7 Mar

Mortgage Monday – Closing Costs

Mortgage Monday

Posted by: Tyler Cowle

This weeks industry term which is used all the time, is the Closing Costs.  What are they and what do they mean for your mortgage?

Closing Costs are legal and administrative fees that are payable by the buyer in a real estate transaction and are due prior to the transfer of the property title.  These costs are usually payable to different parties in the transaction; therefore, the payments are handled by the lawyer that is ‘Closing’ the property.  Prior to the closing date; the lawyer will supply a statement showing which Closing Costs are due and payable so that the purchaser can ensure to have the funds paid ahead of time; usually along with the down payment.  It is important not to overlook the Closing Costs throughout the homebuying journey; even though they may be a small portion (usually between 1.5% and 4%) of the overall transaction; they are necessary to facilitate a smooth closing and the absence of them can risk the property closing; resulting on other fees!

Closing Costs differ based on many factors; such as location, property, mortgage type, mortgage conditions, property taxes and utilities paid etc.  Tyler’s My Mortgage Toolbox App can be used to help estimate the closing costs for your particular transaction; further to this, he will be able to assist with a more accurate estimation when consider all aspects of the file.

Some of the most common Closing Costs are:

 

Land Transfer Tax (LTT) – Provinces may have a LTT payable whenever a property changes ownership.  Ontario, for instance, has a tiered LTT based on the property value in an arm’s length transaction.  It should be noted that the LTT is higher when purchasing a property in the City Of Toronto.  First Time Homebuyers are able to take advantage of a LTT Rebate (up to $4,000) in order to make their first home purchase more affordable; the rebate is greater for purchases in the City of Toronto as well (up to an additional $4,475).  Example – a home purchased in the Durham Region for $800,000 would be subject to a LTT of $12,475; or $8,475 for a First Time Home Buyer.

PST on Mortgage Default Insurance – If the mortgage is an insured mortgage (less than 20% down payment) then the mortgage default insurance premium is added onto the mortgage; however, the PST (8%) is payable upon closing.

Legal Fees and disbursements – These are the fees charged by your lawyer to handle the transaction on behalf of yourself and the lender for the preparation and recording of the legal documents as well as registration.

Title Insurance – Although this is not a mandatory cost in Ontario; almost every lender will require that Title Insurance is acquired for the property in order to protect against losses in the event of an ownership dispute.  On top of the lender required Title Insurance; the purchaser is able to acquire additional insurance to protect themselves as well; this is recommended!

Prepaid taxes and utilities – If the seller of the property has already prepaid for property tax and some utilities; the portion for the amount not yet consumed will be reimbursed to the seller by the buyer on the closing date.

 

Other closing costs that may be payable may be specific to the mortgage (lender or broker fees), lender conditions (appraisal cost) or property (water tests, Estoppel Certificate, inspection).

As mentioned; Closing Costs are extremely important and mismanagement of the availability of these funds may lead to the purchase not closing in time; or at all!  It is best to account for these funds separately from your down payment funds to ensure no issues will arise!

Download My Mortgage Toolbox App here to assist with the calculation of these; as well as other costs!

Check in next week for our next topic!

Published by Tyler Cowle!

28 Feb

Mortgage Monday – Stress Test

Mortgage Tips

Posted by: Tyler Cowle

This weeks industry term which is used all the time, is the Stress Test.  What is it and what does it mean for your mortgage?

The Stress Test was introduced in 2018 as a way to ensure that the Canadian Housing Market remains strong by making sure that home owners can afford their mortgage payments if mortgage lending rates were to raise.  The way this was accomplished was to have lenders qualify a borrower based on the Bank Of Canada’s Qualifying Rate (or contract rate + 2%) rather than the actual contract rate that the payments were to be based on.  The Contract Rate + 2% comes into effect if the actual mortgage rate received +2% would be higher than the BOC Qualifying Rate.

The Bank Of Canada Qualifying Rate is not a static number and changes when the BOC finds it necessary, based on the market and future trends; the most recent change was in June of 2021 when it was increased to 5.25% from 4.79%.  This Stress Test was introduced towards Insured Mortgages (less than 20% down payment); however, OSFI has followed suit and most mortgages are Stress Tested using the BOC Qualifying Rate; including re-finances on your current property!

When qualifying a client using the Stress Test we need to ensure that the resulting GDS and TDS are kept in line and do not go over the maximum allowed.

 

Let’s see how it works in this example:

  • 2 Clients on the file; shopping for their first home together
  • Down payment available of $100,000 from their own savings
  • Combined annual income of $140,000
  • Other debts amount to $500/month
  • Estimated Property Tax is $400/month and Heat is $120/month

Using the contract fixed mortgage rate of 2.99%:

The clients purchasing power would be roughly $950,000; or a mortgage of $850,000 after their down payment.

Using the qualifying mortgage rate of 5.25% (The Stress Test):

The clients purchasing power is drastically reduced to roughly $775,000; or a mortgage of $675,000 after their down payment.

 

The reason for the reduction in purchasing power in the example above is because the clients Gross Debt Service (GDS) and Total Debt Service (TDS) were calculated using the Stress Test Rate.  Looking at the above example; even a small change in mortgage rates would mean that a house that cost $950,000 would be un-affordable to these clients with all other things staying the same and they risk falling behind on payments or defaulting on their mortgage.

It should be noted that at the time of writing; fixed mortgage rates are raising and variable rates are likely to raise as well.  Should the fixed mortgage rates increase above 3.25%; the Bank Of Canada Qualifying Rate would no longer apply; since the mortgage would have to be qualified on the contract rate + 2% if is is higher.  The easy thing to do in this instance would be to offer the clients a variable rate mortgage; however, if this product is not properly suited for the specific clients it may cause issues with approval!

The calculations performed in the above scenario were done using My Mortgage ToolBox App which can be downloaded here!

Check in next week for our next topic!

Published by Tyler Cowle!

7 Feb

Mortgage Monday – L.T.V. – Loan-To-Value

Mortgage Monday

Posted by: Tyler Cowle

One of the industry terms we use is LTV or Loan-to-Value.  What is it and what does it mean for your mortgage?

The Loan-to-Value is basically a number from a simple calculation; which reflects the amount of risk that a lender is willing to take on when considering offering a mortgage to a borrower and it is critical to the mortgage being approved.

 

LTV = Mortgage Amount/Appraised Value

Example – $600,000 (Mortgage)/$800,000 (Appraised Value) = 75%LTV

Therefore; if this was a purchase, the down payment required would be $200,000

 

Lenders will set Loan-to-Value maximums based on certain aspects of the application (Insurability, Property type and age, Loan Purpose (purchase, re-finance, HELOC) etc.).  In many instance; these maximums are set to keep in line with regulations (I.e. – refinances can have a maximum of 80% LTV).

In Canada, the maximum Loan-to-Value for a purchase that a lender can go up to is 95%; which means that the minimum down payment required would be 5%.  This type of mortgage is called a High-Ratio mortgage (any mortgage over 80%) and will need to be insured in order to help alleviate the lenders risk and make the lending possible.

The Loan-to-Value is not a static number and is always changing; mortgage payments and fluctuations in the market are large factors accounting for the movement.  The hopes for all homeowners is that the number is always decreasing; however, it is possible for it to increase if the property value decreases.  This is where the mortgage amount is higher than the property value (Negative Equity aka – Underwater).

Check in next Monday for the next Mortgage Tip!

Published by Tyler Cowle