Buying your first home is quite stressful, isn’t it?
On top of that, you must learn the meaning of banking terms specific to real estate – that’s not going to help! That’s why we’ve put together a little glossary of key real estate banking terms you need to know.
Deed of Sale
The deed of sale is the actual contract, the one that transfers ownership from the seller to the buyer. You sign it before a notary.
When you take out a mortgage, you will have to choose the number of years it will take to pay it off. This period of time over which you pay off your mortgage is called amortization. The law currently limits this period to 25 years. The longer you take to pay off the mortgage, the lower the payments will be. But you will pay more interest!
If you buy a condo, know that two types of condominiums are possible. If each condo belongs to a different owner and the common areas are the responsibility of everyone, it is a “divided co-ownership.”If the whole is owned by everyone, without distinction, it is an “undivided co-ownership.”
The sum you must pay out of your own pocket when you buy a property is the down payment. It is the portion of the purchase price that you cannot pay with a mortgage. The percentage required for a down payment varies depending on the selling price and the type of property. Generally, the minimum down payment is 5 per cent of the purchase price if the loan is insured by mortgage loan insurance. If the loan is not insured, you must put down a minimum of 20 per cent yourself.
A “mortgage” is a security interest in the ownership of the house itself. A loan for the purchase of a house must be secured by a mortgage on that house. In other words, a loan to buy a house is secured by the house and is called a “mortgage.” If you do not pay your mortgage, the lender can take possession of the house secured by the mortgage.
Home Buyers’ Plan (HBP)
If you’ve never owned a home, the Home Buyers’ Plan allows you to dip into your RRSP to buy your first home, without having to pay taxes on the withdrawal. It is a loan that you must repay in part each year for 15 years. If you are unable to make a repayment, the amount due is added to your income for the current year. The HBP is a good way to make a down payment.
Fixed and Variable Rate
If you choose a fixed interest rate, your monthly payments will remain the same for the duration of the mortgage. With a variable rate mortgage, the interest rate is adjusted according to the Bank of Canada’s key interest rate. This means that your monthly payments can fluctuate throughout the term.
These are the taxes you must pay to the municipality to cover your share of municipal expenses. The cost of municipal taxes is calculated based on the value of your property and the tax rate set by the municipality. You can usually pay these taxes in instalments. Your financial institution may also offer to deduct a dedicated property tax payment at the same time as your mortgage payment.
Open or Closed Term
The term of the loan is the time period over which the mortgage is to be repaid. (Amortization covers the entire length of the loan repayment, while the term is often two, three or five years, for example.)
If you choose an open term, you have the option of paying off your loan in part or in full before the end of the term. The ability to make additional payments is often limited to a fixed percentage in any one year.
If you choose a closed term, you must make payments until the end of the term. If you wish to pay before the end of the term, you will be charged a penalty.
The best way to reduce the stress of buying your first home is to get help. Team up with a real estate broker to help you understand all the aspects of the transaction.