copyright © 2008 pearson education canada 12-1 chapter 12 home mortgages
TRANSCRIPT
Copyright © 2008 Pearson Education Canada 12-2
To Rent or Buy a Home? No easy answer Depends on the individual
Financial circumstances Social circumstances
Copyright © 2008 Pearson Education Canada 12-3
Costs of Renting a Home Rental payment Tennant’s insurance Security deposit Opportunity cost of security
deposit
Copyright © 2008 Pearson Education Canada 12-4
Advantages of Renting a Home Mobility Fewer responsibilities Little or no maintenance Lower initial and ongoing costs Income-tax implications
Capital gain on principal residence not taxable
Copyright © 2008 Pearson Education Canada 12-5
Disadvantages of Renting a Home Limitations on remodeling Smaller space Restrictions on
Noise, pets, etc. Not building equity
Copyright © 2008 Pearson Education Canada 12-6
Costs of Buying a Home Down payment Mortgage payment Opportunity cost of down payment Home insurance Property tax Closing costs Maintenance and upkeep
Copyright © 2008 Pearson Education Canada 12-7
Advantages of Buying a Home Pride of ownership Possible capital gains from sale Payments going to equity No limitation to remodeling
Copyright © 2008 Pearson Education Canada 12-8
Disadvantages of Buying a Home Major commitment
Financial and time Large opportunity costs Limited mobility Responsible for maintenance and
repairs Higher insurance and property taxes Higher living costs
Copyright © 2008 Pearson Education Canada 12-9
The Price of Home You Can Afford Depend on Size of down payment The interest rate on the loan The amortization period The mortgage features
Copyright © 2008 Pearson Education Canada
12-10
Financing a Home Home is used as security of the loan Borrower signs a contract
Mortgage Borrower
Mortgagor Lender
Mortgagee
Copyright © 2008 Pearson Education Canada
12-11
Mortgage Contract Mortgagee (financial institution)
Retains ownership of property May sell mortgage Mortgagor’s permission not required
Mortgagor (homeowner) Retains possession Has equity of redemption
Copyright © 2008 Pearson Education Canada
12-12
Equity of Redemption Mortgagor’s right to redeem the
property Ownership transferred back
To mortgagor When mortgage is discharged
Copyright © 2008 Pearson Education Canada
12-13
Mortgage Repayment Amortization period
Time to completely pay off the mortgage
Mortgage term Time before lender can demand
Repayment of all the principal Payments
Equal blended payments Principal + interest
Copyright © 2008 Pearson Education Canada
12-14
Renewing the Mortgage At end of mortgage term
Balance has to be paid off, or Mortgage has to be renewed
Can transfer to another financial institution
Pay off part of the principal
Copyright © 2008 Pearson Education Canada
12-15
Mortgage Claims First mortgage
Offered by major financial institutions This claim has top priority
Second & later mortgages When down payment & first mortgage loan
Are not enough to buy house Rates are much higher Terms are always shorter Second mortgagee receives equity of
redemption
Copyright © 2008 Pearson Education Canada
12-17
Open Mortgages Prepay some or all of the balance
Prior to maturity Without penalty Wide range of terms
Copyright © 2008 Pearson Education Canada
12-18
Closed Mortgages Cannot prepay in full prior to
maturity Prepayments subject to interest
penalty Although certain prepayments can be
made Under prepayment options Without penalty
Copyright © 2008 Pearson Education Canada
12-19
Basic Types of Residential First Mortgages Conventional mortgages Insured mortgages
Copyright © 2008 Pearson Education Canada
12-20
Conventional Mortgages 25% or more down payment Loans up to 75 % of the smaller of
Appraised value of property Purchase price of property
Mortgage insurance not required
Copyright © 2008 Pearson Education Canada
12-21
Insured Mortgages 5% down payment Loans up to 95 % of property’s value Compulsory mortgage insurance
Protection for financial institution In event borrower defaults on loan
Provided by CMHC Genworth Financial Canada
Copyright © 2008 Pearson Education Canada
12-22
Mortgage Life Insurance Differs from mortgage insurance Protection for survivor
In event mortgagor dies Insurer pays off balance of mortgage Insured age requirement
Less than 65 years of age to qualify Premiums based on
Age and mortgage balance
Copyright © 2008 Pearson Education Canada
12-23
Assumption of an Existing Mortgage Take over the existing mortgage When buying a “used” house Assume the mortgage on the house
Involves a formal agreement Pick up payments where vendor left
off Vendor still responsible for payments
Unless specifically released by financial institution
Copyright © 2008 Pearson Education Canada
12-24
Closing Costs Purchase price Appraisal fees Survey fees Legal fees
Title search Document registration
Copyright © 2008 Pearson Education Canada
12-25
More Closing Costs 6% GST
On new houses Adjustments
Pro-rated items Property taxes Fuel Electricity Cable
Copyright © 2008 Pearson Education Canada
12-26
Mortgage Life Insurance Decreasing term Life insurance policy Discharge mortgage Same amount as the balance
Copyright © 2008 Pearson Education Canada
12-27
Qualifying for a Mortgage Depends Upon Two Criteria The quality of the property The borrower’s creditworthiness
Copyright © 2008 Pearson Education Canada
12-28
The Quality of the Property Lender appraises the property
Determines the lending value May differ from selling price
Mortgage loan based on The appraised value
Copyright © 2008 Pearson Education Canada
12-29
The Borrower’s Creditworthiness Lender evaluates borrower’s
Credit history Income Assets and liabilities
Lender calculates Gross debt service ratio Total debt service ratio
Copyright © 2008 Pearson Education Canada
12-30
Gross Debt Service Ratio Percent of borrower’ income to
cover Mortgage payments Municipal taxes Heating costs
Must be less than 25% to 30% Depending upon lender’s guidelines
Copyright © 2008 Pearson Education Canada
12-31
Total Debt Service Ratio Percent of borrower’ income to
cover Mortgage payments Municipal taxes Heating costs Consumer debt payments
Must be less than 40 %
Copyright © 2008 Pearson Education Canada
12-32
Total Debt Service Ratio Calculation
100income annual gross
debtconsumer heating/yrtaxes/yrrpayments/yTDS
Copyright © 2008 Pearson Education Canada
12-33
Reverse Mortgages Canadian Home Income Plan (CHIP
) Home equity
Used as collateral for a loan Eligibility
Homeowners At least aged 60
Specified geographical area