The following is a link to the official press release - http://www.fin.gc.ca/n10/10-011-eng.asp

The most important points are below.

Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.

Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save.

Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.

I believe that the industry has a number of clarification questions that we need answered before we fully understand how this will affect the market place this spring.

When everything is all sussed out I will be sure to update you.

If you are purchasing your first home then it is likely the first time you will pay City Taxes.  These taxes are separate from the income tax that you probably paid in the past.  These taxes are levied by the city that you live in and are used to pay for things like roads, parks, street cleaning and hockey rinks.  These taxes are very important to all people who live in the city because if these taxes are not collected from everyone then the city services would grind to a halt.

These taxes an annual assessment based of the value of the property.  Once the value of the property has been established (they do this through a complex mathematical system) then the nominal tax rate is applied.  This gives you an annual payment that is your part of the total city tax revenue.

These taxes are so important to cities that the province has created a law that if the home owner does not pay these taxes then before they can change possession to another owner – the taxes owing are collected from that revenue – even before the lender.  This rule alone makes taxes a very important part of the mortgage process to the lender.

The lender wants to have all homes in its portfolio taxes paid so that if a house goes through the foreclosure process that they will get the full sum owed to them as first payable on the Title.

The lender will ensure that taxes are paid by one of two ways:

-          They pay them on your behalf.  The Lender takes 1/12 of the annual tax amount and sets that as the payment.  This payment is added to your monthly mortgage payment.

-          You pay them yourself monthly via the Tax Installment Payment Plan (TIPP) Program.  Payments will be automatically taken from your bank account on the 1^st of the month.

It is very common to meet people with a great idea, “I want to buy a home.”  But they seem to be basing all their purchase on thoughts in their head.  So it is very common for me to hear people ask their better halves, “How much was that fireplace again?” or “Where did you put the <insert key piece of paperwork here>?”

My suggestion is to create two file folders – one for the purchase and one for the mortgage.  Carry these files with you or put them in a place that you can easily access them.

Keep important paperwork in the corresponding folder.  Be sure not to throw away any key data until the deal has been finalized and you have moved in.  This will likely be quite a lot of paper but it is better to have the information in case you need it in a pinch.

By having two places to keep your documents and referring to them all along as you go through the process you will be basing your decisions on real facts not what you think you remember.

Things happen – divorce, your job is moved to another city – your needs change.  This is ok.  Lenders will allow people to get out of mortgages that they have gotten themselves into – for a fee of course.

These fees are called Pay Out Penalties.

Pay out penalties are typically determined in two different ways:

-          Interest Rate Differential

-          Three Months Interest

Lenders take whichever of the two is greater.

The Alberta Mortgage Broker Association defines the how these are calculated as follows:

“You can calculate these two penalty amounts using the simple interest formula to five a borrower an approximation of the cost:

I = P x R x T”

I = Interest

P= Principal

R = Rate

T = Time

For the three month interest calculation the formula would look as follows:

I = Current Mortgage Balance x Original Mortgage Interest Rate x 3/12 (Since time is in years we only want to calculate 3 months)

So if you have a mortgage of $150k at a rate of 7.5% the calculation to determine 3 months interest would give us a value of $2812.50.

For the Interest Rate Differential calculation the formula would look as follows:

I = Current Mortgage Balance x (Original Mortgage Interest Rate – Current Mortgage Interest Rate) x Time remaining in contract

So if you have the same scenario as above and the current mortgage Interest Rate is 6% and you have 3 years left in the term the calculation to determine the Interest Rate Differential would give us a value of $6750.

In this case the lender would charge you $6750 for leaving this mortgage.

What I believe is important to note in this case are:

-          The lender is not picking a number out of the air – there is a clear formula that they use.

-          People need to know what the consequences are.  This allows people to make educated decisions and educated decisions are good decisions.

If you have any questions regarding this please do not hesitate to contact me or another qualified Mortgage Broker.

The reality is that the borrowers are only one part of the equation – the property is the other part.

Lenders want to make sure that if unforeseen circumstances arise and they are forced to start foreclosure proceedings that they can sell the property for market value.  This means that the house/condo has to be in at least “average” condition.

Lenders may shy away from properties that are great deals because of the following:

- Refurbished grow op house

- One of those houses where there were 20 cats living there

- “Fixer-upers”

- Dirt basements

The lender also wants to make sure that the property has enough funds in the Condominium reserve funds to handle any unforeseen expenditures for the building.  So if a building is 35 years old and only has $2500 in its reserve fund this will likely raise a red flag.

It is important to understand that the lender did not implement these policies to stop people from buying places.  They just want to be sure that they have invested their money someplace safe – they already think you are strong now they need to confirm that the property is strong as well.

This is just one of the many reasons to be sure that you use a qualified Realtor, home inspector and mortgage broker in your purchase.