Mortgages- Guide to Buying a Home in Halifax,Nova Scotia

It is a great idea to have a mortgage in place before you start looking for a home. All lenders will now do a mortgage application and give you pre - approval. They will not only pre-approve the mortgage but they will lock the interest rate in for up to 90 -120 days. If the rate goes up while you're house hunting it doesn't affect you but if it goes down you can still get the lower rate. This is a smart thing to do. You will know exactly how much house you can afford to buy, you will find out any credit problems that have to be addressed if any and the interest rate is locked in. There is usually no cost to do this so there is no downside just benefits. I highly recommend doing this and also having the lender include a credit check in the pre-approval. A credit check is usually not part of a pre-approval because there is a cost to do a credit check. The lender may charge you the small fee but it's worth it to know if there are any problems that might come up such as a bill you forgot to pay or something else.
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Different types of Mortgages - High Ratio versus Conventional

There are many different types of mortgages on the market today. The one thing they all have in common is whether they will need high ratio insurance or not. What determines whether you need this insurance is the amount of down payment you have.

High Ratio or Insured Mortgage: A high ratio mortgage is a mortgage that is between 80% and 95% of the appraised value or purchase price of the property, whichever is less. (Note: in some cases 100% mortgages can be obtained). This means that you have less than 20% down payment. This type of mortgage, by law, must be insured against non-payment by either the Canada Mortgage and Housing Corporation (CMHC) or another insurer such as GE Capital. Mortgage insurance protects the lender against loss if the borrower fails to meet the repayment terms. The high ratio insurance premium ( listed below ) are paid by the borrower. The higher the ratio of mortgage to property value, the higher the cost of insurance. The fee is usually added to your mortgage.

CMHC rates are shown below as of January 2009. These are subject to change. Check with your lender for current rates. Note: some of the rates refer to values of less than 80% of value. This is for specialty properties such as commercial or rental properties that still might require CMHC insurance.

Conventional Mortgages: Under a conventional mortgage, a lender will normally provide up to 80% of the appraised value or purchase price of a property, whichever is less. You must be able to provide at least 20% of the value by your down payment. The main difference between this type of mortgage and a high ratio mortgage is there is NO insurance fee on a conventional mortgage.

Example: Say you were buying a $200,000 property had a 20% down payment this is what the financing would look like.

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Your Mortgage Down payment

The amount of money you require as a down payment has been changing lately. For years there was a requirement for a 10% down payment. This was later reduced to 5% and eventually no down payment. In 2009, following the world financial crisis, the amount of down payment went back to 5%. Normally, the minimum down payment comes from your own resources. However, a gift of a down payment from an immediate relative is acceptable for dwellings of 1 to 4 units. For eligible borrowers, additional sources of down payment, such as lender incentives and borrowed funds, are also permitted. Check with your lender to see what you will require as a down payment before you begin looking at homes.

If you have money in an RRSP account it is possible for you to use these funds as a down payment or to use for your closing costs. With this plan, called the Homebuyer's Plan, the government will allow you to take out money from your RRSP with the requirement that you will repay it over the next 15 years. See my section on Homebuyer's Plan at RRSP.
It's to your advantage (although impossible for most buyers) to aim for a down payment of 20% or more, so you'll qualify for a conventional mortgage and avoid paying the mortgage insurance premium. The larger your down payment, the easier it will be to arrange a mortgage and carry it comfortably. The smaller your loan, the lower your interest expense will be, and the more equity you will have in your home. Equity is equal to the value of home minus the amount of your mortgage.
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Choosing a Mortgage Amortization Period

Once you're settled on the type of mortgage that fits your financial circumstance you are ready to start considering the various options available. Amortization refers to the number of years it will take to repay the loan in full. As of January 2009 the longest amortization period for mortgages in Canada with less than 20% down payment was 35 years. You can get a 40 year amortization but only for a conventional mortgage of 80% of value or less.
Longer amortization periods result in lower payments, but increase the total amount of interest paid. If you can handle a shorter amortization period, you'll achieve tremendous savings on the interest cost of your mortgage and live mortgage free sooner!

Example $150,000 mortgage at 6% interest.

You can see by the example above the interest savings of a shorter amortization is significant so choose the shortest amortization you can afford. It will pay off in the end.
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Deciding on a Mortgage Term

The length of time for which the interest rate is fixed is called the term. Most mortgages have terms of six months to five years however there are some longer terms available. The most common term is 5 years. The interest rate usually gets lower with the increase in the term you take. For example a 1 year term would have a higher rate than a 5 year term usually. There are exceptions because the rates are always changing

Open versus closed term
An open mortgage is one which allows payment of the principal, in part or in full, at any time without penalty. Open mortgages tend to be for a short term - usually six months or one year. Since open mortgages offer greater flexibility than closed mortgages, they usually have a higher interest rate.This might be to your advantage if you were expecting a large amount of money in the near future that you were intending on paying down your mortgage with such as a bonus or inheritance.

Variable rate mortgages
Variable rate mortgages have become extremely popular. Most lenders say that is what they personally have. The way these mortgages work is that the interest rate is usually locked into the prime lending rate. The mortgage interest rate you pay is usually locked to the prime lending rate. For example the rate could be Prime + 1%. This often results in the mortgage rate being significantly lower than Fixed Rate mortgages.The amount above or even below prime varies between lenders. The downside to these mortgages is the prime rate goes up and down and so does your mortgage payments. Most lenders agree over the life of the mortgage this can be a great way to go but it's a gamble. You have to be prepared for the ups and downs of rate changes. Talk to your lender about this option to see if it is right for you.

Short versus long term
When interest rates are either high or falling, there is a tendency to choose a shorter term mortgage. This strategy pays off if you can renew at a lower rate six months or one year later. You may want to consider a longer term mortgage if interest rates are rising, if you felt could not afford higher payments if rates were to increase or if you want to keep your mortgage payments the same for a longer period.

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Payment Options

You should select a payment frequency based on what is convenient for you. You may want to match your payments to your pay periods. If your goal is to pay off your mortgage quickly, consider accelerated weekly or bi-weekly payment plans. You'll realize significant interest savings. Other options are to choose a shorter amortization period or take advantage of prepayment privileges.

Example: If you have a $100,000 mortgage, 8% interest rate, 25 year amortization

Accelerated Bi-weekly vs. Monthly payments $100,000 mortgage at 6.5% interest compounded semi-annually
Payment Frequency	Number of Payments	Interest Costs	Principal Payments
Monthly @ $670/month	300 (25 years)	$100,956	$100,000
Accelerated Bi-weekly @ $335/2 weeks	538 (20 years, 9 months)	$80,354	$100,000
Amount saved:		$20,602
Source: Mortgage Wise Booklet, Canadian Bankers Association

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Prepayment Privileges Prepayment privileges are voluntary payments in addition to your regular mortgage payments. The money is applied directly against the principal owing, so you'll pay off your mortgage more quickly. You'll also significantly reduce the total amount of interest you would otherwise have paid.

Some examples of possible options available:
1) You can increase your regular principal and interest mortgage payment by as much as 100%.
2) You can pay up to 15% of the original principal balance in a lump-sum once annually or on the anniversary date.

Taking advantage of prepayment privilege is a good way to reduce the life of your mortgage.

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Mortgage Application Checklist

Information you should bring to the mortgage application interview:

1.Tax returns for the past two years.
2.Bank statements for the past three months.
3.Copies of all assets including stocks, life insurance and RRSP's.
4.A letter from your employer indicating your salary, your position and how
long you have worked there. If you are self-employed, bring tax returns
and profit/loss statements from the previous three years.
5.Several recent pay stubs.
6.The names and addresses of your past employers.
7.A list of all credit cards and other debts including the lender's name,
your account number and balance outstanding.
8.A list of your home addresses for the past 10 years.
9.Copies of rent cheques for the past 12 months.
10.A copy of the purchase agreement and MLS listing sheet for the property you are buying
11.If you have sold your current home to buy a new one, bring a copy of the
listing agreement. If you have sold your current home, bring a copy of the
purchase agreement.

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