Owning a home is a financial goal that many Canadians have.  But unlike some goals that are finished when you achieve them, homeownership is a long-term commitment to financial responsibility.  

• What factors should you consider when house shopping? 
• What can you afford? 

• What are some key terms related to mortgages? 

• How are mortgage payments calculated? 

• What are closing costs? 

How much do you know about the average price of homes in different parts of Canada? Check out the Canadian Real Estate Association’s national price map to learn more. The MLS Home Price Index is updated monthly to show the average home price levels and trends at various neighbourhoods. 

https://www.crea.ca/housing-market-stats/national-price-map/

When exploring the national price map, consider the following questions and enter your response in the text field.  

1. What area of Canada has the highest home prices on average? 

When exploring the national price map, consider the following questions and enter your response in the text field.  

2. What area of Canada has the lowest home prices on average?  

When exploring the national price map, consider the following questions and enter your response in the text field.  

3. What causes some prices to be high in some areas and low in others? 

House

• Examples include townhome, semi-detached, or single family. 

• Offer privacy and independence as you typically own the home and the land it is on. 

• Upkeep can be significant as maintaining the home is your responsibility. This includes things like replacing the roof, updating the furnace and appliances, lawn cutting and watering, planting trees and gardening, building a fence or deck, etc. 

This table shows 5 types of homes you might find in your neighbourhood.  

This table shows 5 types of homes you might find in your neighbourhood.  

A newer trend in housing is the tiny home. You can learn more about this trend at:  

https://www.realtor.ca/blog/tiny-homes-can-offer-huge-potential/16352/1365

You can explore what’s currently for sale near you right now! 

• Average house price in Canada - https://www.crea.ca/housing-market-stats/national-price-map/
• Search current listings - https://www.realtor.ca/

Location

• What kind of neighbourhood do you want to live in? 

  • Do you want peace and quiet or lots of activity? 

  • How close would you like to be to green space?  

  • Do you have family or friends nearby?  

• How long will it take to commute to work? 

  • How close is it to public transportation or highways? 

• What amenities are nearby? 

  • For example: 

    • schools 

    • community Centres, parks and playgrounds 

    • grocery stores, shopping centres and other amenities like restaurants 

Size

• House too small means not enough space for everyone to live comfortably in the house. 

• House too big means you’ll need to invest a lot of time and money to maintain the home. 

• Consider how much square footage you need, how many bedrooms or bathrooms are needed, how much furniture you have and what you can afford to maintain. 

Affordability

Before house shopping, do some homework.

• Your income level primarily determines what you can afford, but estimating the expenses to maintain the house is also an important consideration. 

• Make a budget.  Know your income and expenses (including those of the new house) to determine what is affordable.   

• Speak to a bank or mortgage broker.  Most of us do not have enough money available to pay for a house in cash and will require a loan to do so. A loan to purchase a home is called a mortgage.  

Two ratios are commonly used to determine how much of a mortgage is affordable: 

1. Gross debt service (GDS) ratio: calculated by comparing homeownership costs relative to household income. 

GDS = Mortgage Payments + Property Taxes + Heating Costs + 50% of Condo Fees

             Annual Income

    2. Total debt service (TDS) ratio: calculated by comparing total homeownership costs and debt          payments (e.g. car loan, credit card payments) relative to household income. 

TDS = Housing Expenses (per GDS) + Credit Card Payments + Car Payments + Loan Repayments

     Annual Income

• Highest allowable GDS ratio is 39%. 

• Highest allowable TDS ratio is 44%. 

Lower your debt service ratios by increasing your income, paying down other debts you have, or lowering your anticipated mortgage payments by considering a less expensive house. 

In 2016, the Government of Canada introduced new rules that made it more difficult to purchase a home.  

Why? 

After a long period of low interest rates, the Government was worried about increasing consumer debt levels and the risk that consumers may not be able to afford that debt should interest rates increase. 

To manage this risk, the Government introduced a stress test that requires Canadians to demonstrate that they can afford debt based on the current Bank of Canada 5-year fixed mortgage rate (which is typically higher than mortgage rate you could get from your lender).  

The result is that for many Canadians, what they could afford is now 20% - 30% lower than what they could previously afford before the stress test was put in place.  

Learn more at https://itools-ioutils.fcac-acfc.gc.ca/MQ-HQ/MQ-EAPH-eng.aspx 

Down payment: the amount of money paid towards the purchase of the home that comes out of your own pocket (not the lenders).   

• It is usually expressed as a percentage of the price of the house.   

• A minimum amount is required depending on the price of the home. 

Do some research on your own to figure out how much of a down payment is required in Canada.  What did you discover? 

Learn more:

• https://www.canada.ca/en/financial-consumer-agency/services/mortgages/down-payment.html
• https://www.sagen.ca/
• https://www.cmhc-schl.gc.ca/
• https://www.canadaguaranty.ca/

Calculate the down payment using the home price and down payment percentage given in each question. 

1. Sally wants to buy her first house at a cost of $500,000 in Waterloo and her bank will accept a down payment of 5%. Calculate the dollar value of the down payment required to buy this house.  

2. Mark wants to buy a newly renovated house in Toronto that costs $3,050,000 and his bank requires a down payment of 20%. Calculate the dollar value of the down payment required to buy this house.  

3. Who will require mortgage insurance? 

From the previous slide, we know that Sally will require mortgage insurance. Recall that her first house will cost $500,000 and her down payment of 5% to her bank will be $25,000. 

Calculate the approximate cost of that insurance by using the Premium Calculator offered by Sagen™, the financial sponsor of the Financial Literacy Competition. Assume that the product is “Homebuyer 95”.

• Before you begin the home buying process, check your credit reports and credit score.  

• A low credit score can limit how much money you can borrow and/or lead to higher interest rates. 

• A minimum credit score may be required to get a high ratio mortgage.  

Consider this scenario: 

Serena, a graduate of the University of Waterloo, would like to buy a bungalow located near Niagara Falls for $460,000. With some help from her family she has saved $60,000 for the down payment. As a professional accountant, her annual employment income is $78,000. She needs to pay $550/month for her car loan. Her monthly heating bill is $125 and the annual property tax she will need to pay is $3,000. She wants to get a mortgage with a 25-year amortization period. The interest rate on the mortgage would be 3.8%.  

Respond to the following questions: 

1. Serena’s down payment of $60,000 is large enough that she will not need to purchase mortgage loan insurance. 

2. Calculate Serena’s Gross Debt Service (GDS) ratio. For purposes of this calculation, assume Serena’s mortgage payment would be $2,125 per month. Enter your response as a percentage to two decimal places (eg. XX.XX%).

Consider the scenario below (same as previous slide). Respond to the following questions: 

Serena, a graduate of the University of Waterloo, would like to buy a bungalow located near Niagara Falls for $460,000. With some help from her family she has saved $60,000 for the down payment. As a professional accountant, her annual employment income is $78,000. She needs to pay $550/month for her car loan. Her monthly heating bill is $125 and the annual property tax she will need to pay is $3,000. She wants to get a mortgage with a 25-year amortization period. The interest rate on the mortgage would be 3.8%.  

3. Calculate Serena’s Total Debt Service (TDS) ratio. Use the same assumptions as question #2 ($2,125 monthly mortgage payment). Enter your response as a percentage to two decimal places (eg. XX.XX%).

4. Based on Serena’s GDS ratio and TDS ratio, she would likely be denied for a mortgage for this house. 

Consider the scenario below (same as previous slide). Respond to the following question: 

Serena, a graduate of the University of Waterloo, would like to buy a bungalow located near Niagara Falls for $460,000. With some help from her family she has saved $60,000 for the down payment. As a professional accountant, her annual employment income is $78,000. She needs to pay $550/month for her car loan. Her monthly heating bill is $125 and the annual property tax she will need to pay is $3,000. She wants to get a mortgage with a 25-year amortization period. The interest rate on the mortgage would be 3.8%.  

​​​​​​

5. Assuming the lender uses a maximum GDS ratio of 32% and a maximum TDS ratio of 40%, what is the minimum level of income Serena would need to make to qualify for the mortgage she needs to purchase this house? Round your response to the nearest thousand. 

You can use the FCAC’s mortgage qualifier tool to check your work or build your own scenario. 

• Mortgage: A loan used exclusively for real estate transactions where the property is collateral for the loan.  

• Collateral: For a mortgage, the property purchased is provided as security for the loan. If you fail to pay your mortgage back, the lender can assume ownership of your home, sell it and use the proceeds to pay off your loan. 

• Fees: Additional costs of purchasing a home and/or obtaining a mortgage. These costs may include land transfer tax, legal fees, title search, mortgage insurance, etc. 

Mortgages are classified based on the amount of down payment:  

• Conventional mortgage: The down payment is at least 20% of the home’s appraised value. The lender bears the risk that you may default on loan. 

• High-ratio mortgage: The down payment is less than 20% of the home’s appraised value. The lender will require your mortgage be insured thereby sharing the risk of default with the insurance company.  

• Mortgage loan insurance premiums may be paid immediately by the borrower or added to the principal amount of the mortgage. 

• Monthly payment: The amount of money you pay to the lender each month (the frequency of your payments can be monthly, weekly, bi-weekly or semi-monthly).  Each payment includes principal and interest. 

  • Principal: Portion of the payment that is repaying the original amount of money that your borrowed. 

  • Interest: Portion of the payment that is paying for the amount charged by the lender for the use of their funds.  This amount is based on the principal amount outstanding and is typically stated as a rate per annum (year). 

  • As you repay the principal, the interest charged decreases.   

  • The more frequently you make a payment in a month, the less interest you will pay. 

Example: Time and Interest Savings for a $250 000 Mortgage, amortized over 25 Years at an Interest Rate of 6% Compounded Semi-Annually.

Mortgages are classified based on the flexibility of payments: 

• Open mortgages:  

  • Additional payments can be made over and above your required payments at any time without penalty.  

  • Can help you pay off your mortgage faster and reduce the amount of interest you will pay.  

  • Best suited to homeowners who are planning to sell in the near future or who expect to have the ability to make more frequent or large, lump-sum payments before maturity. 

• Closed mortgages:  

  • Additional payments are not allowed or if made, are subject to a penalty. 

  • Payments remain the same for the term of the mortgage. 

  • Best suited to homeowners who have a strict budget and want to know what their required payments will be for the term of the loan or for those who don’t expect to have additional funds during the term to put towards the mortgage principal. 

Mortgages are classified based on the length of the mortgage term: 

• Mortgage term: The period of time in which the mortgage interest rate and other terms of the mortgage contract remain the same. 

  • Short-term mortgages: Usually 2 years or less.  

  • Long-term mortgages: More than 2 years.  

  • Choosing the term that’s best for you depends on your expectations for future interest rates, your income level or cash flows, and your ability to manage risk and uncertainty. 

• Amortization period: The length of time it takes to pay back the principal amount borrowed.  Your mortgage payment is based on this amortization period. 

• Renewal: At the end of each mortgage term, you will need to renew the mortgage by renegotiating the terms of the loan based on the current interest rates and lending environment.  

  • Terms can range from 6 months to 7 years (or longer in some cases) 

  • You will need to renew your mortgage several times during the amortization period 

  • With a good credit history, you may be able to negotiate favourable terms each time you renew.   

Mortgages are classified based on the type of interest rate: 

• Fixed rate: Interest rate remains the same during the mortgage term. This is preferred during periods of rising interest rates. 

• Variable rate: Interest rate will vary (float) during the mortgage term based on current interest rates set by the market. This may be preferred during periods of declining interest rates or by borrowers who are comfortable with the fluctuations to their payments. 

Understanding these terms and knowing the options available can help you choose the right mortgage. Check your understanding of these terms by responding to the following questions. 

You have located a home that you would like to purchase with an asking price of $495,000.  You have a down payment of $100,000 saved.  If you purchase this home and apply the full down payment to the purchase, your mortgage would be considered a:

An open term mortgage allows you to do all of the following, EXCEPT

M = 𝑃 𝑟(1+𝑟)𝑛((1+𝑟)𝑛)−1Pr1+rⁿ

   ((1+r)ⁿ)

M = Mortgage payment  

P = Principal (mortgage amount) 

R = Periodic interest rate (annual interest rate adjusted for compound and payment frequency)  

N = Number of payments over the mortgage term  

Mortgage payments typically remain the same throughout the mortgage term. 

Source: https://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MCReport-CHSommaire-eng.aspx 

Which mortgage will have the higher monthly mortgage payment?

Which mortgage will take longer to repay in full?

Which mortgage will cost more?

Complete the table below using the Government of Canada mortgage calculator at: 

https://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MortgageCalculator.aspx?lang=eng&lang=eng  

Assume the term is 5 years and there is no prepayment plan. 

Key takeaways: 

• A shorter amortization period results in a higher periodic payment, but lower overall cost because you are paying back the amount borrowed faster. 

• A longer amortization period results in a lower period payment, but higher overall cost because you are borrowing money for a longer period of time. 

Don’t be caught off guard. Budget for these common closing costs:  

• Home inspection fee 

  • A home inspector will go through the entire house to make sure there are no problems that will either affect its value or cause major problems (and cost to you) in the future. 

• Legal fees and title insurance 

  • Hire a real-estate lawyer to look over your contract. Make sure you understand the fine details before signing the contract. 

• Property/Home Insurance 

  • To take possession of your new home it must be insured.  Insurance is an annual cost of owning a home. 

• Land Transfer Tax 

  •  Based on a percentage of the property value. 

• Mortgage fees 

  • Registration fees, mortgage insurance  

• Property tax, condo fees, etc.  

  • Home ownership costs are often paid on a periodic basis.   

  • If the current owner of the home you are purchasing has prepaid any of these costs, you will need to reimburse them at the time of purchase. 

See this helpful first time home buyer’s guide prepared by our financial sponsor, Sagen™ for more information.  

• https://i.pinimg.com/originals/79/84/04/798404d779cc406349f566381894d330.jpg 
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