Buying season is upon us, and as always, we want to be well informed before we make a decision (rash decisions are a thing of our past...). Joan Del Bianco, Vice President of Real Estate Secure Lending at TD Canada, is here to answer all our mortgage questions...
What are the differences between fixed and variable mortgages?
When you take out a fixed rate mortgage, your interest rates will never change throughout the entire term of your mortgage. As a result, you’ll always know exactly how much of your mortgage will be paid off at the end of your term.
With a variable rate mortgage, your interest rate may vary from month to month. Historically, variable rate mortgages have tended to cost less than fixed rate mortgages when interest rates are fairly stable. When rates change, your payment amount still remains the same. However, the amount that is applied toward principal and interest will change. If interest rates drop, more of your mortgage payment is applied to the principal amount owing, which can help you to pay off your mortgage faster. However, if interest rates rise, more of your regular mortgage payment will go toward interest.
How much should you save for a down payment?
The size of a down payment can vary. Depending on the type of mortgage, down payments generally range from 5% to 20% of the purchase price.
To obtain a conventional mortgage, home buyers are required to put down at least 20% of the purchase price or appraised value (whichever is less) as a down payment. If you are not able to provide a 20% down payment, you can choose a high-ratio mortgage and buy a home with as little as a 5% down payment. This option is called a high-ratio mortgage and it requires you to purchase default insurance.
Whether you choose a conventional or a high-ratio mortgage, one thing is almost always certain: the larger your down payment, the more you save in the long run. A larger down payment will:
- Reduce the amount of your monthly principal and interest payment
- Reduce the total amount of interest you pay over the life of your mortgage
How can you determine your maximum purchase price?
To determine what you can afford, use these two simple calculations:
Gross Debt Service ratio (GDS): The GDS looks at your proposed new housing costs (mortgage payments, taxes, heating costs, and 50% of condominium fees, if applicable). Generally speaking, this amount should be no more than 32% of your gross monthly income.
Total Debt Service ratio (TDS) : The TDS ratio measures your total debt obligations (including housing costs, loans, car payments, and credit card bills). Generally speaking, your TDS ratio should be no more than 40% of your gross monthly income. Keep in mind that these numbers are prescribed maximums and that you should strive for lower ratios for a more affordable lifestyle.
Get a Mortgage Pre-Approval: once you’ve made the necessary calculations and feel that you are ready to obtain a mortgage, it’s a good idea to select a lender to get pre-approved. This will help you stay within your price range and spend your time looking at homes you can reasonably afford. The pre-approval meeting is the time to find out about different mortgage products that are available to suit your particular needs. Once the mortgage is pre-approved, many lenders will commit to an interest rate for a specified period of time.
What are some additional costs to consider when planning purchasing a home?
Including but not limited to:
- Up-front Costs
- Mortgage Insurance Premium: Any purchase where the down payment is less than 20% is considered a high-ratio mortgage, and will require mortgage default insurance. The insurer will charge a fee for this insurance. The amount of the fee will depend on the amount you are borrowing and the percentage of your own down payment. This amount can be paid up front or added to the principal portion of your mortgage.
- Land transfer taxes: Most provinces (and some municipalities) levy a one-time tax when you buy a home (subject to change). The tax is based on a percentage of the purchase price of the property, and varies from province to province.
- Legal Fees: You should be represented by a lawyer or notary during the purchase and mortgaging of the property, and you are responsible for paying the lawyer's or notary's fees and disbursements.
- Fire insurance: You are required by the mortgage lender to have fire insurance effective at the time you legally take possession of your new home.
- Home inspection fee: This is a report on the condition of the home (recommended).
- Other Costs: Moving Costs, Appliances, Furniture, Renovations or Repairs
Joan Dal Bianco joined TD Bank (now TD Canada Trust) in 1986. In July 2005, she became the District Vice President for the mid-town branches of the Central GTA region of TD Canada Trust, responsible for driving results for 19 branches. Joan is currently the Vice President of Real Estate Secured Products with responsibility for the Mortgage and Home Equity Line of Credit business.