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Mortgage
A quick way to see how much you can afford is to use the gross
debt-service formula (GDS). Here, the Principal, Interest
and Taxes (PIT) on your mortgage loan should not exceed 30
per cent of your gross income. Increasingly, financial institutions
will factor energy costs into the PIT formula, moving the
rule of thumb GDS from 30 to 32 per cent.
You can work it out in reverse: multiply the monthly payment
on principal, interest and taxes (include any condominium
maintenance fees) by 40. So if your monthly payment for these
items is $1,000, you'll need a gross annual income of at least
$40,000. Discuss your mortgage limit and different types of
mortgages with your salesperson before you begin seriously
looking for a new home.
There are several different types of mortgages:
- Pre-approved Mortgages:Pre-approval means that you as a
buyer, have qualified in advance for a mortgage of X dollars,
contingent upon the lender approving the property. Many financial
institutions offer pre-approved mortgages, with your interest
rate guaranteed not to rise for a certain period.
- Conventional Mortgages: Most banks and trust companies offer
standard loans using the property as security and require
you to make a monthly blended payment including principal
and interest. Conventional mortgages require at least 25 per
cent of the purchase price as a down payment.
- High-ratio Mortgages: If your down payment is less than
25 per cent, you may still qualify for a mortgage, but you
will need mortgage insurance. Canada Mortgage and Housing
Corporation (CMHC), a federal crown corporation, and GE Capital
Mortgage Insurance Company, a private company, provide insurance
for high-ratio mortgages.
- Vendor Take-Back Mortgages: The seller underwrites part
of the purchase, as a loan to be repaid by the buyer. These
are often used as second mortgages, to bridge any gaps or
to make the property more attractive to the buyer. In some
provinces, the seller may also transfer the mortgage to the
buyer.
- Open and Closed Mortgages: Open mortgages allow you to make
extra payments on the principal, reducing your borrowing costs.
Because of this flexibility, interest rates for open mortgages
are a little higher. Closed mortgages have no flexibility;
you must wait until the term is up to pay your mortgage. However,
interest rates for these mortgages are generally lower. In
the middle, are the partially open mortgages that have some
of the characteristics of both open and closed mortgages.
Just as there is a range of mortgage types, there is also
range of repayment schedules. As well as the traditional monthly
payment plan, there are now semi monthly, biweekly and even
weekly payment schedules. Accelerated repayment options speed
up the process even more, paying down the mortgage faster
and spending less on interest charges. You may also opt for
a shorter amortization period, or mortgage "life".
It raises your monthly payments in the short-term, but saves
you in the long-term, on the interest you pay.
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2001- 2002. GTAHouse.com.
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