Chapter 7 - Mortgages and Rental Properties

Question 1

what is the difference between freehold and condo?

Answer 1

freehold = not condominium

freehold: you own everything inside and outside the building. (ex. a single family home)
condo: you legally own everything from the walls of your property inwards. everything outside are owned by the condo corporation

Question 2

what are some pros and cons to owning a condo?

Answer 2

pros:
- the condo corp takes care of all/most maintenance and repairs (cutting the grass, shoveling the snow, replacing windows)

cons: you pay monthly fees and may need to pay very high “special assessments” for large repairs (roof/window)

Question 3

freeholds: pros and cons

Answer 3

pro: you do not have to pay condo fees
cons: everything is your responsibility, need to make sure that you are budgeting for these inevitable expenses

Question 4

what are the 5 steps to purchasing a home?

Answer 4

1. familiarize yourself with the neighbourhood you’re interested in living in. begin shopping on realtor.ca
2. get a real estate agent. meet with 3-6 different agents to see who is best fit
3. wander through open houses (goal: learn about prices of the different type/ quality of houses in the neighbourhood)
4. submit an offer (real estate agent will help)
5. have your lender approve your pending purchase, get a home inspection and obtain property insurance.

Question 5

what are the 3 elements of an offer

Answer 5

1. price
2. closing date
3. conditions

Question 6

what is a deposit in terms of a home purchase?

Answer 6

an amount of money you pay once the deal is accepted. it makes the contract legally binding.

Question 7

t/f: conditions exist to protect the seller

Answer 7

false they protect the buyer

Question 8

your offer is not legallly binding if until you ___ each condition as having being fulfilled

Answer 8

waive

Question 9

what are the 3 conditions that you should always have

Answer 9

1. financing
2. home inspection
3. property insurance

Question 10

condition: financing. elaborate.

Answer 10

always have your agreement conditional on you obtaining financing (a mortgage)

Question 11

condition: home inspection. elaborate.

Answer 11

always make your offer conditional on a home inspection

Question 12

what happens if the home inspection comes back poorly?

Answer 12

1. have the seller fix the problems (not a good idea, they will do quick and cheap)
2. adjust the sales price
3. walk away from the deal

Question 13

condition: property insurance. elaborate.

Answer 13

conditional on getting insurance for the house.

Question 14

what does it mean to “firm up the deal”

Answer 14

once you have waived the final condition, the offer becomes firm and legally binding

Question 15

can you walk away if you have one or more of your conditions open?

Answer 15

yes

Question 16

what are the legal minimum down payments?

Answer 16

< 500,000 = 5%
500,000 < x <1,000,000 = 5% on first 500k and 10% after
> 1,000,000 = 20 %

Question 17

what is the first time home buyers incentive?

Answer 17

the government grants you a 25 year interest free loan for part of your down payment but they share in the increased value of your property

Question 18

who does the first time home buyers plan apply to?

Answer 18

individuals/couples with a household income of less than 120,000

Question 19

what are the two limitations of the first time home buyers plan?

Answer 19

1. must have at least 5% down payment in cash. therefore you cannot use this to meet the minimum legal requirement
2. the max mortgage size you are allowed to borrow and still qualify for this program is $480,000. (not that helpful)

Question 20

what happens if you buy a house with less than 20% down payment?

Answer 20

you have to get mortgage default insurance

Question 21

how do you calculate the cost of mortgage insurance? how do people pay for this?

Answer 21

cost = (mortgage amount)(premium - this is a %)

either add it to the mortgage or pay it up front.

Question 22

what is the home buyers plan?

Answer 22

allows you to “borrow” up to $35,000 from your RRSP to buy a home if you are a first time buyer (no taxes paid on this withdrawal)

Question 23

how do you pay back the loan from the home buyers plan?

Answer 23

in equal installments over no more than 15 years. (you can pay it back more quickly if you like)

any amount not repaid in time can never be put back into your rrsp and will become taxable income in that year

Question 24

what do real estate agents help with?

Answer 24

1. helping you buy/sell a home
2. help you determine FMV of your home
3. negotiate on your behalf
4. refer you to other professionals (stagers, lawyers, etc)

Question 25

what do mortgage brokers do?

Answer 25

1. help you prepare your mortgage application 2. give you advice on improving your credit and paying off other debt 3. "shop" around to get a good deal

Question 26

What is the difference between the amortization period and the mortgage term?

Answer 26

Amortization represents the expected number of years it will take you to pay off the entire mortgage loan balance, whereas the mortgage term represents the period of time over which the mortgage interest rate and other conditions will not change. The mortgage term will always be less than or equal to the amortization period.

Question 27

Describe the characteristics of a fixed-rate mortgage. Why do certain homeowners prefer a fixed rate mortgage to a variable-rate mortgage?

Answer 27

Traditional fixed-rate mortgages offer a fixed rate of interest. Most homeowners prefer fixed-rate over variable-rate mortgages because their payment is not tied to market interest rates. This is especially true if the homeowner expects that interest rates will rise over time.

Question 28

What is an amortization schedule? What does each mortgage payment represent?

Answer 28

The amortization schedule discloses the monthly mortgage payment based on the mortgage amount, a specified fixed interest rate, and an amortization period. Each payment contains a portion to pay on the principal and a portion that goes toward the interest.

Question 29

List the three things that determine the amount of the monthly mortgage payments. Explain how each affects the payments.

Answer 29

``` mortgage amount interest rate ammortization period (longer = lower) ```

Question 30

Discuss the characteristics of a variable-rate mortgage. What influences your choice of a fixed-rate or variable-rate mortgage?

Answer 30

A variable-rate mortgage (VRM) changes interest rates according to the market prime rate. VRMs have relatively low initial interest rates. The rate to which the mortgage rate is tied, the prime rate, must also be included in the mortgage contract. The choice of fixed- versus variable-rate mortgage is based on your expectations of interest rates. If you expect interest rates to decline, you may prefer a variable-rate mortgage. When you expect interest rates to increase over time, a fixed-rate mortgage is more appropriate.

Question 31

What is mortgage refinancing? Are there any disadvantages to refinancing?

Answer 31

Refinancing a mortgage entails paying off an old mortgage with a new mortgage that has a lower interest rate. This is generally done when interest rates fall substantially lower than your current mortgage rate. Like all mortgages, refinanced mortgages have closing costs. There may also be prepayment penalties if you have a closed mortgage and choose to refinance your mortgage before the end of the term. The borrower needs to consider the savings from the lower interest rates compared to the closing costs and any prepayment penalties that would be incurred to determine if refinancing is advisable.

Question 32

what rate is variable rate mortgages tied to?

Answer 32

prime rate set by the bank of canada

Question 33

a mortgage is a loan against _____

Answer 33

your income

Question 34

what is the gross debt service formula

Answer 34

(principle + interest + taxes + heat) / gross annual income

Question 35

total debt service ratio = ?

Answer 35

(principle + interest + taxes + heat + other debt obligations) / gross annual income

Question 36

what interest rate is used in the total/gross debt service ratio?

Answer 36

max ( 1. contract mortgage rate + 2% 2. 5.25%

Question 37

what are the pros and cons of paying off your mortgage early?

Answer 37

pros: - peace of mind, free up cashflow in your budget, reduces risk cons: - opportunity cost - lack of diversication