Can you break your mortgage?

Short and sweet this week. The answer: usually. Before you sign to refinance, check your existing mortgage – some banks only allow you to pay out your current mortgage if you are selling. It’s in the fine print, and they’ll hold you to it.

The better question is, should you break your mortgage.

What should you have in writing when co-owing a house?

If you are buying a house with someone who does not share their financial life with you, you will need to consider several extra points in addition to where and how much. The first question is how to take title [reference last post]; the second is how you run the day-to-day and the big questions of when to sell or refinance.

Whenever I have clients going on title to a property with a sibling or parent, I recommend they get a trust agreement that details their obligations. It discusses who is responsible for which expenses (mortgage, taxes, insurance, maintenance, etc.), who can authorize a new mortgage, and when the property can be sold (and how much each party gets on a sale).

 

Having the rules set out clearly at the beginning makes for far less stress going forward.

What is the best way to take title with a parent?

I see a lot of clients who are buying their first homes, and getting some assistance with either the down payment or the financing from a family member, usually a parent. Most of the time, because it’s not something they would have come across on their own, they have not considered how they should take title.

There are two ways of taking title to property in Ontario: joint tenants, and tenants in common. Joint tenants means that everyone owns the whole thing jointly with everyone else, and there are survivorship rights if one owner dies. Tenants in common means that you own shares, in whatever percentage you decide – the default is equal shares, but you can set it differently. For example, if you are going on title to your daughter’s house solely for financing, you can own 1% and she can own 99% to maximize her first-time buyer rights and minimize any chance you could be charged capital gains taxes.

If you are going on title with anyone – even with a spouse – you should be asked how you want to take title, and get more information if you’re not sure. It’s a big decision that can affect you financially down the road.

3 extra costs to budget for on a sale

Last time I blogged about extra costs on a purchase. Today is three extra costs to budget for on a sale.

  1. Realtor’s commission. You will have to pay it on the sale, and not at a later date. Even if you are selling by yourself, you may have to pay a buyer’s commission. Don’t forget that they have to charge HST on their commission.
  2. Legal costs. Many lawyers (including our firm) will give you an estimate of legal fees and disbursements before you make a decision about who to hire. Get a quote if you can so that you know how much it will cost as it gets taken off the sale proceeds before you get your cheque.
  3. Mortgage discharge. This is where the big costs often come in. Many people assume they know what the penalty will be, and then it ends up higher. There are discharge fees, and fees to register the discharge. You should be able to get an estimate from the bank so that you know what to expect when the closing day comes around.

6 extra costs to budget for on a purchase

When you buy a house, you usually think of one cost: the amount you will pay above what your mortgage is. There are, however, a lot more.

  1. Land Transfer Tax. There is provincial LTT, and if you’re in Toronto, municipal LTT too. LTT is approximately 1.5% of the purchase price, and is payable on closing, so you have to have it available in order to buy your house. There are rebates available for first time buyers, and you should check whether you’re eligible, but be prepared to pay this up front.
  2. Mortgage costs. Some banks charge you to do an appraisal; some charge a lender fee. If you’re putting down less than 20%, you will definitely have to pay for mortgage default insurance, and while they often will simply add that to your mortgage, you will have to pay the tax on it up front. Budget accordingly.
  3. Property taxes, condo fees, fuel tanks: all of these are adjusted on closing so that each party pays their proportionate share for the year or month. You will want to speak to your lawyer about what you should expect to have on hand to be able to pay for these.
  4. House insurance. Whether or not you are getting a mortgage, you will want to have insurance in place, and you will usually have to pay at least a portion of it up front so that it is available for closing.
  5. Legal costs. Many lawyers (including our firm) will give you an estimate of legal fees and disbursements before you make a decision about who to hire. Get a quote if you can so that you know how much to set aside for this.
  6. Title insurance. This is a one-time premium for insurance to protect against fraud, as well as against a former owner doing something to the house that was not permitted. If you’re getting a mortgage, it’s effectively mandatory; even if you’re not getting a mortgage, it’s usually a good idea.

5 mistakes first-time buyers make

You’ve saved up your down payment. You’ve picked your dream neighbourhood. You’ve chosen a realtor to work with. Now comes the hard part: actually buying the house. Here are some common mistakes to avoid:

  1. You fell in love with the staged house. Generally, you don’t get to take the staging with you – and a staged home can be just as hard to see past as a home that desperately needs an update. Will your furniture actually fit? Does the layout make sense for your needs, ignoring whether it is beautifully designed? It’s important to think beyond the design when choosing a home.
  2. You didn’t check out the neighbourhood. It doesn’t matter if the house is perfect if the neighbours party all night, every night. Or if you want somewhere to walk with your toddler and the nearest park is across four busy streets. Before you sign an offer, be sure it’s not just the right house, but the right neighbourhood.
  3. You didn’t get pre-approved for a mortgage. This is one of the biggest: you should never, ever go house hunting without knowing exactly what you can afford to buy. Related to that, don’t look at houses that are outside of your budget; you will just want to stretch beyond your means.
  4. You skipped a home inspection. Sometimes, in hot seller’s markets, people minimize their conditions to make their offers more attractive, but this can be dangerous. If you skip a home inspection, in Ontario, you become responsible for any defects that a home inspector could have found – which means that you can’t go after the seller. Unless you have unlimited funds to repair possible damage, you should not risk it.
  5. You forgot about closing costs. Tax adjustments, legal fees, even title insurance: the little things add up. Get an estimate from your lawyer at the beginning so that you aren’t surprised at the end.

You’ve been approved for a mortgage. Don’t risk it by buying a car.

When you are approved for a mortgage, you will often sign a document that states that they can revoke your approval if your creditworthiness changes before the mortgage is funded. Most people don’t think anything of this, if they even notice it, but it is actually quite important. If you buy a car, or open a new credit card, or sometimes even borrow more money on your existing credit line, that is a change in your creditworthiness, and it can affect your ability to close your mortgage. Your best bet is to hold off on any change to what you have borrowed until after your mortgage has funded.

A secured credit line is a mortgage

I’ve blogged about this before, but it bears repeating because it seems that people are still not being properly advised: when you get a secured credit line, it is legally a mortgage. It will be registered on title to your house. It will have to be paid in full when you sell or refinance. And it will affect your ability to get any further financing on your house.

Secured credit lines can be a great way to have access to cheap credit, but be aware of what they are.

How do you own your house?

If you own a property with another person, there are two ways of sharing ownership: joint tenancy, or tenancy in common.

Joint tenants have a common undivided interest in the entire property; that is, everyone owns the whole thing in common with everyone else. This means, in practice, that the last person left alive gets the whole property, because there are survivorship rights.

Tenancy in common means that each owner owns a percentage share, whether equal or not, depending on the decision at the time they took title. On death, each owner’s share passes to their estate.

Whether you own as joint tenants or tenants in common depends on several factors. If you are buying with your spouse, out of joint family funds, then you may be more inclined to joint tenancy. If you are buying with a business partner or friend, or with a partner you are about to move in with for the first time and are investing unequal shares, you may be more inclined to tenancy in common.

You should also note that, at any time, a joint tenant can sever the joint tenancy and make their share in common – and can do this with no notice to the other owner(s).

Before you buy, you should have a conversation with your lawyer about the best way for you to take title.

How do you know you’re ready to buy your first home?

With prices going up and down, and mortgage rules getting increasingly tight, it can be difficult to know when it is the right time to buy, especially if you’re buying for the first time. Here are some signs that it’s time for you to jump into the market:

  1. You have a reliable source of income. If you still aren’t sure where your next paycheque is coming from, or how much it will be for, it’s not the right time, unless you have enough saved to not need a mortgage.
  2. You have saved at minimum 5% of the purchase price, plus extra for closing costs and unexpected repairs in the first six months of home ownership. The closer to 20% down payment you get, the less you have to pay in default insurance, so having a healthy down payment can actually save you money. Having at least your down payment means you aren’t borrowing even more toward the purchase, and you will need to cover your own closing costs, which will likely include at least some land transfer tax. The more you have saved, the more you will save. Don’t rush in until you’re ready.
  3. You don’t have significant other debts. You don’t want to be house poor – and if you have a lot of other debts, you will be. If you have a lot of debt, you may want to wait until you’re in better financial shape.
  4. You’ve spoken to a professional (mortgage broker or agent) and have a sense of all of your monthly expenses for the house you’re looking at, as well as all of your closing costs. You need to be prepared before taking this leap.
  5. If you need to have someone co-sign the mortgage, you have an exit plan to get them off within five years. With mortgage rules tightening up daily, expecting all first-time buyers to be able to buy alone may be unrealistic. However, you don’t want to leave your parent or other co-signer on title forever. If you need help, have a good plan in place to be able to qualify for a mortgage on your own by your first renewal.