Mortgage Terms and Fees
Over the course of your amortization period, you may have many different mortgages. The term is simply the length of time that interest rates, payment schedules and obligations to the lender exist. When the term comes to a close, you will have the option to renew your mortgage at your current or new lending institution. You can also put a lump sum toward the principal without restriction, or pay off your entire mortgage without penalty. If you wish to change the structure of your agreement during the term you may have to pay a substantial fee to the lender.
Choosing Security or Flexibility
Mortgages are available with closed, open and convertible options, with fixed or variable rates. The options you choose will reflect your beliefs about the market and your short-term goals and desire for long-term security.
This refers to the length of time over which the entire debt will be repaid. Most mortgages are amortized over 15, 20, or 25 years. The longer the amortization, the lower your scheduled mortgage payments, but the more interest you pay over the life of the mortgage.
This type of mortgage offers a great deal of flexibility, as it can be repaid in part or full at any time without penalty. This mortgage may be for you if you believe interest rates are moving down or if you plan to move in the near future. The term may be limited to six months or one year.
With closed mortgages, the interest rate is fixed for the full term of the mortgage, and you will have to pay a penalty to change the agreement conditions. This type of mortgage is ideal for buyers who suspect that interest rates will rise and who are not planning to move in the near future. This type of mortgage is usually available in a wide variety of terms.
With a convertable mortgage, you'll enjoy the same peace of mind as a closed mortgage, plus have the added flexibility to convert to a longer closed mortgage at any time without penalty. If you think rates will drop, this will allow you to wait until you feel they have hit bottom, or if rates rise, you can lock in.
It is always prudent to have a slush fund set aside for incidentals. Before calculating the amount of your down payment and determining what you can afford, it's a good idea to set aside a few thousand dollars to cover the extra costs that have a way of coming up when we least expect them. Some examples of these extra costs are;
- Property Taxes - If the Vendor has paid a portion of the taxes in advance, you will be responsible for reimbursing the Vendor on closing. Plus, if you have a high-ratio mortgage, your lender may require that you have your property taxes added to your mortgage payments.
- Utility Fees - Utility fees are calculated through a meter. You will be responsible for those utilities consumed between billing periods and before the closing date on your existing home. Similarly, you will be responsible for all utility costs on your new home after the closing date.
- Land Transfer Tax - This applies in most provinces and ranges from 1% to 4%. For instance, in Ontario, you'll pay 1% of the first $55,000 - $250,000 and up to 2% of any amount over $400,000.
- Survey Fee - Your lender will require an up-to-date survey. You can make it a condition of the Offer to Purchase that the Vendor provide a survey, or you will have to have one done. If there is no survey available, you may purchase "Title Insurance" in lieu of a survey which could save you between $500 - 700.
- Appraisal Fee - A basic appraisal usually costs under $250. This said, most lending institutions pay the cost to have their own appraisal performed.
- Property Insurance - Your lender will insist that you have insurance on your property because your home is used as security for the mortgage.
- Service Charges - You'll be charged for telephone, cable and a variety of other services that you hook up at your new home.
- Lawyer (Notary) Fees - Each real estate transaction requires the assistance of a legal professional to review the Offer to Purchase, search the title, draw up the mortgage documents and take care of the details on the day of closing. Lawyer’s fees range widely depending on the complexity of the transaction. Ask your sales representative to recommend a lawyer. And remember, fees can be negotiated.
- Mortgage Loan Insurance Premium and Application Fee - Mortgage loan insurance will be necessary if you have a high-ratio mortgage (less that 25% down payment). The application usually costs $75 with a valid appraisal, otherwise it's $235. The actual insurance premium will range from .5% to 3.75% of the purchase price and is added onto the mortgage.
- Mortgage Broker Fee - Some brokers may charge as much as 2% of the total mortgage to find you a lender. In most cases though, the broker is paid by the lender. Buyers with good credit should not have to pay a fee.
- Moving Costs - Whether you've decided to do it yourself or hire a moving company, now is the time to budget for the costs involved.
- Status Certificate - If you're moving into a condominium complex, this certificate outlines the condominium corporation's financial and legal state. It will cost you up to $100, usually paid for by the seller if agreed to in the Offer to Purchase.
- Condominium Fees - These monthly fees vary from complex to complex. The fees are applied to everything from grounds keeping and carpet cleaning to security personnel and health club maintenance. Depending on the type of structure, these fees will usually be a few hundred dollars each month.
- Home Inspection Fee - For around $300, depending on the size of your home, you'll receive a complete written report about the condition of the structure. Do your research and hire a reputable firm. Your representative should able to offer you the names of a few reputable inspectors.
- Renovation and Repairs - Your home inspection may indicate the need for some general repairs or a major project. Have some money set aside, particularly if you are purchasing an older home.
- Redecoration - Your taste will be different from the previous owner. Set aside money to paint and wallpaper. Prepare a list of things you can live with, for now, and decorating faux pas that need immediate alteration.
- Water Quality Certification - If you are purchasing a home with a well, you'll want to ensure the quality of the water as well as supply. In Ontario, potability certificates are available through the Public Health Unit after first supplying a water sample for testing. Water quality testing kits are available through the Public Health Unit and this service is free. Additional well inspections, such as recovery and condition testing, are performed by certified well specialists and are at additional cost. These additional tests can cost as much as $250 depending on geographical location and the scope of the work to be performed.