before arranging your mortgage

IMPORTANT INFORMATION YOU NEED TO KNOWBEFORE ARRANGING YOUR MORTGAGE© 2004 WebTechDezine Inc.

ContentThe First Step Towards Home Ownership

Anatomy of a Mortgage

The Mortgage Amount Budgeting to Buy a Home How to Create a Budget Saving for a Down Payment Additional Costs to Remember

Shopping for a Mortgage

Do You Qualify for a Mortgage? Key Mortgage Terms Types of Mortgages Other Types of Mortages Your Mortgage Checklist

Applying for a Mortgage

Mortgage Insurance

RRSP Home Buyer’s Plan

Glossary of Mortgage Terms

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IMPORTANT INFORMATION YOU NEED TO KNOWBEFORE ARRANGING YOUR MORTGAGE

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© 2004 WebTechDezine Inc.

The First Step TowardsHome OwnershipBuying your own home is one of the most satisfying things you will ever do. But like all good things in life, it’s not easy. There are so many things you need to do — such as looking for a real estate agent, visiting plenty of suitable houses and arranging the move. And to top it all off, you need to find the right mortgage — one that will work with you to make your dream of home ownership a happy reality.

So how do you begin? With plenty of research and the right information, of course.


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Anatomy of a Mortgage A mortgage consists of two parts: principal and interest. Principal is the actual amount of money borrowed. Interest is the fee you are charged by your lender for borrowing from them.

There are many mortgage options available, so keep this mind before you go to a financial institution or mortgage broker. Comparison shop for the best rates and the best terms. Negotiate and haggle. Plenty of mortgage providers want your business, but only you know what’s best for you. Remember it’s your responsibility to negotiate a mortgage that fits your budget — one that doesn’t leave you house rich but cash poor.

The Mortgage Amount

With today’s competitive interest rates, your monthly payments will be lower and you may qualify for a larger mortgage than you would under different circumstances, which might tempt you into taking on more than you would have with higher interest rates. But keep in mind that the larger your mortgage, the more interest you’ll pay in the long run — meaning your home will ultimately cost much more. Consider the cost of rising interest rates too — if they went up, could you still carry the payments comfortably?


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Budgeting to Buy a Home

Budgeting is an important part of preparing yourself for the purchase of a home. Although it’s not fun, keeping track of all your income and expenditures gives you a true picture of your financial health. When you pay attention to everything you spend money on each week (those trips to the coffee shop really add up!) you may be surprised at how much you waste on unimportant things.

And sticking to a budget makes it much easier to save for your down payment. Ideally, you want to have 25% to put down, plus you will need extra cash for up-front costs such as closing fees, an emergency reserve, moving costs, and utility hook-ups etc.

Once you have a budget in place, you can begin a regular savings routine. This pattern of savings will help you when it comes time to apply for a mortgage, making your application stronger and more likely to be approved.

Getting into the habit of living by a budget will continue to help you after you buy a home as well. You will be in the habit of saving regularly, and this emergency fund will come in handy if and when something needs repaired. Replacing a hot water heater, a furnace or a roof can run into the thousands of dollars and if you don’t already have the funds on hand, you will be forced to go deeper into debt to pay for the repairs.


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As a homeowner, you will also be responsible for paying your own utilities, and without enough money on hand to pay the bills, you risk having your services cut off. Budgeting also helps you differentiate between wants and needs and helps you resist putting the next frivolous purchase on a credit card. If you absolutely must buy something, pay cash whenever possible to avoid using up your available credit on non-essentials — save your credit limit to cover true emergencies instead.

How to Create a Budget

For the next month, write down every expense you have each day. Include everything you buy, no matter how inconsequential the item may seem. Carry a small, spiral notebook and keep a pen with you at all times to write down each purchase as it happens so you don’t forget.

Next, keep track of all of your large monthly expenses, such as car and life insurance premiums. Figure out how much your average utility bills are each month and set that money aside so you have it when it’s time to pay the bills.

Next, work your savings goal directly into your budget — if you don’t budget for savings, it probably won’t happen!

Now add up your total monthly savings and expenses, then calculate your net (or after-tax) monthly income, including any other money your regularly receive, such as the Child Tax Credit or child support payments.


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Compare your savings and expenses with your total income. If you don’t like what you see, look for ways to cut back on spending, so you have more money available to put into a savings account. Do you need to eat out every week or could you have more meals at home? Could you buy fewer pieces of clothing or visit a second-hand shop instead? Remember — the money you save now brings you that much closer to buying your dream home. Talk about motivation!

Once you’ve created a budget and found ways to increase your savings each month, you can begin to create a separate “homeowners budget”, which is similar to your regular budget but takes into consideration the unique costs you’ll have as a homeowner.

Talk to your banker and get an estimate on what your mortgage payment would be, including the cost of the principal, interest, taxes and insurance. Then find out from your utility companies how much their average payment plan costs per month — based on previous monthly costs, you can estimate how much you will need to set aside for gas and hydro payments.

Next, set aside at least 1% of the home’s value to cover future maintenance expenses for a year and divide by 12 to find the amount you need to save each month to cover unexpected repairs. Don’t forget to budget in savings for an extra emergency fund to cover car repairs, medical costs etc.


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Saving for a Down Payment

You can buy a house for as little as 5% down, but the larger the down payment you can make, the less your mortgage will cost in the long run and you will have more money available to cover other costs. Again, it’s a good idea to use an online calculator to figure out how much you can afford to buy. Even though the numbers say that you can afford a certain amount, it’s never a good idea to max yourself out — buy a slightly cheaper home than the bank says you can afford and have a little financial cushion available instead.

Now open a separate bank account just for your down payment and make it a habit to pay into this account on a regular basis. Any extra money you “find”, either by cutting back or through employment bonuses etc., should go directly into this account.

First-time homebuyers can also withdraw up to $20,000 for their RRSP to buy or build a home. This amount is then treated like a loan and must be repaid with fifteen years, starting in the third year after the withdrawal.

Determining what you can afford to pay for a home is essential — it narrows down what homes you can look at and prevents you from falling in love with a place that you can’t buy after all. The general rule is that your household expenses should not equal more than 40% of your total household income, before taxes. These expenses typically include property taxes, heating costs, mortgage payments, as well as any existing loans, lines of credit, leases or credit card debt.


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Additional Costs to Remember

While a mortgage is the main expense you will pay in order to buy the home, there are several other costs that you should be prepared for. Some of these will occur at the beginning your house-buying process, while others will take place at closing. Then there are additional costs such as moving fees and decorating costs — make sure you’ve budgeted for these as well to prevent getting caught unprepared. All costs are approximate; your actual fee may differ from those listed below.

• Mortgage Application Fee — $165Covers the cost of processing your mortgage application.

• Appraisal Fee — $150Ensures the value of the home matches the amount of the mortgage.

• Home Inspection Cost — $300A home inspection evaluates the structural and mechanical condition of the property and identifies problems before you purchase the home.

• Property Survey Cost — $1,000Verifies the property’s boundaries, measurements and structures. Identifies any easements, rights-of-way or encroachments on your property or adjacent properties. In lieu of a survey, you might consider buying title insurance.


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• Insurance Costs RE: Low Down Payment Mortgages — 0.50%-3.75% of the mortgage amountInsures your low down payment mortgage, enabling you to buy with as little as 5% down. This amount varies depending on the size of your down payment and can be worked into the mortgage amount.

• Home Insurance — $450/yearInsures the home and its contents.

• Land Transfer Tax — $2,000This tax is collected in some provinces when a property changes hands. The actual amount varies with the purchase price.

• Interest Adjustment — $100Covers any gap between the closing date of the purchase and the first payment date of the mortgage.

• Prepaid Property Tax and Utility Adjustments — $1,100Reimburses the person selling the home for any prepaid property taxes or utility bills.

• Goods and Services and Sales Taxes (if applicable) — VariableAmount will depend on the type of property purchased — always ask if sales taxes apply, before you sign an Offer to Purchase.

• Real Estate Agent Fees — VariableThis might already be included in the purchase price of the home — ask before you sign an Offer to Purchase.


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• Moving Expenses — $1,000To hire movers or to rent a truck to move yourself.

• Service Charges — $50 eachTo hook up utilities, such as electricity, gas, telephone.

• Immediate Repairs — VariableThese repairs may have been identified in the home inspector’s report and can be added to the amount of the mortgage.

• Appliances — VariableMay not be included with the purchase of the home.

• Decorating — $800Covers the cost of any changes you would like to make to the home.

These prices are subject to change and may not be correct in your city or area.


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Shopping for a Mortgage Before you can start house shopping, visit your bank and get pre-approved for a mortgage. Getting pre-approved locks in your interest rate for a set period of time (usually 30 days), so if you find a place you love you can buy it at the interest rate listed on your pre-approval certificate.

Being pre-approved before you start house hunting gives you guidelines to follow — it basically tells you how much you can spend. That way, you are only looking at houses in your approved price range, saving you the heartache of falling in love with a house but finding out you can’t afford it after all.

Do You Qualify for a Mortgage?

When considering a mortgage application, lenders look at five factors:

• Income• Debts• Employment History• Credit History• The Value of the Property

If you understand how a lender thinks, you will be able to see the strengths and weaknesses of your own application. To be considered a strong prospect, your application must have the following features:


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• Housing expense ratio no greater than 32% — the lower the ratio, the better.

• A secure, steady income — at the same job for two years or longer.

• Debt-to-income ratio no greater than 40% — the lower the ratio, the better.

• Good credit rating — bills have been paid on time.

• The house is worth what the buyer is paying.

Income

When applying for a mortgage, the lender will look at your gross income — all your pre-tax income, including overtime, commissions, bonuses and any other sources. For the strongest application, you must be able to show a secure history of these extra sources of income, for example, wages from a long-term part time job that you’ve had for at least two years.

The lender will also consider how much of your total income will be needed for housing costs. This helps the lender determine if you can really afford to buy a home. If your house payment will consume the main chunk of your income, you’re more likely to have trouble making your payments because of other financial obligations, such as car expenses, groceries, etc. But if your mortgage payment represents


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only a small amount of your total income, this is encouraging and means you can actually afford the house.

The lender will also compare your current housing costs to the proposed costs of buying a home. The smaller the difference you will need to pay each month, the stronger your application appears.

Debts

Your lender will also look at your debts, which include your proposed house payment, as well as payments for any loans, credit cards, car leases or child support that you must pay each month.

Employment History

A history of steady income is also an important factor that lenders consider. Mortgage lenders are more apt to lend to people who have worked at one place continuously for several years or have stayed in the same field. But don’t worry — you can still receive a mortgage if you’ve changed jobs recently as long as you don’t have any unemployment gaps during the past two years.Before your mortgage application can proceed, the lender will need to verify your place of employment and will usually ask your employer to sign a statement showing how long you’ve worked there and how much your income is. If you’re self-employed or you’ve worked at a place for less than two years, you may be asked to submit further information, such as federal income tax statements, to verify your income.


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Credit History

To qualify for a mortgage, it’s essential to have a good credit rating. Besides looking at your debt and income, a mortgage lender will also need to see your credit report, which details your payment history and shows exactly how well you’ve paid your past obligations. It’s a good idea to get a copy of your credit report before you apply for a mortgage, so you can verify its accuracy or correct any errors before applying for a loan to buy a house.

The Property’s Value

Before granting your mortgage loan, the lender will need to verify that the house in question is actually worth the amount that you have applied for — the amount of the mortgage will be based on the value of the property. The property’s value is the lender’s best guarantee that they will be able to get back the money they have lent you, should you default on your mortgage payments. The lender has the right to sell the house if you stop making payments (foreclosure) and the lender must know that they can make back the value of the foreclosed mortgage by selling the property at a price equal to the amount of the mortgage loan.

Understanding Your Credit History

Credit can be a blessing when used properly or a curse if your debt load becomes too great of a burden. In order to qualify for a mortgage


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loan, your credit rating must show that you have faithfully paid your debts, as expected. When you apply for a mortgage, the lender will look at your credit report to see if you have been paying your debts on time. By law, you are allowed to see your credit report, so get a copy from a credit bureau. This report will give you an overall history of your credit payments, including your current debts.

How to Improve Your Credit Rating

• Pay down existing debts and make sure bills are paid on time, especially minimum payments on credit cards.

• Postpone major purchases until you can save the money needed instead of creating more debt.

• Use credit carefully — establish a track record of timely payments to improve your credit rating.

• Don’t skip bills to make other payments — missed payments appear on your credit report.

• Don’t default on payments — delinquent payments, collection items and court judgments stay on your credit report for six years, even if you pay them at a later date.

Your lender will need to verify the value of the property you wish to buy, as well as your financial situation and credit history. If your down payment will be less than 25% of the purchase price, you will need to


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qualify for a low down payment mortgage — which means you have to pay an insurance premium.

This insurance premium can be paid in full immediately or added to the life of the mortgage. Low down payment mortgages are insured by either the Canada Mortgage and Housing Corporation (CMHC) or GE Capital Mortgage Insurance Company (GEMICO). The amount of the fee will depend on the amount you are borrowing and the percentage of your own down payment, but these fees typically range from 1.00% to 3.25% of the principal amount of your mortgage.

Key Mortgage Terms

Your down payment pays only a portion of the home’s purchase price. The outstanding balance is financed in the form of a mortgage from either a financial institution or private lender. In simplest terms, a mortgage is a personal loan used to purchase a property. You must then use that property as security for the loan.

The amount of the loan is called the principal. Interest is added to the amount you have borrowed to reimburse the lender for the use of their money. A mortgage is repaid in regular payments (e.g., monthly, bi-weekly, weekly) and these payments are applied toward both the principal and the interest (also referred to as a blended payment).

Term is the number of months or years the mortgage contract covers — typically six months to five years — during which you pay interest at a certain specified rate.


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Amortization refers to the actual number of years it will take to repay the mortgage in full. This is usually longer than the term of the mortgage. For instance, you may decide on a five-year term amortized over 25 years. Although most mortgages are amortized over 25 years, you can choose a shorter period if it meets your budget. The longer the amortization period, the smaller your monthly payments, but a shorter amortization period will reduce the amount paid in interest over the life of the mortgage.

Equity is the difference between the amount for which you can sell your property and the amount you still owe on the mortgage. You can use the equity in your home to give you an upper hand when negotiating further borrowing.

Types of Mortgages

When shopping for a mortgage, always consider your long-term goals and needs. There are many options, and a mortgage can be customized to fit your unique circumstances. Make sure you understand the mortgage contract, which may take a chunk of time to read and absorb. Canadian banks have taken steps to make this document easier to understand, using regular everyday language.

Types of mortgages include conventional and high ratio. Then there are a variety of features and payment options to consider. Mortgages are available on a closed or open basis, at fixed or variable rates and can have various terms ranging from six months to 25 years.


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Open vs. Closed

With an open mortgage, you can pay off as much of your debt as you wish, whenever you want, without penalty. This could allow you to pay off your mortgage more quickly if you can afford to, potentially saving you thousands of dollars in interest over the long run. If you want flexibility, an open mortgage is a good option to consider.

A closed mortgage is one which is for a set term and with fixed conditions. In some cases, the agreement allows pre-payment but a penalty may be charged. While most closed mortgages in Canada do offer a range of penalty-free, partial pre-payment privileges, options differ between lenders so take the time to compare. The interest on a closed mortgage is usually lower than that charged for an open mortgage. It could be to your advantage to lock in your interest rate if interest rates are on the rise. If your income is static, and you want the security of guaranteeing your monthly payments over an extended period, this may be the best option for you.

All mortgages are fully open at the end of their term. This allows you to repay all or part of the outstanding principal without penalty on the maturity date.

Fixed Rate vs. Variable Rate

A fixed rate mortgage carries a set interest rate for a specific period of time (the term of the mortgage). The regular payment of the principal


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and interest remains the same throughout the term. This means you are protected if interest rates rise, but you could end up paying significantly more if they fall.

With a variable rate mortgage (or floating rate), the interest rate rises and falls periodically as market conditions change. An open variable rate mortgage gives you the flexibility to make unlimited pre-payments or lock into a fixed term at any time. This type of mortgage is more popular when interest rates are low.

If interest rates go down, more of your mortgage payment goes to your principal; and if interest rates go up, less goes toward your principal. But if interest rates rise dramatically — as they did in the early ’80s — your regular payment may not cover all of the interest owing. In this case, the unpaid interest will be added to the principal still owing and this can eat away at your equity.

Short-term vs. Long-term

You can set the term of your mortgage. Typically, terms range from six months to five years, but it’s possible to arrange seven, ten and even twenty-five year mortgages. A short-term mortgage is typically for terms of two years or less, while a long-term mortgage is for three years or more. Generally speaking, the longer the term, the higher the interest rate. The benefit of a long-term mortgage is the security of knowing exactly what your interest rate and payments will be for an extended period.


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In contrast, the shorter the term, the lower the interest rate you generally pay. A shorter term is also helpful if you plan on selling your home and will no longer need a mortgage, or as much of one.

Recent studies have shown that locking in for a longer term can cost you more money than if you renew every six months, for example. This is largely due to the higher rate you pay on long-term mortgages. If interest rates are rising, or are expected to rise, it may make more sense to go long-term and lock in at prevailing rates.Specialty mortgages are also available through some lenders. For instance, you may be able to split your mortgage into a combination of terms or types.

Other features and options

• Partial pre-payment: This feature allows you to make extra payments against your principal. Many institutions permit an annual lump sum payment or extra regular payments. Sometimes this pre-payment is restricted to the anniversary date of your mortgage. Pre-payment privileges let you pay down your mortgage faster.

• Compound interest: This refers to the interest that’s charged on the interest owing on your mortgage. The more frequent the compounding, the more interest you’ll pay. Most traditional mortgages have the interest compounded semi-annually. In the case of variable rate mortgages, interest is usually compounded monthly.


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• Increases in regular payments: Some lenders will let you increase your regular payments up to an extra 10% or 15% annually. This can save you thousands of dollars in interest costs over the life of your mortgage.

• Frequency of payments: With this option, you are not confined to making your mortgage payments monthly. You can schedule your payments to coincide with your pay cheques, making them weekly, for example. This flexibility may help you budget better, and the more frequently you pay your mortgage, the more you’ll save on interest costs over time.

• Portability: If you are selling your present home and buying another, this option allows you to take your mortgage (with the same term, rate and amount) and apply it to your new house. If your mortgage isn’t portable, don’t sign for a longer term than you’re likely to stay in the house or you might be forced to pay a penalty to break the mortgage agreement.

• Assumability: This feature allows the buyer of your house to take over or “assume” your mortgage. If your mortgage has a fixed interest rate lower than current rates it could be an attractive selling feature. In most cases, your lender will release you from your mortgage, meaning if the buyer defaults, you won’t be responsible for the payment. But if the buyer doesn’t meet the lender’s usual credit requirements, the responsibility could fall into your lap. Check with a lawyer to see what laws applies in your province concerning this matter.


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• Early Renewal: This allows you to renew your mortgage before it matures. It is a useful option if you expect mortgage rates to increase because it allows you to change to a fixed long-term rate. If current interest rates are lower than your existing mortgage rate, you will likely have to pay a charge for renewing early. Your lender can calculate this amount for you.

Different lenders may offer other features and options such as a convertible mortgage, blending and extending interest rates and interest rate buydown. Take the time to investigate all of these options, to ensure you choose the absolute best mortgage for your needs.

Other Types of Mortgages

• Second MortgageA second mortgage is granted when there is already one other mortgage registered against your property. If you default and the property is sold, the second mortgage is paid only after the first mortgage has been repaid. Because it’s riskier for the lender, a higher interest rate is usually charged for a second mortgage.

• Leasehold MortgageThe leasehold mortgage is a mortgage on a home where the land is leased rather than owned. These mortgages must be amortized over a period that is shorter than the length of the land lease.


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• Collateral MortgageThis type of mortgage secures a loan by way of a promissory note. In most incidences, money is borrowed for home improvements, a vacation, a business investment or other personal purposes.

• Bridge FinancingThis refers to a special short-term loan needed to cover the time between completing the purchase of a property and finalizing the arrangements to pay. This usually occurs when two properties are involved and the closing dates don’t match. For a short time, you may find yourself the owner of both properties.

• Vendor-Take-Back MortgageIf the market is slow, or the vendor wants the benefit of a steady return on the mortgage, he/she may agree to a vendor-take-back (VTB) mortgage. In this situation, the vendor offers to help a potential buyer by lending a portion of the purchase price. The loan usually comes with favourable or flexible terms. It may be an open loan or have a lower interest rate than that offered by financial institutions. A bit of caution is needed here — take your time before you rush into an agreement. Remember, if it seems too good to be true, it probably is. To be on the safe side, make sure a lawyer checks your agreement before you sign.


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Your Mortgage Checklist

While you’re shopping for a mortgage, think about which features are most important to you and take note of what each lender has to offer. While doing this, consider the following:

• The types of mortgage available for the amount of money you need.

• The interest rate and the length of time that rate is in affect. • What is covered by your regular payment? Principal and interest only,

or does it also include property taxes and insurance premiums?

• Pre-payment, repayment and re-negotiation options and any applicable charges.

• Are there any fees required by the lender to set up, discharge or renew the mortgage?

• Any other features, conditions or options that lender offers


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Applying for a MortgageOnce you’ve found the best lender to meet your needs, the next step is arranging your mortgage. You can apply for a mortgage in person, by phone or even on-line via the Internet. Here are some tips to help you get ready:

• Get comfortable with mortgage terms such as amortization, term, fixed, open and closed.

• Be prepared to share personal information with your lender, particularly related to your finances — your net worth (assets and liabilities), monthly expenses and employment earnings.

• Have related documents available, including copies of the following:

property or house plans (if house is being built); certificate of location; survey certificate if applicable; the accepted offer; and your pre-approved mortgage certificate, if one was issued. Before applying, find out what documentation you’ll need.

• Don’t be afraid to ask questions, no matter how basic.

As the lender evaluates your application, he/she will look at your credit history, your capacity to make your mortgage payments and whether the property you want to buy offers good enough security for the loan. The lender normally needs a few days to process your formal mortgage application.


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Mortgage InsuranceSaving for the down payment is usually the hardest part of buying a home — especially a first home. If you have less than 25% of the purchase price to put down, you will be required to purchase mortgage insurance through your lender, which protects your lender against payment default.

Sometimes part of the regular mortgage payment is used to pay mortgage insurance costs. There are several types of insurance, some of which are compulsory and some optional:

• Mortgage default insurance: If you are borrowing more than 75% of the value of the property, your mortgage must be insured against default by CMHC or a private insurer, such as GE Capital Mortgage Insurance.

• Mortgage life insurance: This optional coverage can be obtained when you take out your mortgage. If you die before the mortgage is paid off, the insurance will cover the balance, usually up to a prescribed maximum.

• Mortgage payment insurance: Offered by some financial institutions, it insures that your regular mortgage payments are covered in the event that your income is suddenly reduced (for example, if you are laid off or unemployed for a period of time).


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• Mortgage disability insurance: Also available at some financial institutions, it protects you if you cannot make your mortgage payments due to an accident or illness that leaves you unable to continue your usual employment.

Borrowers must also get fire insurance as a condition of getting a mortgage; this insurance is paid separately.

Do You Qualify?

If the following conditions are satisfied, you will be eligible for Mortgage Loan Insurance:

• The home which is to be occupied as your principal residence is located in Canada.

• You have a down payment of at least 5% of the purchase price of the property (7.5% for two-unit properties).

• Your home-related expenses do not exceed 32% of your gross household income.

• Your total monthly debt load does not exceed 40% of your gross monthly household income.

• You are able to pay closing costs equivalent to at least 1.5% of the purchase price.


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At a minimum, you must provide equity of 5% from your own resources. Gift down payments from an immediate relative are also acceptable.


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RRSP Home Buyer’s PlanThe RRSP (Registered Retirement Savings Plan) Home Buyers’ Plan is a government of Canada plan which allows you to withdraw tax-free money from your retirement savings plans.

The Home Buyers’ Plan allows you to withdraw up to $20,000 from your registered retirement savings plans (RRSPs’) to buy or build a qualifying home for yourself.

You can withdraw a single amount or make a series of withdrawals throughout the same year, provided the total of your withdrawals is not more than $20,000.

If you buy the qualifying home together with your spouse or another individual, each person who qualifies can withdraw up to $20,000.

This plan offers several benefits — under the Home Buyers’ Plan you do not have to include eligible withdrawals as income on your income tax return, and your RRSP issuer will not withhold tax on these amounts. However, if the total of your RRSP withdrawals under the Home Buyers’ Plan is more than $20,000, you will have to include the excess amount as income on your tax return for the year you receive it.

Generally, if you participate in the Home Buyers’ Plan in a particular year, you have to buy or build the qualifying home before October 1 of the year following the year of withdrawal. If you are building a qualifying


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home, Revenue Canada considers you to have ‘built the home’ on the date it becomes habitable.

What if I Don’t Use the Money?

If you do not buy or build the qualifying home before October 1 of the year after the year of withdrawal, you can:

• cancel your participation in the Home Buyers’ Plan and return the money to an RRSP or

• buy or build a different home, called a replacement property, before October 1 of the year following the year of withdrawal.

When Must I Pay the Money Back?

You must repay all withdrawals to your RRSPs within a period of no more than 15 years. Generally, you will have to repay an amount to your RRSP each year until you have repaid the total you withdrew. If you do not repay the amount due in a year, you will need to include the amount as income on your tax return for that year.

Conditions for Participating

To participate in the Home Buyers’ Plan you must meet the following conditions:


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• Canadian Residents OnlyYou must be a resident of Canada when you receive funds from your RRSP under the Home Buyers’ Plan and up to the time a qualifying home is bought or built.

• Proof You Are Purchasing a PropertyTo withdraw funds from your RRSP under the Home Buyers’ Plan, you must first have entered into a written agreement to buy or build a qualifying home. Obtaining a pre-approved mortgage does not satisfy this condition.

• Principal Residences OnlyWhen you withdraw funds from your RRSP under the Home Buyers’ Plan, you must intend to occupy the qualifying home as your principal place of residence no later than one year after buying or building it. Once you occupy the home, there is no minimum period of time that you must live there.

What If I am a First-Time Home Owner?

You are considered a first-time home owner if neither you nor your spouse (including common-law) has ever owned a home that was occupied as your principal residence.

If you are a first time home-owner and you are about to be married and your soon-to-be spouse owns his/her principal residence (or did within the previous five years), you will have to withdraw funds from your RRSP prior to your wedding to be eligible.


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What If I Have Already Owned a Home Before?

If you previously owned your principal residence, you may be able to use the Home Buyers’ Plan again if:

• You did not previously participate in the Home Buyers’ Plan or your previous Home Buyers’ Plan balance is zero on January 1 of the year during which you plan on making another Home Buyers’ Plan withdrawal and

• You meet all the other Home Buyers’ Plan conditions.

Timing is Everything

You cannot withdraw an amount from your RRSP under the Home Buyers’ Plan if you or your spouse owned the home more than 30 days before the date of your withdrawal.

Are All RRSPs Eligible?

You are not allowed to withdraw funds from some RRSPs, such as locked-in or group RRSPs. Your RRSP institution can give you more information about the types of RRSPs you have and whether or not withdrawals under the Home Buyers’ Plan can be made from them.


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Repaying the Withdrawal

In each year of your repayment period, you must repay a minimum 1/15 of your original Home Buyers’ Plan balance until the full amount is repaid to your RRSP.

For example, if you withdrew $15,000, you would have to repay a minimum of $1,000 per year. Your repayment period starts the second year following the year you made your withdrawals. For example, you withdraw during 2004, you must start repaying in 2006. Each year, The Federal Government will send you a Home Buyers’ Plan (HBP) Statement of Account. This statement will tell you the amount you have repaid, your Home Buyers’ Plan balance, and the repayment you have to make for the next year.

To make a repayment under the Home Buyers’ Plan, you must make contributions to your RRSP in the year the repayment is due or in the first 60 days of the following year. You can contribute the repayments to a new or existing RRSP account. Once your contribution is made, you must designate all or part of the contribution as a repayment under the Home Buyers’ Plan. For example, if you contribute $4,000 to your RRSP, you could designate $1,000 as a repayment to the Home Buyers’ Plan, leaving $3,000 as a tax deduction.


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Can I Repay More?

If you repay and designate more of your RRSP contribution to the Home Buyers’ Plan than required, the annual amount to be repaid in later years is reduced.

The annual Home Buyers’ Plan (HBP) Statement of Account that is sent to you takes into account any additional payments you make and gives you the new repayment amount for the next year.

Can I Repay Less?

If you repay less than the minimum amount, you will have to include the difference as income on your tax return.

Can I Make Early Repayments?

Your repayment period starts the second year following the year you made your withdrawals. You can choose to begin your repayments earlier, but the repayment period will remain the same.

Any payments made before you are required to start your repayments will reduce the actual amount you have to pay in the following years.


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Repayment Must Be Made in Less Than 15 years if:

Additional repayment rules apply if the participant:

• dies • becomes a non-resident • 70 years of age or over

What If I Don’t Meet All of the Conditions?

If you do not meet all the Home Buyers’ Plan conditions and you have already used the money, your RRSP withdrawals will not be considered eligible and will have to be included as income for the year you received them. If the government has already assessed your return for that year, they will reassess it to include the withdrawals.

You can cancel your participation in the Home Buyers’ Plan if you have met all but one of the following Home Buyers’ Plan conditions:

• you did not buy or build a qualifying home or replacement property

• you became a non-resident before buying or building a qualifying home or a replacement property

If you cancel your participation because a qualifying home or replacement property was not bought or built, your cancellation payments are due on or before December 31 of the year after the year you received the funds.


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If you repay the full amount you withdrew from your RRSP under the Home Buyers’ Plan, you will not be taxed on your withdrawal. Any portion of your withdrawal that is not repaid will have to be included in your income for the year you received the funds.

What Can I Use the Funds For?

As long as you buy or build a qualifying home and meet all the conditions to participate in the Home Buyers’ Plan, you can use the funds you withdrew from your RRSP for any purpose, such as buying furniture or paying off credit card balances.


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Glossary of Mortgage TermsAmortization: The number of years it takes to repay the entire amount of the mortgage.

Appraisal Value: An estimate of a property’s market value by a professional Appraiser; used by lenders in determining the amount of the mortgage.

Debt Service Ratio: The percentage of a borrower’s income that can be used for housing costs.

Gross Debt Service (GDS) Ratio: Gross debt service divided by household income. A rule of thumb is that GDS should not exceed 30%. It is also referred to as PIT (Principal, Interest and Taxes) over income. Sometimes energy costs are added to the formula, producing PITE, which moves the rule of thumb GDS to 32%.

Total Debt Service (TDS) Ratio is the maximum percentage of a borrower’s income that a lender will consider for all debt repayment (other loans and credit cards, etc.) including a mortgage.

Equity: The difference between the price for which a property can be sold and the mortgage(s) on the property. Equity is the owner’s stake in the property.


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Foreclosure: A legal process by which the lender takes possession and ownership of a property when the borrower doesn’t meet the mortgage obligations.

Mortgage: A contract between a borrower and a lender. The borrower pledges a property as security to guarantee repayment of the mortgage debt. Lenders consider both the property (security) and the financial worth of the borrower (covenant) in deciding on a mortgage loan.

Assumable Mortgage: A mortgage held on a property by the seller that can be taken over by the buyer, who then accepts responsibility for making the mortgage payments.

Conventional Mortgage: A mortgage loan that is 75 per cent or less of the loan-to-value ratio; and does not require insurance by CMHC or other private insurer.

First Mortgage: The first security registered on a property. Additional mortgages secured against the property are “secondary” to the first mortgage. High-ratio Mortgage: A mortgage that exceeds 75 percent of the loan-to-value ratio; must be insured by either the Canada Mortgage and Housing Corporation (CMHC) or a private insurer to protect the lender against default by the borrower who has less equity invested in the property.


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Open Mortgage: A mortgage that can be prepaid or renegotiated at any time and in any amount, without penalty.

Pre-Approved Mortgage: Tentatively approved by a financial institution for a specified amount, interest rate and monthly payment.

Second Mortgage: A second financing arrangement, in addition to the first mortgage, also secured by the property. Second mortgages are usually issued at a higher interest rate and for a shorter term than the first mortgage.

Term Mortgage: A non-amortizing mortgage under which the principal is paid in its entirety upon the maturity date. Sometimes called a straight loan.

Variable-rate Mortgage: A mortgage for which payments are fixed, but whose interest rate changes in relationship to fluctuating market interest rates. If mortgage rates go up, a larger portion of the payment goes to interest. If rates go down, a larger portion of the payment is applied to the principal.

Vendor Take-Back Mortgage: When sellers use their equity in a property to provide some, or all, of the mortgage financing in order to sell the property.

Mortgage Life Insurance: Insurance that pays off the mortgage debt should the insured borrower die.


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Mortgage Payment: The regular instalments made towards paying back the principal and interest on a mortgage.

Mortgagee: The person or financial institution lending the money, secured by a mortgage.

Mortgagor: The property owner borrowing the money, secured by a mortgage.

Mortgage Broker: A person or company having contacts with financial institutions or individuals wishing to invest in mortgages. The mortgagor pays the broker a fee for arranging the mortgage. Appraisal and legal services may or may not be included in the fee.

Mortgage Insurer: In Canada, high-ratio mortgages (those representing greater than 75% of the property value) must be insured against default by either CMHC or private insurers. The borrower must arrange and pay for the insurance, which protects the lender against default.

Mortgage Prepayment Penalty: Is a fee paid by the borrower to the lender in exchange for being permitted to break a contract (a mortgage agreement); usually three months’ interest, but it can be a higher or it can be the equivalent of the loss of interest to the lender.

Portability: A mortgage feature that allows borrowers to take their mortgage with them without penalty when they sell their present home and buy another one.


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Prepayment Clause: A clause inserted in a mortgage, which gives the mortgagor the privilege of paying all or part of the mortgage debt in advance of the maturity date.

Principal: The mortgage amount initially borrowed or the portion still owing on the mortgage. Interest is calculated on the principal amount.

Rate: (Interest) The return the lender receives for advancing the mortgage funds required by the borrower to purchase a property.

Refinancing: The process of obtaining a new mortgage, usually at a lower interest rate, to replace the existing mortgage.

Secondary Financing: Second, third, fourth, etc. mortgages, secured by a property “behind” the first mortgage.

Term: The actual life of a mortgage contract — from six months to ten years — at the end of which the mortgage becomes due and payable unless the lender renews the mortgage for another term (See Amortization).

Weekly Payments: Mortgage payments made weekly or 52 times per year.

before arranging your mortgage

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