Chapter 7 - Mortgages and Rental Properties Flashcards
what is the difference between freehold and condo?
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
what are some pros and cons to owning a condo?
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)
freeholds: pros and cons
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
what are the 5 steps to purchasing a home?
- familiarize yourself with the neighbourhood you’re interested in living in. begin shopping on realtor.ca
- get a real estate agent. meet with 3-6 different agents to see who is best fit
- wander through open houses (goal: learn about prices of the different type/ quality of houses in the neighbourhood)
- submit an offer (real estate agent will help)
- have your lender approve your pending purchase, get a home inspection and obtain property insurance.
what are the 3 elements of an offer
- price
- closing date
- conditions
what is a deposit in terms of a home purchase?
an amount of money you pay once the deal is accepted. it makes the contract legally binding.
t/f: conditions exist to protect the seller
false they protect the buyer
your offer is not legallly binding if until you ___ each condition as having being fulfilled
waive
what are the 3 conditions that you should always have
- financing
- home inspection
- property insurance
condition: financing. elaborate.
always have your agreement conditional on you obtaining financing (a mortgage)
condition: home inspection. elaborate.
always make your offer conditional on a home inspection
what happens if the home inspection comes back poorly?
- have the seller fix the problems (not a good idea, they will do quick and cheap)
- adjust the sales price
- walk away from the deal
condition: property insurance. elaborate.
conditional on getting insurance for the house.
what does it mean to “firm up the deal”
once you have waived the final condition, the offer becomes firm and legally binding
can you walk away if you have one or more of your conditions open?
yes
what are the legal minimum down payments?
< 500,000 = 5%
500,000 < x <1,000,000 = 5% on first 500k and 10% after
> 1,000,000 = 20 %
what is the first time home buyers incentive?
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
who does the first time home buyers plan apply to?
individuals/couples with a household income of less than 120,000
what are the two limitations of the first time home buyers plan?
- must have at least 5% down payment in cash. therefore you cannot use this to meet the minimum legal requirement
- the max mortgage size you are allowed to borrow and still qualify for this program is $480,000. (not that helpful)
what happens if you buy a house with less than 20% down payment?
you have to get mortgage default insurance
how do you calculate the cost of mortgage insurance? how do people pay for this?
cost = (mortgage amount)(premium - this is a %)
either add it to the mortgage or pay it up front.
what is the home buyers plan?
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)
how do you pay back the loan from the home buyers plan?
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
what do real estate agents help with?
- helping you buy/sell a home
- help you determine FMV of your home
- negotiate on your behalf
- refer you to other professionals (stagers, lawyers, etc)
what do mortgage brokers do?
- help you prepare your mortgage application
- give you advice on improving your credit and paying off other debt
- “shop” around to get a good deal
What is the difference between the amortization period and the mortgage term?
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.
Describe the characteristics of a fixed-rate mortgage. Why do certain homeowners prefer a fixed rate mortgage to a variable-rate mortgage?
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.
What is an amortization schedule? What does each mortgage payment represent?
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.
List the three things that determine the amount of the monthly mortgage payments. Explain how each affects the payments.
mortgage amount interest rate ammortization period (longer = lower)
Discuss the characteristics of a variable-rate mortgage. What influences your choice of a fixed-rate or variable-rate mortgage?
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.
What is mortgage refinancing? Are there any disadvantages to refinancing?
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.
what rate is variable rate mortgages tied to?
prime rate set by the bank of canada
a mortgage is a loan against _____
your income
what is the gross debt service formula
(principle + interest + taxes + heat) / gross annual income
total debt service ratio = ?
(principle + interest + taxes + heat + other debt obligations) / gross annual income
what interest rate is used in the total/gross debt service ratio?
max (
- contract mortgage rate + 2%
- 5.25%
what are the pros and cons of paying off your mortgage early?
pros:
- peace of mind, free up cashflow in your budget, reduces risk
cons:
- opportunity cost
- lack of diversication
