Before Arranging Your Mortgage

Content
The First Step Towards Home Ownership ............................................... 1

Anatomy of a Mortgage ....................................................................... 2

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 ................................................................... 10

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

Applying for a Mortgage .................................................................... 24

Mortgage Insurance .......................................................................... 25

RRSP Home Buyer’s Plan ................................................................... 28

Glossary of Mortgage Terms .............................................................. 36

IMPORTANT INFORMATION YOU NEED TO KNOW
BEFORE ARRANGING YOUR MORTGAGE
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The First Step Towards
Home Ownership
Buying 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.

IMPORTANT INFORMATION YOU NEED TO KNOW 1

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?


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.


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.


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.


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.


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 — $165
Covers the cost of processing your mortgage application.

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

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

• Property Survey Cost — $1,000
Verifies 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.


• Insurance Costs RE: Low Down Payment Mortgages —
0.50%-3.75% of the mortgage amount
Insures 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/year
Insures the home and its contents.

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

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

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

• Goods and Services and Sales Taxes (if applicable) — Variable
Amount 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 — Variable
This might already be included in the purchase price of the home
— ask before you sign an Offer to Purchase.


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

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

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

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

• Decorating — $800
Covers 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.


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:


• 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


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.


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


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


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.


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.


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


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.


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.


• 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.


• 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 Mortgage
A 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 Mortgage
The 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.


• Collateral Mortgage
This 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 Financing
This 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 Mortgage
If 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.


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


Applying for a Mortgage
Once 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.


Mortgage Insurance
Saving 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).


• 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.


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


RRSP Home Buyer’s Plan
The 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


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:


• Canadian Residents Only
You 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 Property
To 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 Only
When 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.


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.


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.


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.


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.


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.


Glossary of Mortgage Terms
Amortization: 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.


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.


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.


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.


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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