Finance & Tax


Financing

Financing criteria:  Basic

When financing a home in Big White or anywhere in Canada, there are two criteria:

First, housing costs including the mortgage payment, taxes, utilities, and strata fees cannot exceed 32% of your gross income. If you have no other debt an exception can be made up to 35%. Total debt servicing, including all other loans and credit payments, cannot exceed 40% of your gross income.

Secondly, in a conventional mortgage a down payment of 25% is required. The exceptions to this are high ratio, insured mortgages that are available for your primary residence with a minimum of 5% down payment. The insurance cost increases as the percentage of financing requested increases.

Financing criteria: Higher Valued Properties

With higher valued properties lending values decrease as the value of the property increases.

  • For a property valued at or below $500,000 the conventional down payment of 25% is required.
  • For the next $250,000 a down payment of 40% is required.
  • For the next $250,000 a down payment of 45% is required.
  • For the remainder a down payment of 50% is required.
  • An example: With a purchase price of $800,000 the maximum mortgage allowed is $552,500.
  • Note: this applies to Canadian residents only, either owner occupied or investment properties.

Non-residents

  • For non-residents the required down payments are slightly different.
  • For the first $400,000 a down payment of 35% is required.
  • For the next $300,000 a down payment of 45% is required.
  • For the remainder a down payment of  50% is required.
  • An example: If the purchase price is $800,000 the maximum mortgage allowed is $475,000.

Taxation

The HST (Harmonized Sales Tax) is a 12% federal tax. It is a value added tax and, in the case of real estate, it applies to the purchase of new construction and on the resale of accommodations that have been rented out for short term / nightly rentals. It also applies to most of the services provided in completing a real estate transaction.

The payment of HST can be deferred if the new purchaser is going to continue to offer the property for short term or nightly rental for 90% of the time and becomes a HST registrant. Becoming a HST registrant is a straightforward procedure of completing four forms. Once you are a HST registrant, you are entitled to claim credits for the HST that you pay on legal fees, property management fees, and utilities such as electricity, gas, cable, and telephone, for example. You are then required to charge, collect and remit HST on the nightly rentals, which in some cases may be done through your property manager. You will be required to file an annual HST return as well.

HST rebate is available under certain conditions where the house is to be a principal residence. However, most properties in Big White do not apply.

HST on New Homes

When you buy a newly constructed home, condominium or townhouse, the entire purchase price including land is taxable. If the home is going to be your primary place of residence it may qualify for a partial HST rebate depending upon the sale price. If the property is to be rented to tenants the full 12% HST is charged on the purchase price.

HST on Resale Homes

There is no HST on the purchase price of a used residential property that was occupied as a residence before you bought it. Used residential property includes an owner occupied house, condominium, apartment, summer cottage, vacation property, or non-commercial hobby farm.

Frequently Asked Questions:

What is the difference between a fixed and variable rate mortgage?

A fixed rate mortgage will have the same interest rate for the time you choose as the “term” of the mortgage. Available terms usually range from 6 months to 10 years.

A variable rate mortgage will fluctuate with the Canadian prime rate. While often lower than the fixed rates at the time you arrange financing, there is more risk involved with this mortgage as the rate is not guaranteed. The rate will float depending on the upward or downward pressure of the prime rate. The Canadian prime rate is reviewed every 6 weeks.

If I go with a fixed rate mortgage, how do I choose the term?

Because fixed rate mortgages are “closed” and have prepayment penalties to pay off early, it is important that you choose the right term. Canadian interest terms are closed interest rate contracts – closed for the term you select (ie. 1 to 10 years). The maximum amortization available is 35 years. The penalty to break the interest rate contract prior to the maturity date is the greater of 3 months interest, or the IRD (interest rate differential). The IRD is the bank’s loss of interest for the time remaining in the term. So, if you take a 5 year fixed and pay it off after 3 years, either from your own resources or by sale, the bank will calculate the IRD by comparing your rate with the current rate for 2 years and charge that on the balance to the end of the term. The estimate for 3 months interest is approximately 2 months worth of payments.

Additionally worth noting is that the Bank Act, the maximum penalty that can be charged after the 5th anniversary is 3 months’ interest – so this is applicable for terms longer than 5 years.

When a “term” expires or matures, we say that it is “up for renewal”. At the renewal date, you can pay off as much as you like without any penalty or restriction.

Sometimes a guide for the term you choose is picking one that coincides with how long you think you may own the property. Sometimes it is chosen to time with a maturing investment.

What is the difference between a “term” and the “amortization”?

The amortization is the length of time the mortgage payments are calculated over. The term of the mortgage is the length of time the interest rate remains the same. Or, in the case of a variable rate mortgage, it is the length of time that you receive either prime plus +__%, or prime minus -__%.

What options do I have with a variable rate mortgage?

Variable rate mortgages are either “open” or “closed”. You would normally choose an open variable rate mortgage if you knew you were going to be selling or paying off your mortgage within a certain time frame.

A closed variable rate mortgage is usually registered as a 5 year term and has a penalty of 3 months’ interest to pay off early.

The benefit of taking the closed variable rate mortgage is that usually you receive a better rate. You pay a higher rate for the privilege of having the mortgage “open”.

Usually there is a “lock in” provision that comes with the variable rate mortgage that allows you to convert to a fixed rate mortgage at any time without penalty. The bank will often have a minimum term that they want you to lock into or they will want you to honour the original 5 year commitment (ie. if you have been floating your rate for 2 years and then want to lock in, you may have to take a minimum term of 3 years). The rate you “lock into will be at the prevailing interest rates. Once you have “locked in” you are then subject to the usual fixed rate penalty clauses.

What happens when the mortgage is up for renewal?

If you do not need to borrow extra money (refinance) and you are just renewing the balance with the existing lender, the renewal should be an easy process. You just choose a new term at whatever the prevailing interest rates are. As long as all payments have been made as agreed, the bank will not ask you to re-qualify or have the home reappraised. There are no legal fees involved in a straight renewal of the existing balance.

If you decide that you want to take some equity out of your home then the renewal date may be a good time to look at refinancing. A new application is required and you will be asked to provide updated income confirmation. An appraisal may or may not be needed depending on the circumstances.

Many of our clients contact their mortgage broker at renewal to get confirmation of what the best available rates are.

If I sell my home before the term expires, what options do I have?

Usually mortgages are “portable” or “assumable” with qualification. This means that if you sell your home before the term matures you can transfer your mortgage balance and rate to the new property you are buying. As long as you still qualify and the new property meets the bank’s guidelines you should be able to transfer your mortgage without penalty. If you need to borrow additional funds, the banks can usually accommodate you by increasing your first mortgage and “blending” the rate or giving you a separate segment for the new money at the prevailing interest rates.

The “assumable” portion means that if you are selling and not transferring your mortgage to a new property the purchaser of your home may want to take over your mortgage. If you have a lower rate than what is available on the market at the time this could be an attractive selling feature. The person assuming your mortgage would still have to quality for the financing.

Am I able to make extra payments against the principal?

Yes. The banks offer different pre-payment privileges that range anywhere from 10% to 25% per year. This percentage is based on the original amount borrowed and is either allowed once a year or cumulatively throughout the year. Often the annual percentage allowance is also accompanied by a “double up” feature or a percentage increase in your payments.

What is CMHC’s role?

By law, financial institutions require that all mortgages with a loan to value ratio greater than 80% be insured against default. CMHC provides mortgage loan insurance to approved lenders in the event that the home owner defaults on their mortgage. Depending on the situation, a lender may also request that a conventional mortgage be insured through CMHC.

The insurance premium is a one time fee for as long as you own the property. It can be paid up front from your own resources or added to the mortgage. This high ratio insurance is only available for applicants filing taxes in Canada. The premium table below is based on the property being owner occupied.

 

Loan to Value Ration Purchase Premium Cash-Out Refinance
Lesser of Premium as % of
Total Loan Amount Top Up Portion
Up to 65% 0.50% of the mortgage 0.50% 0.50%
65.01 – 75% 0.65% of the mortgage 0.65% 2.25%
75.01 – 80% 1.00% of the mortgage 1.00% 2.75%
80.01 – 85% 1.75% of the mortgage 1.75% 3.50%
85.01 – 90% 2.00% of the mortgage 2.00% 4.25%
90.01 – 95% 2.75% of the mortgage
90.01 – 95 %
(CMHC Flex Down)
2.90% of the mortgage

*Note that for extended amortizations, CMHC will add .20 for every 5 years beyond a 25 year amortization. So, for a 35 year amortization there is a .40 premium surcharge added. This premium surcharge applies no matter which high ratio insurance program you are applying under.