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8 · NEW HOMES, March 12, 2004 P O R T F O L I O O F N E W H O M E S What you need to know about your mortgage agreement Take the guesswork out of your mortgage with the answers to these frequently asked questions n ce y o u d ecid e to b uy a new h o m e, o n e o f th e first an d m o st im p o rta n t step s is to lo o k clo sely at y o u r financing needs. p eo p le tak e o u t a m o rtg ag e lo an to h elp fin an ce th e ir purchase. Whether you are buying your first home, or already own one, it's a good idea to talk with your lender early on about the plans and options that are available to you. Here are some of the most commonly asked questions to help you get started on understanding mortgages. How do I qualify for a mortgage? When you apply for a mortgage, lenders consider two key factors: your downpayment and income. The downpayment refers to your own funds that will be used for the pur chase (e.g., cash on hand, savings, gifts from relatives). Your downpayment can be as little as 5 per cent of the price of your new home (max imum home prices based on geographical location apply when the downpayment is less than 10 per cent). Your income determines the size of mortgage payments you can carry, and therefore the total amount of the mort gage debt you can take on. What are the Gross Debt Service and the Total Debt Service ratios? The Gross Debt Service (GDS) ratio is the percentage of your gross (or pre-tax) earn ings allocated to payment of the mortgage principal and interest, property taxes and energy costs (PITE). This ratio should nor mally not exceed 32 per cent. Lenders also O consider the Total Debt Service (TDS) ratio, the percentage of your gross annual income required to cover fixed payments for all debts and financing obligations, including housing. M o st ratio must usually not exceed 40 per This cent. What's a high-ratio mortgage? When the mortgage amount is larger than 75 per cent of the purchase price or the appraised value of the home (whichever is less), it's cailed a high-ratio mortgage. By law, it must be insured against default by an insurer such as G.E. Capital Mortgage Insurance Canada or Canada Mortgage and Housing Corporation. How much can I afford to spend on a home? There is a standard method for estimating the maximum affordable price you can pay for your new home, based on your downpay ment and your maximum monthly payment according to the GDS or TDS ratio (whichever is lower). Using a mortgage payment calculator (available at most lenders' offices or on the Internet), you or your lender can work out the maximum amount of the loan you can carry with your payments. Lenders recommend that you don't buy to the limit, and few people do these days. It is also important to set aside money for upfront "out-of-pocket" expenses associated with buying and moving, such as lawyer's fees, insurance and land transfer tax. Many of these costs vary, but as a rule of thumb you should allow for 1.5 per cent to 2.5 per cent of the price of the home. What's involved in a pre-approved mortgage? Pre-approval gives you the comfort of knowing exactly how much you can spend before you begin to shop around. When you are ready to make an offer, the financing is already arranged. Pre-approved mortgages are usually valid for 90 days, during which time the interest rate is guaranteed. Pre approval is easy; many financial institutions even let you apply via the Internet or over the telephone. It is free and entails no obligation for you. And if mortgage rates drop before the 90 days are up, you'll get the benefit of the lower rates. (Note that a pre-approved mortgage is subject to a satisfactory appraisal of the home you wish to buy.) How can I pay my mortgage off faster? Typically, mortgages are amortized over 25 years. If possible, use a shorter amortiza tion period from the very beginning, or reduce it at renewal (the end of a term when you and your lender renegotiate the mort gage at current interest rates). Your mortgage payments will be a little higher but you will own your home a lot faster. How can I save on interest costs? Take advantage of prepayment options. By making extra payments regularly, you can shave years off your mortgage and save thou sands of dollars in interest. Pay a little extra each month, try a lump sum once a year, or increase the frequency of your payments. Lenders also offer early renewal options, so you can benefit from lower interest rates. What if I need to miss a payment? There may be times when you'll need to take a breather from y our mortgage to pay for other things, like the arrival of a new child, the care of a relative or important bills you need to catch up on. Some financial institutions offer programs that allow you to skip one or more mortgage payments. Does it make sense to buy life or dis ability insurance to cover my mortgage obligation? Most financial planners agree that it is wise to get additional life and/or disability insurance when you take on a mortgage. In the event of death, life insurance is used to pay off the mortgage in full. Disability insur ance covers your mortgage payments if you become unable to work because of a disabil ity caused by accident or illness. What does it cost to get a mortgage? This can vary greatly from one lender to another, but typically the borrower pays for an appraisal of the home when required, as well as all costs associated with insurance on a high-ratio mortgage, such as the premium and fees for the application and legal servic es. Want to know more about mortgages? Pick up information at lenders' branches and offices. Check the Internet-most financial institutions have their own Web site. 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