homeownership mortgages

8/12/2019 HomeOwnership Mortgages

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Mortgages

A mortgage is an agreement between a lender (the mortgagee) and a borrower (the mortgagor) whereby the

mortgagor receives money to buy a house and agrees to pay the loan back over time with interest. Te lenderassumes the right to claim the property if the loan terms are not met.

How much can you borrow?

Tere are two considerations for the financial institution/lender. First, since the property is the collateral onthe loan, the institution will typically be willing to lend up to 80% of the appraised amount of the propertyand you will put up the other 20% as a down payment. Tis provides the lender with a 20% cushion shouldthe value of the property drop. However, loans are available on up to 95% of the value of the property. Teseare known as high ratio mortgages and must be insured. Te interest rate charged on a high ratio mortgagemay be higher than on a conventional mortgage due to the higher risk.

Te second consideration when determining how much they will lend a buyer is your ability to makethe mortgage payments. Lenders typically use two ratios to determine your ability to make the requiredpayments:

Gross Debt Service Ratio (GDSR)

Tis ratio is calculated by dividing the monthly costs associated with your home, such as interest andprincipal on the mortgage, heating costs and property taxes, by your gross monthly income. As a generalrule, this ratio should not exceed 32%. Here is a tablethat you can fill in to get an idea of your GDSR.

Total Debt Service Ratio (TDSR)

Tis ratio is calculated by dividing not just your monthly housing costs but also any other household debts,such as auto and credit card debt, by monthly gross income. As a general rule, this ratio should not exceed40%. Here is a tablewhich you can fill in to give yourself an idea of your DSR.

FINANCING AND M ORTGAGES

HOME OWNERSHIP:

YOUR HOME WILL PROBABLY BE THE L ARGEST PURCHASE/INVESTMENT YOU WILL

EVER MAKE AN D IN MOST C ASES YOU WILL BE BORROWING MONEY TO COMPLETE

THE PURCHASE. THERE IS NOTHING INHERENTLY WRONG WIT H DEBT, BUT IT IS

CRUCIAL THAT YOU UNDERSTAND THE LEGAL AND FINANCIAL IMPLIC ATIONS OF

BORROWING MONEY.
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How much should you borrow?

Lending institutions will typically be prepared to lend up to 32% GDSR and 40% DSR as described above.However, you need to sit down and decide how much you are willing to borrow and still maintain your peace

of mind. Based on the ratios, you may be able to borrow $500,000 with monthly payments of $3,000 but thismight be based on the assumption that you and your spouse are continuously employed. You would want toconsider the implications if one of you is not working. Tere are many cases where families are house richand cash poor or, even worse, have lost their homes due to the inability to meet large mortgage payments.You need to seriously consider how much of your monthly income you want to commit to a mortgagepayment.

New considerations for 2012

As of July 9, 2012, the Department of Finance announced four new measures dealing with mortgages andhome ownership. Tese measures were introduced to deal with what was seen as overly aggressive borrowingpractices.

Te new measures are: e maximum amortization period for government-backed mortgages will be reduced to 25 years from

30 years for mortgages with loan to value ratios of higher than 80%. e maximum amount that can be borrowed on renancing of a mortgage will be reduced to 80% of thevalue of the home from 85%.

e maximum Gross Debt-Service Ratio (GDS) will be set at 39% and the maximum Total Debt-ServiceRatio (DS) will be lowered to 44% from 45%.

Government-backed mortgages will only be available to homes with a purchase price below $1 million.

Mortgage features

Mortgages can be quite flexible and you will need to decide what features will be right for you. Someof the areas where flexibility is available are:

Term. is is the period over which the interest payments are xed. (For example, a one-year mortgagevs. a ve-year mortgage.)

Amortization period. is is the period over which the mortgage will be paid o. (For example,20 to 25 years.)

Payment schedule. You can decide how oen you will make payments. (For example, weekly or monthly.)Paying weekly or semi-monthly will result in the mortgage being paid o more quickly than monthly.

Pre-payment options. Most mortgages will allow you to pay o additional amounts if you choose.is will enable you to pay o your mortgage more quickly. Pre-payment maximums will be in place.

Portability. is allows you to transfer the mortgage to another property should you buy a new homeduring the term of the mortgage.

Open or closed. An open mortgage allows you to prepay the mortgage at any time while a closedmortgage requires the fixed payments over the specified term. You will pay more interest to acquirean open mortgage.

Lets discuss these factors and how they can be structured to suit your situation and objectives.


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Important Information

Information contained herein is provided for information purposes only and should not be relied upon exclusively as estate, tax planning or

investment advice, nor should it be construed as being specific to an individuals investment objectives, financial situation or particular needs.You should always obtain professional advice before acting on the basis of material contained herein. While Dynamic Funds will endeavourto update this information from time to time as needed, information can change without notice and Dynamic Funds does not guarantee the

accuracy or completeness of this information, including information provided by third parties, at any particular time, nor does it accept anyresponsibility for any loss or damage that results from any information contained herein.

2012 DundeeWealth Inc. all rights reserved. Reproduction in whole or in part of this content without the written consent of the copyright

owner is forbidden. Snapshots is brought to you by Dynamic Funds. Dynamic Funds and Snapshots are trademarks of their owner, usedunder license. Dynamic Funds is a division of GCIC Ltd.

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Mortgage insurance

It is always wise to have life insurance in place to pay your mortgage o if anything should happen to you.You can buy mortgage insurance through your financial institution or you can buy a term life insurance policy.

If you buy mortgage insurance, ensure that the costs decline over time as the amount of mortgage you owedeclines. Lets discuss what type of insurance is best for you.

homeownership mortgages

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