Toronto Real Estate and Neighbourhoods Blog | Move Smartly

Is a 40-Year Mortgage Hazardous for your Financial Health?

John Pasalis in Money, Home Buying Tips

Last week, the Toronto Star’s Ellen Roseman wrote an article titled 40-year Mortgage Comes with Hidden Hazards. On Move Smartly, we often try to pick up where the main stream media left off.  Instead of just telling readers the 40-year mortgage is bad for their pocket books, we try to give practical advice that addresses the needs of today's home buyers.

Let me start off by saying that a 40-year mortgage is not for everyone. Anyone who qualifies to buy a home with a 25-year mortgage but opts for a 40-year mortgage instead because it leaves them with a little more spending money in their wallets is downright foolish. If you want more spending money in your pocket, spend less on your home - don’t get a 40-year mortgage and pay more interest over the life of that mortgage.

Having said that, does this mean that a 40-year mortgage is wrong for all home buyers? Is a 40-year mortgage like long term renting? Not quite.

Unlike Roseman, many of today's first time buyers are not buying their first home with their partners and therefore don’t have the luxury of counting on a second income to help pay their mortgage. Last year, the Toronto Star reported that single women account for 20 per cent of Toronto's real estate market. Many of the home buyers who are turning to 40-year mortgages are single income buyers who can’t afford to buy a home with a 25-year amortization.

So what is a single (or similarly positioned) first time home buyer to do? Should they eschew buying a home today out of fear that they’ll be paying their mortgage well after they’ve retired, as Roseman suggests. This is definitely one option.

But if the single home buyer shouldn’t buy today, when should they buy? Should they wait another 5-10 years for their salary to increase enough for them to afford a home with a 25-year amortization? This strategy is also risky, since renting and delaying your purchase for 5-10 years also pushes your mortgage payments further into your retirement years.

For the home buyer who doesn’t want to wait another ten years to be able to afford a home with a 25-year mortgage, here are a couple of tips to help you beat the risks and costs of the 40-year mortgage.

Don't Let Closing Costs Catch You Off Guard

Rachel in Home Buying, Money, Legal

Home buyers, especially first time home buyers, are often surprised by their closing costs.  Although the standard legal fees and land transfer taxes have typically been accounted for, there are the additional ‘little’ expenses that very often throw people,  even people who have bought and sold multiple properties, off course.

In the Realosophy HomeBuyers Guide, we recommend budgeting 2% to 3% of the purchase price for your closing costs. At the time of writing, the Realosophy HomeBuyers Guide did not have to take into account the new Toronto Land Transfer Tax, so if you are purchasing in the Toronto area, you will need to account for this additional amount.

Key RRSP Strategies and Mortgage Financing

Heather in HomeBuying, Money

RRSP season is here and at this time of year, Canadians grapple with issues about finding money to contribute, deciding what to invest in, and determining whether to forfeit the RRSP contribution in lieu of the ‘saving for a house fund’. I am offering the following suggestions:

1. Short on money? Consider your home equity to maximize your RRSP contribution.

Higher real estate values may offer a chance for many to maximize their RRSP contributions by tapping into existing home equity. Of the almost $526 billion in RRSP room available to Canadians in 2006, only $74 billion was actually used, according to Statistics Canada. With a home equity line of credit, a homeowner can withdraw funds at relatively low interest rates on an as needed basis for the purpose of increasing RRSP contributions, including unused contributions from previous years.

Is Now a Good Time to Choose a Variable Rate Mortgage?

John in HomeBuying, Money

With all the news about interest rate cuts recently, many home buyers are wondering if now is the right time to go with a variable rate mortgage. The Globe’s Rob Carrick advises that variable is the way to go right now. There are a couple of reasons why Carrick recommends a variable rate mortgage.

Firstly, short term interest rates are expected to drop this year. The economic slowdown in the US has already led to drastic interest rate cuts south of the border, and the Bank of Canada is expected to continue trimming rates this year. This means that variable rate mortgages, which are tied to the Bank of Canada rate, are also expected to drop.

Tips for Paying Off Your Mortgage Faster

Heather in Money

For most Canadian homeowners, paying off their mortgage as quickly as possible is a top priority. Paying down extra principal in the early years by whatever means possible can shorten the life of your mortgage – and dramatically lower the interest you'll pay over the long haul.  Here are a few tips on how to make this happen: 

1. Increase your payment annually to the most you can afford

The upside is that most lenders will allow you to reduce it again to the previous level if it turns out to be too great a burden or your circumstances change.

2. Prepayments give great return on investment

If, for example, you pay an average of 6.0% in mortgage interest, for each $1,000 by which you reduce your mortgage principal, you will save $60 in after tax cash every year. 

3. Utilize your RRSP-driven tax rebate as a mortgage prepayment method

Even if you can only prepay annually, make sure tax refunds are set aside for paying down your mortgage.  Many Canadians borrow (at prime) to buy an RRSP to ensure the maximum rebate.  When applied to the mortgage principal, this refund is a "gift that keeps on giving".  Combining the refund with the tax-free interest earned on the RRSP over the subsequent years will quickly outpace the short-term interest costs of the RRSP loan.

Toronto's Land Transfer Tax - The Official Word

Rachel in HomeBuying, Money, Legal

On October 22, 2007, Toronto City Council approved a Municipal Land Transfer Tax (MLTT), the "Toronto Tax," and we have now received more detailed information as to how this will be implemented.  Although this information is primarily directed at assisting lawyers, it is still relevant to anyone who is considering purchasing property in Toronto.

The following is an excerpt from information provided on the Teranet website, an e-service that assists professionals by providing a database of real property information as well as registration services that were formerly available only at Land Registry Offices.   

When will the City start charging the MLTT?

The MLTT will be charged on the registration of all conveyances of land in Toronto commencing February 1, 2008 and on the disposition of all beneficial interests commencing on February 1, 2008

New Condominium Deposits

Rachel in Condo Buying, Legal, Money

A HomeBuyer can decide to buy a new condo at any point that units are available for sale – meaning from the time the sales office is open all the way through to when the units are registered.  Typically, the lowest prices are available to consumers before any construction has commenced, and this is largely what drives so many people to sign up early.  The downside for the consumer is that there is more risk; for any number of reasons, the project may not be completed.

First-time HomeBuyers Benefit as Ontario Expands Land Transfer Tax Refund

John in HomeBuying, Money, Toronto Real Estate News

It appears as though the Ontario government was listening to views expressed during Toronto's recent Land Transfer Tax Debate.  One of the key outcomes was a compromise that included a full rebate for first-time buyers of homes and condos valued under $400,000, whether newly-constructed or resale.  This differentiated the newly-introduced tax from the province's land transfer tax scheme, under which only first-time buyers of newly-constructed homes and condos qualified for the $2,000 rebate. 

However, as of December 14,2007, the provincial government land transfer tax refund for first-time buyers will be extended to include resale homes.  The provincial program exempts the first $227,500 of the purchase price for first-time buyers (as opposed to Toronto's threshold which is higher at $400,000). 

This means that a first-time HomeBuyer purchasing a home for $400,000 in Toronto would be required to pay (after all rebates are applied) $2,475 in provincial land transfer tax and zero in Toronto land transfer tax.  In contrast, all other HomeBuyers purchasing the same house would be required to pay around $8,200 in combined city and provincial taxes.  (The Toronto Real Estate Board provides a simple calculator to approximate these tax amounts.)

From the press release:

The McGuinty government is giving all first-time homebuyers a break on land transfer tax by proposing to expand the Land Transfer Tax Refund Program to include purchases of resale homes, Finance Minister Dwight Duncan announced today.

"Expanding this Land Transfer Tax refund is an important part of our government's commitment to helping Ontarians buying their first home," Duncan said.

Effective midnight tonight, first-time buyers of resale homes, as well as newly constructed homes, would be eligible for a refund from the provincial government of up to $2,000 of the Land Transfer Tax paid.

The expanded Land Transfer Tax Refund Program for First-time Homebuyers is part of a package of new tax initiatives announced in the 2007 Fall Economic Outlook and Fiscal Review that would provide $1.4 billion in provincial tax relief for business and people over three years. The government is making strategic investments in people, communities and infrastructure to strengthen Ontario's economic advantage and help manufacturers and other sectors challenged by current economic conditions.

For more information please visit: http://www.gov.on.ca/

John Pasalis is a sales associate at Prudential Properties Plus in Toronto and a founder of Realosophy. Email John

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Toronto's Land Transfer Tax (or Beating a Dead Horse)

Rachel in Home Buying, Money, Legal

Mayor Miller’s land transfer tax (Miller’s Toronto Tax) takes effect on February 1, 2008.

I was having a conversation last night about the land transfer tax (read: was complaining, and no, I will not just get over it and move on) and I realized that my response to previous questions surrounding this issue may not have been entirely clear.  This is largely because there is some confusion as to when the tax actually becomes effective.  I have tried to outline the particulars more clearly:

Canadian Interest Rates Impacted by US Subprime Collapse

John in Money, Media Roundup

Rob Carrick from the Globe and Mail had a great article last week that highlighted the effects the US subprime mortgage collapse is having on Canadian mortgage rates.

In a previous post, I highlighted the differences between fixed and variable rate mortgages. I specifically discussed how variable rates are primarily based on the prime rate whereas five-year fixed rates are based on the current rates in the bond market.

Chart: Govt. of Canada marketable bonds, avg. yield: 3-5 year

Banks go to the bond market to borrow the money that they in turn lend to you for your five-year mortgage. The rates that banks pay to borrow the funds often depends on the yield for comparable five-year bonds in the marketplace. One of the benchmark yields that the industry keeps an eye on is the yield for five-year Government of Canada bonds. The yield on government bonds is important because they typically represent the most secure bond in the market. This means that the interest rates that banks are paying to borrow money, and the interest rate you are paying for your mortgage, is going to be at some premium over and above the current yield for a comparable government bond.