrowers is that it allows them to purchase a home with as little as 5% down. C3. Freehold Ownership Owner has title to and full use of the land and buildings on it over an indefinite period. C4. Leasehold A person has use of the property for a limited time. Usually, the land is owned by the federal, provincial or municipal government and land lease payments are made to them. In the case of a residential home purchase, the purchaser owns the building but not the land on which it sits. The term leasehold can also refer to situations where both the building and the land are being leased. C5. Condominium Owner has full and sole use of a housing unit. The owner shares ownership of common space such as parking garage, and recreation areas with others who all belong to the same condominium group. Since ownership of common space is shared, so are repair, maintenance and replacement costs. Usually these expenses are covered through the strata maintenance fees. C6. Co-operative Persons have a share in a residential project. They do not have ownership of a particular unit, but as shareholders they each have use of a unit.

10 C. MORTGAGE AND PROPERTY DEFINITIONS C7. Joint Tenancy If you buy a home with another person or with several other people, many types of ownership agreements can be in place. As joint tenants, each owner holds an equal share in the property regardless of his or her individual financial contribution. If an owner dies without any specific arrangements having been made, his or her share is automatically transferred to the other owner(s). C8. Tenants In Common or Undivided Ownership Each owner holds a specific portion of the property but the portions do not have to be equal. Each individual owner can sell or assign his or her share to any other person, subject to any restrictions that were originally stated in the deed. Rights of survivorship do not exist in this case, so upon the death of one of the owners, their share becomes part of their estate and is dealt with according to the provisions set out in their will. Or, if no will, according to the relevant provincial law. C9. Fractional Interest Properties Fractional Interest properties come in many varieties. The most common are quarter share, tenth share, and time share (1/51st). The title structure for most Fractional Interests includes a proportionate share of the fee simple title, which is charged with a headlease to a management company or owner s association, and a sublease of the headlease, which defines when occupation associated with the fraction actually takes place. In some instances (Montebello, Whistler, BC) the owner also receives a share of the company that holds the headlease. The choice of Lenders may be limited for these Fractional Interest properties. If the title structure is unconventional, then finding a lender may be much more difficult as there may be no formal structure to allow the lender to foreclose if they have to. One lawyer cannot act for both borrower and lender in financing Fractional Interests. The borrower will have to pay for both their lawyer and the lender s lawyer, so the costs of closing a Fractional Interest property are greater.

11 D. MORTGAGE OPTIONS D1. Closed Mortgage The term closed mortgage refers to the fact that there are penalties incurred in the event the mortgage is fully paid, either from sale of the property, a refinance to a different lender, or from your own resources. Some closed mortgages can only be paid off from the sale of the property. The penalties can vary depending on if you are in a closed fixed rate mortgage, or a closed variable rate mortgage. It is best to obtain the specific penalty policy from your lender regarding the specific type of mortgage you are taking. Most lenders allow prepayments based on a certain percentage that can be paid each year, the percentage varying depending on the lender. The usual range is 10 to 20% per annum, and based on the original amount borrowed. Closed fixed rate mortgages usually have a lower rate than open mortgages, and are a good choice for those who want the security of knowing their mortgage rate and payments will not change until the end of the mortgage term. D2. Open Mortgage Allows borrowers to repay all or part of the total amount of their mortgage at any time without penalty. Because of this flexibility, this mortgage is ideal for borrowers who plan to sell their homes or otherwise pay out their mortgage in the near future. An open mortgage also provides flexibility for mortgagors who may wish to take advantage of lower rates and lock in (convert) to a longer term mortgage at a moment s notice. However, if the sole reason for wanting an open mortgage is to allow conversion to a longer term, the mortgagors may be better served by obtaining a convertible mortgage. D3. Convertible Mortgage A closed, short term mortgage, usually 6 or 12 months, which allows the borrower to switch into a longer term at any time without penalty. The rate is usually lower than the open mortgage because the only option available is to convert. These mortgages are best suited for people who want to watch the market over the short term before deciding if and when to lock in. D4. Fixed Rate Mortgage Both closed and open mortgages can have the feature of a fixed rate. This means that the rate of interest is set for the term of the mortgage, which may be as long as 25 years or as short as 6 months. Because of this, the regular payment amount of the principal and interest remains the same throughout the term. 10

12 D. MORTGAGE OPTIONS D5. Variable Rate Mortgage The rate of interest changes from time to time as money market conditions change, but usually no more often than once a month. This type of mortgage was developed in order to provide maximum flexibility to borrowers in times of volatile or fluctuating interest rates. Although the interest rate charged on the mortgage fluctuates, the amount of the regular payment usually does not change throughout the term of the mortgage. Because of this, the rate fluctuation will affect the way each payment is applied. Since payments are made up of both principal and interest, when rates go down, more of the payment will be applied towards the principal. If interest rates rise, more of the payment goes towards interest. If interest rates rise dramatically, the borrower may be required to make a lump sum payment against the mortgage, or increase the payments to ensure pay down as per the original amortization. Most variable rate mortgages offer conversion options to allow you to lock-in to a fixed rate mortgage term. D6. Payment Options Payments are usually made either monthly, bi-weekly, weekly, or semi-monthly. Bi-weekly means every 2 weeks, weekly means every week, and semi-monthly means twice a month. By paying bi-weekly or weekly you pay the equivalent of approximately 1 extra monthly payment against the principal per year and this helps to pay your mortgage off sooner. D7. Amortization and Payment Frequency Comparisons Example: Mortgage Amount: $100,000 Interest Rate: 8% Amortization: 25 years Interest Paid*: $128, *Assumes a constant rate of interest 11

13 D. MORTGAGE OPTIONS D8. Portable & Assumable Mortgages Portability and assumability features offer additional flexibility. Portable means that the borrower can take their current mortgage to a new home at the same rate, etc. If the current mortgage is not enough to cover the purchase of the new home, the lender will often let you increase the mortgage and charge you current rates only on the portion being increased (called blending the rate). Assumable means that, with the approval of the lender, the purchasers of a home may take-over the vendor s mortgage. Allowing a prospective buyer to assume your mortgage when the rate is lower than the current market rates may increase the marketability of the property being sold. 12

14 E. CMHC/GENWORTH POLICIES & PROCEDURES E1. What Is CMHC s Role? Canada Mortgage and Housing Corporation is a crown corporation whose broad mandate includes programs to assist Canadians with housing matters. The most frequent contact most people will have with CMHC will be as a provider of mortgage insurance on high ratio mortgages. GENWORTH provides the same service and high ratio insurance as CMHC, however they are privately owned and operated. By law, financial institutions require that all mortgages with a loan to value ratio greater than 80% be insured against default. CMHC provides mortgage loan insurance to approved lenders in the event that the home owner defaults on their mortgage. Depending on the situation, a lender may also request that a conventional mortgage be insured through CMHC. E2. CMHC/GENWORTH Fees & Premiums The following is a summary of the insurance premiums for different loan to value ratios: LTV Ratio Purchase Premium Cash-Out Refinance The Lesser of Premium as % of Total Loan Amount Top Up Portion Up to 65.% 0.50% of the mortgage 0.50% 0.50% to 75% 0.65% of the mortgage 0.65% 2.25% to 80% 1.00% of the mortgage 1.00% 2.75% to 85% 1.75% of the mortgage 1.75% 3.50% to 90% 2.00% of the mortgage 2.00% 4.25% to 95% 2.75% of the mortgage 2.75% 4.25% to 95% CMHC Flex Down 2.90% of the mortgage * Please note that for extended amortizations, CMHC will add.20 for every 5 years beyond a 25 year amortization. So, for a 35 year amortization, there is a.40 premium surcharge added. This premium surcharge applies no matter which high ratio insurance program you are applying under. In a refinance transaction, the premium payable is the lesser of a) the new loan amount multiplied by the full premium rate below, or b) the increase in loan amount (top-up amount) multiplied by the top-up premium rate in the table above. The insurance premium may be paid in full on closing or added to the mortgage amount. If added to the mortgage, interest is then paid on the insurance premium over the amortization of the mortgage. Since most buyers do not have the extra cash on closing, it is most common to add the premium to the mortgage. 13

15 E. CMHC/GENWORTH POLICIES & PROCEDURES E3. Extended Amortization Options A premium surcharge of.20 is added for every 5 years beyond 25 years, up to a maximum of 35 years. So, to amortize your mortgage up to 35 years you would add.40 to the insurance premium. E4. CMHC s multiple UNIT RENTAL PROGRAMS This program is broken down into two categories 1-2 Units or 3-4 Units. This means the number of CMHC insured mortgages owned or being acquired for rental properties. Eg. if applicants have one CMHC insured rental property and are buying a second one for rental, they would qualify under the first category. If they already own two CMHC insured rental properties, and are acquiring a third, they would qualify under the second category. 1-2 unit rental program Up to 95% Financing for purchase or refinancing. 3-4 unit rental program Up to 90% Financing for purchase or refinancing. Maximum amortization is 35 years. Not allowed for Self-Employed program. Applicants must be fully qualifying. Minimum beacon score requirement for a purchase of up to 95% financing, and with down payment from own resources is 600. Minimum beacon score requirement for a refinance up to 95% is 650. Qualifying based on following formula: PITH (all properties) + All Other Debt Obligations less 80% of Gross Rental Income (All Properties) Gross Annual Household Income 42% PITH = Principal, Interest, Taxes and Heat Insurance Premiums Purchase Refinance/ Premium on Increase to Loan Amount Up to and including 65% 1.25% 2.75% 65.01% to 75% 1.75% 3.00% 75.01% to 80% 2.50% 3.75% 80.01% to 85% 3.50% 5.00% 85.01% to 90% 4.75% 6.25% 90.01% to 95% Traditional Down Payment Non-Traditional Down Payment 6.50% 6.75% 8.00% N/A * Please note that for extended amortizations, CMHC will add.20 for every 5 years beyond a 25 year amortization. So, for a 35 year amortization, there is a.40 premium surcharge added. This premium surcharge applies no matter which high ratio insurance program you are applying under. 14

16 E. CMHC/GENWORTH POLICIES & PROCEDURES E5. High Ratio Financing For Self Employed Applicants There are lending programs available to assist applicants that are self-employed. CMHC and GENWORTH each have their own program. Financing is available up to 95%. Applicants must be up to date with tax filings, and showing no tax arrears. The reported income is not looked at for qualifying purposes. Applicants need good credit with a minimum credit bureau beacon score of 700 for 95% financing. In a refinance transaction, the premium payable is the lesser of a) the new loan amount multiplied by the full premium rate below, or b) the increase in loan amount (top-up amount) multiplied by the top-up premium rate in the table below.the premiums are higher, as follows: Purchase Cash-Out Refinance The Lesser of Premium as % of LTV Ratio Bureau Scores Premium Total Loan Amount Top Up Portion 65.01% - 75% % 1.00% 2.60% 75.01% - 80% % 1.64% 3.85% 80.01% - 85% % 2.90% 5.50% 85.01% - 90% % 4.75% 7.00% % % - - * Please note that for extended amortizations, CMHC will add.20 for every 5 years beyond a 25 year amortization. So, for a 35 year amortization, there is a.40 premium surcharge added. This premium surcharge applies no matter which high ratio insurance program you are applying under. Ideally, applicants need to be self-employed for at least 2 years, or have 2 years in the same type ofwork even if not the self-employed capacity. Down payments can NOT be gifted. E6. CMHC Second Home Lending Program CMHC will allow home owners to have 2 CMHC insured mortgage loans with them, one for their principal residence, and one for a 2nd home, or home occupied by a family member. Financing is available to 95% at the standard insurance premiums, as outlined on page 12. The property can be anywhere in Canada and must be suitable for and available for, year round occupancy. Properties located on an island must have year-round bridge or ferry access. Time-share interests, life leases, and properties in rental pools are not eligible. Applicants must qualify without the use of rental income. Applicants under the Self- Employed program are also eligible to a maximum loan to value of 95%. 15

17 f. OTHER GOVERNMENT INCENTIVES F1. Using Your RRSP For Down Payment The guidelines are as follows: You cannot have owned your principal residence in the last 5 years. Commencing January 28, 2009, first-time home buyers can withdraw $25,000 from a Registered Retirement Savings Plan (RRSP) to purchase or build a home, without incurring tax. Previously, the limit was $20,000. You must make repayments to your RRSP of equal amounts over the next 15 years. If the amount is not repaid in a year, that year s amount will be taken into income and taxed. It is acceptable to repay more than 1/15th of the funds per year. If less than 1/15th is repaid in one year, the difference is taken into income for that year and taxed. The home must be intended to be your principal residence. The funds must be in your RRSP for at least 90 days prior to withdrawal. The government website for more information is: F2. Property Transfer Tax Information When buying a home in BC, there is usually a government charged property transfer tax. As a first time home buyer however, this can be waived if certain conditions are met. Here are a few of the basic conditions: Must be a Canadian citizen, or a permanent resident as determined by Immigration Canada. Purchase price cannot exceed $425,000. You must not have previously owned your principal residence, anywhere in the world. You must have resided in BC for the period 12 months before the date of purchase, or you have filed 2 income tax returns as a BC resident during the 6 years before the date of property registration. For complete details, please go to: F3. FIRST-TIME HOME BUYERS TAX CREDIT First-time home buyers that acquire a qualifying home after January 27, 2009, can claim a 15% non-refundable tax credit on up to $5,000, for a maximum credit of $750. If a home is purchased jointly, the total credit that may be claimed by all purchasers is $750. The unused portion of the credit can be transferred to a spouse or common-law partner. 16

18 g. CLOSING THE DEAL G1. Estimated Costs 15 A few days before closing, your lawyer will have you come into his or her office to sign all the mortgage documents. When they set up this appointment, they will give you the final figure of how much you should write your cheque for and to whom it should be payable (usually the lawyer or legal firm in trust ). You will receive a Statement of Adjustments which will show you exactly how your funds are being disbursed. *Costs are estimated and will vary depending on each individual transaction and property. 17

19 H. MORTGAGE PAYMENT CALCULATOR Mortgage Payment Calculation Chart Per $1,000 Of Mortgage Example: $100,000 5% amortized over 25 years = $5.82 per $1,000, so, 100 x 5.82 = $582 per month. Interest Rate (Compounded Semi-Annually) Amortization Period (In Years) You can also visit our internet web site at: garibaldimortgage.com At this site you can calculate your mortgage amortization schedule and then print out the details of all your payments. You can also view the latest best rates that we have access to. 18

20 I. NON-RESIDENT I1. Non-Resident Lending We frequently receive requests from non-residents of Canada looking for financing for the purchase of revenue or vacation property. While the general guidelines from most banks observe a maximum 65% loan to value policy, we do have lenders that will make exceptions to 75% depending on each application, and the type of real estate you are buying. Depending on your purchase price, the lender may reduce the loan to value ratio, as every bank has different formulas they follow on larger loan amounts. For example, a high value purchase in excess of $2,000,000 may have a maximum loan availability of 55%. As every client situation and property is different, we are able to obtain exceptions and provide financing over and above guidelines, on a case by case basis. You may hear terms like payment hypothecation and assignment of rents. Payment Hypothecation refers to a deposit equal to 3-6 months worth of payments held for at least 1 year in a separate, interest-bearing vehicle. It provides additional security for the loan, and is more common when financing up to 75%. These funds are usually released after one year at the lender s discretion, as long as the mortgage has been repaid as agreed. Assignment of Rents refers to a lender issued document registered on the title of your purchase at the time of mortgage registration. It entitles the lender to use rental income to make up any funds in arrears if the mortgage were ever to go into default. As long as the mortgage is in regular repayment, the lender has no cause to use the assignment of rents. I2. Whistler Condo Financing In the Whistler area, condominiums are generally divided into 2 types: Phase I and Phase II. Phase I properties allow full year round use at the owner s discretion, and when not in use, there is an expectation that the property be placed in a rental pool. Participation is not mandatory. Phase II properties allow the owners to use the condo 28 days in the summer and 28 days in the winter, and when not in use it must be placed in the rental pool. Rental pool participation is mandatory. Financing is generally available to 65%. Rates and possible fees should be discussed wtih your mortgage broker, as the available financing and terms for these properties vary depending on where you are filing tax returns, and your overall qualifications as an applicant. 19

21 I. NON-RESIDENT I3. how canadian mortgages work The way fixed rate Canadian mortgages work is like this: They are closed interest rate contracts closed for the term you select, ie one to 10 years. The maximum amortization available is 25 years. The penalty to break the interest rate contract prior to the maturity date is the GREATER of 3 months interest, or the IRD (interest rate differential). The IRD is the bank s loss of interest for the time remaining in the term. So if you take a 5 year fixed and pay it off after 3 years, either from your own resources, or by sale, the bank will calculate the IRD by comparing your rate, with the current rate for 2 years, and charge that on the balance to the end of the term. The estimate for 3 months interest is approximately 2 months worth of payments. Additionally worth noting is that in the Bank Act, the maximum penalty that can be charged after the 5th anniversary is 3 months interest so this is applicable for terms longer than 5 years. All of our lenders allow a prepayment percentage from 10 to 20%, based on the original amount borrowed. Some allow it only on the anniversary date, and some allow it cumulatively throughout the year. When any mortgage is up for renewal, you may pay off as much as you wish without penalty. The renewal process is very easy. As long as you are just renewing the balance, and not changing anything, you just choose a new term at whatever the prevailing interest rates are. There are no lawyers involved or re-qualifying procedures to go through. Please note, at the end of the term you are able to switch lenders if you are not getting a competitive offer - however by switching lenders, you will have to go through the re-qualifying process. Many of our clients contact us at renewal, and we assist you with either switching lenders, or negotiating a better rate from your existing. There is also variable, prime based financing available. The Canadian prime rate is reviewed every 6 weeks. Generally, with a closed variable rate mortgage, the penalty to pay off early is 3 months interest. With an open variable rate mortgage, there are no penalties for early pay off. 20

22 J. construction mortgage guide J1. Understanding the Construction Financing Process Building your own home is an exciting and rewarding project. We are here to help you understand the process of financing the construction of your new home so that you can get started with confidence and proceed with peace of mind. You may have some experience in obtaining mortgage financing but as you ll see, construction financing is a more detailed process, with several important milestones that don t take place when you buy an existing home. A substantial amount of your own funds are required up front. You are not reimbursed until the end, when the dwelling is 100% complete. Now is the time to plan It is never too early to plan. Read through the example sheets to ensure you have a clear understanding of how your advances work so that you request the right mortgage amount. What to Expect When you build your home, there are more steps and expenses than if you buy an existing home. In the simplest terms, a typical mortgage is advanced in one lump sum. Construction financing is different. At the bank, the total amount borrowed to complete a project is usually advanced in three stages within one year. Typical Mortgage You receive all of the money you borrowed at the time you obtain the property. Construction Financing At the Bank, you pay the up-front costs, then generally receive up to three advances. First advance at the Foundation stage. Second advance at the Lock-up stage. Third advance at the Completion stage. Determining what you need to get started During the application process, you will need to understand the initial costs that you will be responsible for. Land To secure construction financing you are required to own the land, as the bank will need to register a first mortgage on it. Servicing The land you intend to build on needs to be fully serviced. This includes site preparation and municipal services such as septic service, water connection, sewer connection, hydro and gas service. Soft costs These are out-of-pocket expenses for services and charges you are likely to incur at the outset of, and throughout, the construction phases. Depending on your plans and the location of your home, these will likely include: Property taxes Municipal permits Fees for architects and engineers Fees for realtors and solicitors Fees for appraisals and inspections Initial building costs You are expected to finance the initial stage of construction (approximately 15 to 20% of construction) with your own money. As every construction project is different, this percentage is an estimate only for example purposes. Cost overruns We recommend that you set aside an additional 15% of the estimated construction costs to cover unexpected overruns. Interest costs You are required to make interest -only payments on all amounts advanced until your regular principal and interest payments begin. In addition to the costs already outlined, you will also need to budget for lien holdbacks. 21

23 J. construction mortgage guide Lien holdbacks Different banks observe lien holdbacks in different ways. They may also be subject to change. It is best to clarify your lender s policy with your mortgage broker. Your solicitor may be required to hold back some of the money advanced at each of the Foundation, Lock-up and Completion stages of your construction project. This money is held in reserve in the event that a contractor or supplier claims a lien on your property. A lien is a claim by a contractor against the property to secure repayment of unpaid construction costs. The amount of your lien holdback and the number of days that your funds will be held in trust varies by province. The bank will instruct your solicitor to hold back a percentage based on the chart below. Ask your solicitor for details. The application Here s what you should plan to bring to your first meeting with a mortgage representative. All information associated with the construction Construction contract, including costs Construction plans or blueprints Quotes for labour and material if you are acting as the general contractor Site preparations, including municipal services for the lot (e.g. excavation, septic service, water, sewer, hydro, gas, etc.) Evidence of ownership of the land and/or a copy of the purchase agreement with evidence of available funds Other requirements to help fulfill the application or construction financing Province Percentage of Holdback Alberta 10 British Columbia 10 Manitoba 7.5 New Brunswick 20 Newfoundland 10 Nova Scotia 10 Ontario 10 Prince Edward Island 20 Quebec 15 Saskatchewan 10 Confirmation of required funds to complete the Foundation Stage Confirmation of income/employment Name, address and telephone number of your solicitor As we familiarize ourselves with the details of your project, we can tell you what, if any, other documents specific to your application may be required. The appraisal Determining the estimated value of your completed home. The Lender will obtain an appraisal to estimate the value of your completed home, including the land. 1 To arrive at an estimate, your appraiser will review your construction plans and blueprints to understand the type of home you are building. 1 For the purpose of the mortgage application, the value of the completed project is the lesser of a) the cost to construct including land value or b) the appraised value. 22

24 J. construction mortgage guide Your 1st advance - the FOUNDATION stage When you have completed the Foundation stage, we will send an appraiser to your home to inspect the property and confirm that the Foundation stage is complete. Up to this point, you will have paid all expenses from your own resources. At each stage, when you are ready for an advance, the bank will send out their appraiser to confirm that the work is completed and what percentage of work is left to complete. The lender will release your first advance of funds to your solicitor, who may keep a percentage of it as a lien holdback. The percentage varies by province. At this point monthly interest-only payments will commence. The amount of your first advance is determined by a formula based on the total requested mortgage amount and the remaining cost to construct your home. Prior to releasing the first advance, your solicitor will need - Builder s all-risk insurance assigned to the Lender A survey showing the location of all buildings to be constructed Confirmation that all necessary building permits are in place IMPORTANT NOTE It is important that you request the right mortgage amount. Review the examples found in the guide on pages prior to applying for a mortgage so that you understand how the advance schedule works. Your 2nd advance - the LOCK-UP stage The Lender will release your second advance to your solicitor. Once again, a lien holdback may be applied. The amount of your second advance is dependent on the requested mortgage amount, the amount of the first advance and the remaining cost to construct your home. Your 3rd advance - the Completed stage When you have completed your home, we will send an appraiser to your home to inspect the property. When the appraiser has determined that your building is complete, the Lender will release the final advance of finds to your solicitor. A lien holdback may be applied. Prior to releasing the final advance, your solicitor may request further documentation, which may include: Well Water Potability Certificate (if applicable) Flow Certificates and Septic Certificates (if applicable) Occupancy Permit New Home Warranty Certificates (if applicable) Release of lien holdbacks All lien holdback will be release to you approximately days (depending on your province) after your project has been completed, assuming there have been no lien claims made against your property. Anticipating mortgage interest and principal payments By the time your reach the Completed stage, most of your mortgage amount will have been advanced to you through your solicitor. You will be required to start making regular mortgage interest and principal payments shortly after receiving your third advance. 23

25 J. construction mortgage guide J2. Construction financing example sheets This example illustrates why it is so important to to apply for the maximum amount of financing you can obtain, rather than just the minimum budgeted amount. The higher financing allows for maximum flexibility during your advances which is important as unforeseen costs, due to materials, scheduling etc., can arise as construction progresses. Keep in mind that your final advance is not released until the project is completed. EXAMPLE 1 The land is owned free and clear of any financing, and the borrower is applying only for the minimum budgeted amount. Funds Needed Land Value: $500,000 Build Cost: 300,000 Total Value: $800,000 $300,000 Build Cost 45,000 Overruns 15,000 GST on Build Cost 5,000 Estimated Legal Costs 20,000 Soft Cost $385,000 Financing Applied For 1. You spend approximately $50,000 to establish the Foundation. 2. The bank sends out their appraiser. 3. The appraiser determines there is $250,000 required to complete the construction. 4. The first draw is calculated as follows: Approved Financing $385,000 less amount required to complete - $250,000 1ST ADVANCE released through Lawyer to use through to next stage - Lock-up = $135, $135,000 spent and the bank s appraiser is called out. The appraiser confirms there is $115,000 worth of work required to complete, calculated as follows: Build Cost $300,000 less Foundation - $50,000 less 1st Advance - $135,000 Amount required to complete = $115,000 24

26 J. construction mortgage guide J2. Construction financing example sheets 6. The 2nd Advance is calculated as follows: Approved Financing $385,000 less First Advance - $135,000 = $250,000 less Work required to complete - $115,000 2nd Advance Available = $135, The $135,000 is used towards the completion of the structure. 8. At this point, you will have spent $270,000 in advances, leaving approximately $30,000 needed in available credit to complete. This figure could be higher depending on how much in overruns you have incurred, and GST. At this stage, the funding to complete construction will have to come from outside resources and credit, as the final advance from the bank is not paid until completion. It is very important to plan for this. Will you be able to get funding from other resources at this stage? 9. The dwelling is 100% finished and the bank s appraiser is sent out once again to confirm if there is any work required to complete. If the appraiser confirms completion of the work, the bank releases the balance of the construction mortgage funds - $115,000 ($385,000 financing - $270,000 advances paid = $115,000) which at that point reimburses you to pay down any credit lines used. 10. Important POINT: This alternative scenario shows why it is important to try to obtain a higher than needed construction mortgage loan at the very beginning to provide flexibility in the mortgage draws. If $485,000 had been approved at the beginning, then outside credit lines would not have been needed to complete the structure: $50,000 Spent on Foundation $250,000 Required to Complete First Advance $485,000 Approved 250,000 $235,000 Available for Advance Second Advance $235,000 Spent and Appraiser confirms $15,000 required to complete $485,000 Approved - 250,000 less First Advance - 15,000 less Amount to complete $235,000 Available for Advance $470,000 has been made available in advances to complete structure completely, cover overruns, GST and legal costs. In this scenario, there is no need to go to outside resources for funding to reach the completion stage. 25

27 J. construction mortgage guide J2. Construction financing example sheets This example shows the construction mortgage process when there is also a lot loan involved. EXAMPLE 2 There is a lot loan registered against the land. Funds Needed Lot Loan $250,000 Land Value 500,000 Build Cost $300,00 Total Value: $800,000 $250,000 to Pay off Lot 300,000 Build Cost 45,000 Overruns Estimate 15,000 GST 5,000 Legals 20,000 Soft Costs $635,000 Financing Applied For 1. You spend approximately $50,000 to establish the Foundation. 2. The bank sends out their appraiser. 3. The appraiser determines there is $250,000 required to complete the construction. 4. The 1st Advance is calculated as follows: Approved Financing $635,000 Required to Complete - $250,000 1st Advance released through Lawyer to use through to next stage - Lock-up AND to pay off lot financing = $385,000 Lot Loan mus be paid off - 250,000 Amount remaining to spend on construction $135, $135,000 has been spent and the bank s appraiser is called out. The appraiser confirms there is $115,000 worth of work required to complete, calculated as follows: Build Cost $300,000 Foundation Cost - $50,000 First Advance - $135,000 Work required to complete = $115,000 26

28 J. construction mortgage guide J2. Construction financing example sheets 6. The 2nd Advance is calculated as follows: Approved $635,000 First Draw - $385,000 Work required to complete - $115,000 2nd Advance Available $135, The $135,000 is used towards the completion of the structure. Once again, there will have been $270,000 used towards the build, with approximately $30,000 plus GST plus overruns to be covered from an outside source at this point in time. 8. IMPORTANT POINT: In this example, the $635,000 applied for is 79.3% financing based on the end value cost (ie. $635,000/ $800,000 = 79.3% loan to value ratio). In this case, to apply for higher financing at the beginning would provide you with flexibility during the advances, BUT would also incur CMHC mortgage insurance costs. Remember that any mortgage with a loan-to-value ratio of 80% or higher will incur CMHC mortgage insurance costs. Your decision in this case as to how much financing to apply for at the beginning would be determined by th availability of outside lines of credit and/or family assistance and the cost of the CMHC premium. (See Section E for insurance premium tables). 9. The dwelling is 100% finished and the bank s appraiser is sent out once again to confirm if there is any work required to complete. If the appraiser confirms completion of the work, the bank releases the balance of the construction mortgage funds, which at that point reimburses you to pay down any credit lines used. 27

29 K. GLOSSARY OF MORTGAGE & REAL ESTATE TERMS Accrued Interest Interest which has accumulated unpaid since last payment date. Amortization The gradual retirement of a debt by means of partial payments of the principal at regular intervals. Amortization Period A time of arrangement for paying off a mortgage by equal installments or periodic constant payments. Repayments of principal and interest in blended amounts. Fully amortized means complete repayment without a balloon payment at the end of the term. Can be as short as 5 years or as long as 40 years. Amortization Schedule The amortization schedule shows monthly installments of principal and interest and how much of the payment is allocated to each. It also shows the unpaid principal balance. Appraised Value A dollar amount assigned to taxable property, by the assessor, for the purpose of equalizing the burden of taxation. Assets What the borrower owns. Liquid assets are those that can be quickly converted to cash. Assignment of Mortgage The assigning of a mortgagee s interest in the mortgage to a new mortgagee. The legal sale of the mortgage with or without an agreement to repurchase. Assignment of Rents Refers to a lender issued document registered on the title of your purchase at the time of mortgage registration. It entitles the lender to use rental income to make up any funds in arrears if the mortgage were ever to go into default. As long as the mortgage is in regular repayment, the lender has no cause to use the assignment of rents. Assumption of Mortgage The purchaser of property assumes the liability for an existing mortgage against a property and becomes liable for timely payment of the mortgage. This action might occur with or without approval of the existing mortgagee depending on the terms of the existing mortgage. Blanket Mortgage A single document which is registered covering more than one title to property. Blended Mortgage Combining the amount owing on an existing mortgage with additional mortgage money for the purpose of buying another property. The interest rate changes to one that combines the rate on the old loan with the rate in effect at the time you add additional financing. Blended Payments The method of repayment where periodic payments of principal and interest are made in such a way that the payments remain constant in amount, although the portions attributed to principal and interest vary with each payment. Bridge Financing A special short-term loan needed to cover (bridge) the gap in time between completing the purchase of one property and finalizing arrangements to pay for it. This is often the result of mismatched closing dates. Carrying Costs The actual cost of living in and maintaining property, including mortgage payments, property tax, heating and repairs. Closed Mortgage The restriction or denial of repayment rights until the maturity of the mortgage. Closing Date The date on which the sale of a property becomes final and the new owner takes possession. 28