Canadian Residents / Getting the Right Mortgage

The following information will help you understand the various mortgage options available to you.

Amortization

The time over which the payments are spread, usually 25 Years.

Term

The period of time for which the interest is fixed. At the end of the term you renew your mortgage for another term. Terms vary from 1 to 25 years.

Closed vs. Open Mortgages

In general a closed mortgage offers a lower rate than an open mortgage of the same term. The open mortgage permits you the flexibility of paying off any amount whenever you wish without any penalty. Closed mortgages allow for limited pre-payment of 15% to 20% of the principal amount annually without penalty. Payment in full without penalty may be made at the end of the term. A penalty of 3 months interest or interest rate differential, whichever is greater, will apply to full prepayment at any other time.

Variable vs. Fixed

A variable rate mortgage is a mortgage that is based on the Bank Prime Rate. It is a floating rate that changes every time the bank changes its Prime Rate. The rate can go up or down, however, it can be converted to a fixed rate at any time. A fixed rate mortgage has the same interest rate for the period of time you choose to fix the rate for.

Short vs. Long Term

Shorter term mortgages are appropriate if you believe interest rates will drop substantially by the time you renew. Long term mortgages are suitable if you feel current interest rates are reasonable and would like the security of ‘locking in’ so you can budget for the future with a fixed payment.

Conventional vs. High Ratio

A conventional mortgage is defined as one that does not require default insurance and is available up to a maximum of 80% of the purchase price or appraised value, whichever the lesser. High ratio mortgages are insured against default by either Canada Mortgage and Housing Corporation or G.E. Capital Services Mortgage Insurance Canada. This insurance permits you to obtain a mortgage with as little as 5% down payment allowing you to finance 95% of the purchase price or appraised value whichever the lesser. An insurance premium based upon a percentage of the mortgage amount is chargeable and may be added to the mortgage balance. Borrowers are required to demonstrate their ability to cover closing costs equal to at least 1.5% of the purchase price. Where all or part of the minimum equity requirement is being met by way of a financial gift, the donor must be an immediate relative. The lender must verify that the money is a genuine gift and the funds must be in the borrower’s possession.

Property Transfer Tax

This tax is levied by the Provincial Government and is applicable on all purchases. The amount is 1% of the first $200,000 of the purchase price and 2% on any amount over $200,000.

RRSP as a Down Payment

It is available when either buying or building a home that is intended to be the borrower's principal residence.

1. The maximum withdrawal is $20,000 for each purchaser.
2. There is no income tax payable on these funds as long as they are repaid to an RRSP in the future.
3. Annual repayments of equal amounts based on a 15 year period should be scheduled. Repayment of more than the scheduled amount is permitted.
4. Any amount withdrawn must have been in the RRSP account at least 90 days.

Exemption from payment of the Property Transfer Tax for a First Time Home Buyer

1. Every purchaser who applies for exemption must:
   a) be a Canadian citizen or a permanent resident of Canada at the time of transfer and have resided in BC for the 12 consecutive months prior to the registration of the transfer
   b) not have previously owned an interest in a principal residence anywhere in the world
2. The purchase price cannot exceed $425,000 in British Columbia (exclusive of GST).
3. Purchaser must move into the property within 92 days after registration and reside in it for one year.
4. For further information and to order forms please call (250) 387-0604