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The Money Management Newsletter: Home Ownership
Buying a new home may be the biggest investment you make in your life.

When it comes to financing your purchase, you'll want to make sure that you make the choices that will suit your particular needs and budget, says the Greater Toronto Home Builder's Association. Banks, trust companies and other financial institutions are offering more ways to finance a new home purchase than ever before, with a wide range of options, features and services.

As a general rule, no more than about one third of assured gross income should go toward the total sum of mortgage payments, property taxes and estimated heating expenses. Also, toward the total of your mortgage and all other payments, such as car loan payments. You can usually borrow up to 90 per cent of the first $180,000 of the property's value, and up to 80 per cent of the remainder. For a $210,000 home, for example, you could borrow $186,000. You would need at least $24,000 as a downpayment.

Find the right mortgage fast.
One of the first steps towards buying a home is applying for a mortgage pre-approval. That way, you can shop for your home with confidence - you'll know approximately how much you can afford and the mortgage interest rate will be secured for a certain period.

Under Canada Mortgage and Housing Corporation's (CMHC) First Home Loan Insurance program, first-time buyers can borrow up to 95 per cent of a new home's property value, making a minimum downpayment of five per cent depending on the location and the selling price of the home.

When deciding how much of a down payment you can afford, however, be careful to set aside enough money to cover the other expenses of buying a home, such as legal fees, moving expenses and furniture and appliance costs.

A conventional mortgage does not exceed 75 per cent of the property value. The property value is established as the lesser of the purchase price or the appraised value. A high-ratio (low down-payment) mortgage exceeds 75 per cent of the property value. Making a lower downpayment can give you the opportunity to qualify for a mortgage sooner, shop for homes with a wider price range, or put additional cash aside for landscaping, home furnishings and other expenses. Under the National Housing Act, this type of mortgage must be insured against default by CMHC or the Mortgage Insurance Company of Canada.

What about insurance? Mortgages greater than 75 per cent of the property's value must be insured against default. Default insurance protects the lender against possible default on the loan; it does not protect the borrower. The lender will arrange for the insurance, and the one-time premium (between 1.5 and 3 per cent) of the mortgage amount) is usually added to the loan amount, although it can be paid by the borrower in a lump-sum payment in advance.

Most borrowers choose to take mortgage life insurance, which is offered by most financial institutions. Mortgage life insurance is designed to pay off the mortgage in the event of the insured person's death.

If you are buying a new home, coverage will usually begin when your mortgage application is approved, even though your home may not be completed. Mortgage disability insurance is also available and can cover your mortgage payments if you are unable to perform your usual job due to accident or illness.

An open mortgage allows the borrower to repay the debt more quickly than specified, usually without prepayment charges.

In most circumstances this allows your estate, usually your family, to receive the home mortgage-free. Premiums are based on your age and on the amount of your mortgage when you apply for coverage. The cost can be added directly to the mortgage payment.

A closed mortgage provides for limited prepayment prior to maturity.

Prepayment options let you prepay your mortgage in full or in part at any time, without interest penalty. A clause in the mortgage agreement specifies when and how prepayments may be made.

With a fixed-ration mortgage, the rate of interest is fixed for a specific period of time (the term). Terms of up to seven years or even longer are available from some lenders. With a variable-rate or floating-rate mortgage, the rate of interest changes as money-market conditions change (usually not more than once a month).

The monthly payment usually stays the same for a specified period, but the amount applied toward the principal will vary according to the change (if any) in the rate of interest.

In the last year of your term, you can renew your mortgage early to take advantage of the rates. This mortgage rate protection is useful if you expect interest rates might rise. Except for open mortgages, you may be charged an early renewal fee and the interest rate differential.

Check out the mortgage related tools in this special section at the left sidebar.


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