What is a second home?

I know it sounds like it’s self-explanatory, but the reality is many people have a slight misunderstanding of what a second home is. From the typical borrower’s perspective, a second home is a subsequent property that is being purchased or already owned. However, from a lender’s perspective, a second home is intended to be owner-occupied by the borrowers themselves, OR by their immediate family to an acceptable capacity.

In other words, purchasing a second home is not the same as purchasing a second property, whereby the property is going to be rented out (investment)…

Okay great, so how does it work?

Now that we understand what a second home is (and what it’s not) …getting a mortgage for this type of purchase/refinance is pretty much the same as if it were going to be your first home. There are a few additional things to consider, and they are as follows:

• You must demonstrate that you can qualify to support the second home, while debt servicing your existing home and any other debts you may have
• There cannot be any suspicion that the property is an investment property, you must demonstrate that you or your immediate family will be living in the home

Why does it matter – second home vs 2^nd property for investment?

The reason the distinction is important is that a home that is “owner-occupied” vs a home that is “tenanted” carry different degrees of risk. When you as the owner live in a home, you tend to do so with a certain level of care and concern for the well-being/upkeep of the home. When you are simply a tenant, you may not have the inherent concern or feeling to do so (at least to the same extent). Therefore, from a lender’s perspective, this distinction matters so that they can mitigate the risk with the appropriate down payment requirements and Interest rates offered under the two scenarios.

If you are interested in learning more about second home mortgages or would like to run your scenario by us, just give us a call today – at (905) 455-5005

Did you know that more Canadians became self-employed between the years 2020 – 2022 than in any 2 consecutive years prior? Can you spot the correlation? It probably comes as no surprise that the Covid-19 pandemic presented a magnitude of work opportunities for Canadians and their families.

Self Employed Mortgage Ontario:

As a result, the demand for self employed mortgages in Ontario has grown rapidly. For a long time, there has been a misconception about the difficulty or obstacles of self employed mortgages. Many business for self individuals considered the idea of getting a mortgage to be unachievable given the limited income declared on their taxes. Simply put, there are many self employed mortgage solutions available without the need for tax documents – solutions that have been available for many years.

Mortgage for Self Employed Applicants – How it Works?

For a self employed mortgage, you do need proof of income, but not in the traditional sense. Here is a list of items typically asked for by banks and lenders to prove income for ‘business for self mortgages’:

• Articles of incorporation, HST # or Master business license
• 6 – 12 months of business bank statements (or personal bank statements if sole proprietor)
• A few invoices to match income deposits (or contracts, etc.)
• A stated income letter (a template is usually provided by each bank)

Did you notice that we made no mention of tax documents? That’s because many lenders don’t require business tax documents to qualify income for a self employed mortgage in Canada. (However, if your business is profitable and can be proven through CRA documents, you can also provide your business tax documents as requested – more often than not, this is not required).

To be transparent, most major banks (or ‘A’ banks as we refer to them) will NOT offer a self employed mortgage without proof of tax documents (business financials, business T1s, etc.). B lenders on the other hand are great for this, and you will need to connect with a reputable Mortgage Broker like us to gain access to these lenders.

Are you business for self and seeking out a self employed mortgage? If you are, please connect with us and we’ll spend the necessary time to help you plan months ahead of your purchase or mortgage refinance. Call us today at (905) 455-5005.

Q: What happens to my mortgage payment when the prime rate changes?

A: If you have adjustable-rate mortgage, your payment will increase or decrease based on prime rate changes.

• When you first get a mortgage, your payment will be based on the prime rate at the time of boarding.
• When a prime rate change occurs, you will often be notified in writing by your financial institution of the new payment and the effective date of the change.
• Not all institutions might inform you in writing. If not, it’s likely that changes in the payment will take effect on the 1^st of the month immediately following the prime rate change announcement.

Q: What happens in the prime rate changes on the 1^st of the month?

A: If the prime rate changes on the 1^st of the month, you can expect your adjustable rate mortgage payment to reflect the change immediately on your next payment based on your payment frequency (i.e. weekly, bi-weekly, monthly, etc.).

Q: Will I be notified of changes to payments for my adjustable rate mortgage?

A: Yes. With most banks and institutions, changes will be notified in writing, by a customer service member, online banking, or customer portal (if applicable).

Q: I am concerned about future interest rate hikes. What are my options?

A: Most banks will offer convertibility options for their variable and adjustable rate mortgage holders. This means that you can convert to a fixed rate at any time throughout the term of your mortgage. The rules for this option are:

• Your mortgage must be in good standing (up to date and paid as agreed).
• You must convert to a fixed term equal to, or greater, than the adjustable rate mortgage term you have remaining (i.e. 3 years remaining in your original adjustable rate term means that you can choose only between a 3, 4, or 5-year fixed term).
• Fixed rates offered at the time of converting will be at the bank’s current market rates. It is unlikely to receive promo rates that might apply to new purchases (or new business as the banks refer to it).

There are two types of mortgages – Open vs. closed.

Most homeowners obtain closed mortgages when they expect to own the home for a longer period. These mortgages offer lower rates as compared to Open mortgages with the caveat that there would be a penalty if you break the mortgage before the maturity of the term.

If, however, you are expecting to sell the home in the near term, you may opt for an open mortgage because, unlike closed mortgages, these mortgages do not have any penalties associated with their repayment. The caveat here is that the interest rate would be higher than its “closed” counterpart because you could repay the loan at any time, without consequence…

So, within the closed mortgage realm, there are currently 2 forms of penalties that exist. Most homeowners are familiar with the “3 months interest penalty” which is self-explanatory. If you have a variable mortgage, then this is the only kind of penalty that would apply to you if you “broke” your mortgage term…

Having said that, if you have a fixed mortgage, then a 3-month interest penalty isn’t necessarily the “maximum consequence” you would need to consider. This is because there is another type of penalty called “interest rate differential”. This type of penalty is triggered if the calculated amount of the penalty here, is greater than the 3-month interest penalty. That’s right, the potential penalty you pay here could be the higher of the two…

When does interest rate differential apply?

We won’t go over the exact formula that goes into the interest rate differential, but instead, we will explain the general idea behind it. For example, let’s say you obtained a fixed mortgage at 5% on a 4-year closed term and you were about to refinance your property with 2 years left on the term. At the same time, mortgage rates happen to come down to 3.5%. In this example, the bank would lose higher interest returns on 2 more years of the mortgage. At the same time, you could benefit from switching to another lender and getting a mortgage at the lower market rates that are available at that time. This scenario would likely trigger the “interest rate differential penalty” which would calculate the difference between your rate and the current rate + account for how much time you have left on the mortgage term. This penalty could come to tens of thousands of dollars and is meant to recoup the expected losses the bank would face over the remaining term.

Since fixed closed-term mortgages offer the banks a stable future indication of a certain return on investment, they rely on the interest rate differential penalty as a way to protect those expected returns and deter homeowners from constantly bouncing around and following the lowest rates as often as they might…

So what do I know what my penalty would be?

Although online tools and conversations with mortgage professionals can help you wrap your head around how it all works, the best advice is that you speak with your existing mortgage provider. Only they can provide you with the most accurate feedback as you what your mortgage allows you to do and the exact penalty you would pay at any given time. It is best not to guess when it comes to these things because the last thing you’d want is to show up to the law office to finalize everything, and then learn you owe $20k in penalties. Maybe you would have approached things differently if you had this information at the beginning….

Having said that, we’d be happy to discuss your situation and plans, so please feel free to reach out to us so we can continue to share our guidance. – (905) 455-5005

If you’re like most homeowners, you purchased your home, make your mortgage payments and the rest is history. However, many homeowners tend to overlook the various benefits or “mortgage features” that come with their mortgage, including this one – “Porting”

Okay, but what is it?

Porting is a mortgage feature that is typically found in most mortgages today. It is a feature that allows homeowners who are selling & buying the ability to “transfer” their existing balance (sale home) over to their new home. The main reason a homeowner would want to potentially take advantage of this feature is to avoid penalties that would otherwise be associated with breaking the existing mortgages that are still in their “contract term”.

In other words, instead of repaying the existing mortgage (+ Penalties) and getting a new mortgage altogether, porting a mortgage allows you to bypass penalties.

But what if my new mortgage needs are greater?

Commonly, homeowners would need to “top up” their ported mortgage. After all, it’s not often that we sell and buy our homes at even prices. In these instances, the existing lender usually can provide a top-up solution based on the qualifications of the borrower/s. There are some terms and conditions that the banks would consider when completing ports, but this is a simplified explanation.

Okay got it, but what about a down payment?

Regardless of whether you port your mortgage or not, the need for a down payment remains unchanged. Having said that, the amount of the down payment required to complete the purchase will come down to your ability to carry the desired mortgage. For example, if you have sufficient qualifying income and excellent credit, you may be able to minimize your down payment, while maximizing your borrowing. In most cases, homeowners that are porting their mortgage also intend to “transfer their equity” by using most of the proceeds from the existing home (sale) towards their new purchase.

Whether or not porting is right for you will come down to various factors, but the most significant one to consider is your potential penalties. In any case, it’s certainly worth exploring your options when presented with this opportunity. In other words, you should always speak to your existing mortgage provider about any penalties that you may trigger from your decision to change your living situation. Ask them about porting your mortgage and they can go into greater detail as it relates to you.

On the other hand, you can always reach out to us, and we can help set you on the right track to obtain the right information – (905) 455-5005

In Canada, financial institutions offer many types of mortgages, including closed and open-term mortgages. While open-term mortgages allow flexibility to borrowers to exit without penalty (only per diem interest payable), most borrowers in Canada have some form of a closed mortgage, likely due to choosing the most attractive rates at the time of first getting the mortgage or renewing. If you have a traditional 1-5 year fixed or variable rate mortgage with any A or B bank, chances are, you have a closed mortgage which yields a penalty if broken early.
It’s less common to see a mortgage term to its’ maturity these days. Some common reasons for breaking your mortgage early could be any of the following:
Selling your home
Paying off your mortgage balance in full
Refinance your mortgage (pull out equity, lock in a better rate with a different bank, etc.)
Removing an existing title holder (including a buyout)
Re-amortize your mortgage to lower payments
A fallout with your existing bank – switch to a competing bank for better treatment/products

What is the Penalty for Breaking a Mortgage in Canada?
So, exactly how much does it cost to break a mortgage early? On the institutional level, most banks and lenders have the following penalty clauses: Either 3 Months of Interest or IRD (Interest Rate Differential). Which penalty type is charged has a lot to do with the type of mortgage you have – Variable or Fixed.
Variable Mortgage Penalty: Unlike fixed mortgages, variable rate mortgages come with 1 penalty clause. The penalty for breaking a mortgage on a variable term will be a 3-month interest penalty at any time throughout the term. This is a clause that attracts borrowers to variable rates (aside from the lower rate to begin with).
To calculate the cost to break a variable mortgage, use this formula
Penalty to Break Mortgage = (Interest Rate x Mortgage Balance) ÷ 12 x 3 Months

Fixed Mortgage Penalty: The fixed mortgage penalty is a bit trickier to determine. While it can also be a 3-month interest penalty, for fixed rates, it’s the higher of the two penalty types. This means you’ll need to do both calculations to determine which penalty applies. Your penalty amount will depend on WHEN you break the mortgage throughout the term and WHAT current market rates are when you break. We discussed the 3-month interest penalty formula above. With interest rate differential (IRD), that penalty is calculated by subtracting the current market rate from the rate you are paying. The difference is multiplied against your outstanding mortgage balance (divided by 12 to get the monthly amount). Finally, using that monthly amount calculated, you will multiply once more with the number of months you have remaining on your term! Here is the formula.
Penalty to Break Mortgage = (Your interest rate – Current market rate) x Mortgage balance outstanding) ÷ 12 x the number of months you have left on your term.

Are there calculators to determine the mortgage breaking penalty?
Yes – Most institutions have some form of a ‘mortgage pre-payment calculator’ on their website to help borrowers determine the cost to break a mortgage at any time. You’ll need to be familiar with what the current mortgage rates are (should you need to calculate the penalty to break a fixed mortgage). These too can be found online at any time.

Can I avoid paying a penalty to break a mortgage?
In some instances, reducing or avoiding a penalty to break a mortgage can be achieved just by knowing what options your contract offers. Some ways to avoid a mortgage breaking penalty might be:
Port your mortgage (If you are selling and buying again, see if your mortgage can be ported to the new property instead of breaking it)
Blend and extend your mortgage (if you’re looking for more mortgage financing than you currently have, see if the bank can blend your new request with your existing mortgage to offer you the funds you need without incurring a mortgage penalty)
Mortgage assumption (if you’re selling and need to break your mortgage, can the buyers assume your mortgage instead? This would avoid a mortgage breaking penalty)
Pre-payment Privilege (Can you use your annual ‘mortgage pre-payment privilege’ to reduce the amount of the penalty to break a mortgage?)
Ask for a penalty reduction (It doesn’t hurt to ask. A penalty can be a make or break for some. Maybe you’ll catch someone on a great day. It doesn’t happen often that penalties are reduced, but under some circumstances, we’ve seen the exception.)

Want to know more about the penalty to break a mortgage in Canada? Give us a call and we’ll be happy to get more granular on this topic relative to your mortgage numbers. Let’s chat at (905) 455-5005.

What is it?

Although not directly tied to mortgages, the Land transfer tax is an important cost and consideration for all home buyers when purchasing a property. In Ontario, when you purchase (or acquire) land or any form of real estate, you pay what’s known as a “land transfer tax” to the province. This tax is payable upon the closing of your home and is a part of your “disbursements” which the lawyer would collect and remit on your behalf.

How much is the tax?

The amount of the tax is based on the agreed price you have paid from the real estate and is always paid by the “buyer” in the transaction. Like most taxes, the amount payable is based on the amount of the purchase price (or acquiring cost). Below are the following tax brackets depending on the applicable value consideration of the purchase:

1^st Bracket: amounts up to and including $55,000: 0.5%

2^nd Bracket: amounts exceeding $55,000, up to and including $250,000: 1.0%

3^rd Bracket: amounts exceeding $250,000, up to and including $400,000: 1.5%

4^th Bracket: amounts exceeding $400,000: 2.0%

5^th Bracket: amounts exceeding $2,000,000, where the land contains one or two single-family residences: 2.5%.

Example:

If you are buying a home with a purchase price of $400k, you would need to pay a total of $4475.00 in land transfer taxes to the province. This is calculated based on the first three applicable brackets indicated above:

$275 for the first 55k + $1950 for the next 195k + $2250 for the remaining 150k = $4475.00 for the total purchase price of 400k.

Having said that, you won’t need to do the manual calculation because, like most things, there are several online calculators you can use to quickly get to the appropriate tax amount you would need to consider.

What about First Time Home buyers?

If you are a first-time home buyer, you’re in luck. In Ontario, the government will provide an instant land transfer tax rebate of up to $4000.00 to help offset any land transfer taxes that you would otherwise need to pay. In the above example, the $4475 land transfer tax on a purchase price of 400k would be reduced to $475.00 after the rebate. This can be extremely helpful for first-time home buyers because it reduced the amount of money you would need to set aside for your closing costs.

Are there any other considerations?

Although not very common in all municipalities, there can be some that levy their land transfer taxes. This additional land transfer tax would be on top of the provincial land transfer taxes. For example, the city of Toronto is one city that does this. In the same example of purchasing a home for 400k, the total land transfer taxes that would need to be paid across the board would be $8475.00 which is an additional $4000.00 to the provincial portion of $4475.00.

For more information on land transfer taxes, feel free to visit the official provincial site for additional insights: https://www.ontario.ca/document/land-transfer-tax . Alternatively, you can give us a shout and we’d be happy to go over any questions you may have – at (905) 455-5005