A homebuyer can arrange a mortgage to help pay for the property purchase. The mortgage is the amount of the loan taken by the homebuyer from the lender who has agreed to finance the purchase as per the terms and conditions of the lending agreement.
Responsibility Lies on the Purchaser to Confirm the Financing Arranged
The purchaser has the responsibility to confirm and arrange the mortgage financing if required to complete the purchase transaction. After arranging the mortgage, the purchaser needs to:
- Successfully clear all lender requirements for income, debt obligations, cash down payment proofs as required (needs to be done within the timelines to avoid delays on the closing day)
- Make sure that mortgage regulations and instructions are sent to the Real Estate Lawyer by the mortgage lender to finalize the mortgage financing processing (they will also ensure that the requisite mortgage funds needed for the closing are obtained)
In case a buyer selects to have a pre-approval before purchasing the property, it should be in written form. It is recommended that the terms and conditions of the mortgage and the pre-approval are clearly obtained in writing.
Power of Attorney
If a power of attorney is used in the purchase transaction, it needs to be pre-approved by the mortgage lenders. Being a customer of the bank or signing a power of attorney document in the presence of an Ontario Lawyer are typical pre-requisites for getting the approval.
An agreement of sale and purchase should be made conditional in those cases where financing is required. It is advisable that the agreement should be based upon the financing terms and conditions, as confirmed in writing by the institutional lender.
Open and Closed Mortgages
Open mortgages are not subject to any penalty when they are paid. Closed mortgages are subject to penalties if they are paid off before the end of the mortgage maturity period. The penalty amount is usually the higher of the interest rate differential or interest for three months. In variable rate mortgages, the penalty is usually three months interest.
Accelerated Payment Options:
Bi-weekly and weekly payment options are made available to homebuyers by the institutional lenders. These payment options allow the homebuyers to reduce the interest cost and pay off the mortgages quickly. Payments count more towards the principal mortgage amount, and the duration of the mortgage is also reduced.
Canada Mortgage and Housing Corporation Mortgages (CMHC)
For all insured mortgages, specified costs can be deducted from the mortgage advance by the mortgage lender. In insured mortgages, cash down payment is less than one-fifth of the total purchase price and is arranged by the purchaser.
The mortgage lender can deduct many costs including appraisal fee; property taxes held, interest adjustments and provincial sales tax portion of the mortgage insurance premium.
Lenders will consider doing mortgage financing only once the property insurance has been taken. To understand the right amount of property insurance, four factors need to be considered.
The mortgage balance is the amount of loan money outstanding on your property. The lender considers this amount to be the value of your property.
Market Value is the amount any purchaser would pay to purchase the property when seller and buyer both are not under any emergency to conduct the transaction.
The Replacement cost refers to the dollar value which would be needed to rebuild your home in the specific locality of your home. This value is important from the insurance view point as this is the amount which your home would be insured for.
Actual Cash Value
The actual cash value is the depreciated value which is the cost to repair the house today deducted by the depreciation amount.
Using a guaranteed replacement cost endorsement is advisable if the mortgage balance is less than the replacement cost of your home. You can consider this in all cases where you own your property with a clear title.
In case, your property is more than 20 years old and new building codes have been introduced, you can consider an endorsement to your policy. This endorsement typically covers the cost of rebuilding to meet the higher standards.
Tax Implications of Mortgage Financing
Mortgage interest payments do not qualify for tax deductions. They are eligible for a deduction only if the home is generating income from being rented out.
If you run a small business from your home, many business expenses can be deducted but the interest on mortgage cannot be deducted.
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