FINA200 Personal Finance ©
Lesson 6 Purchasing and Financing a Home
Lesson/Chapter sections not subject to examination:
LO1:
Criteria used to select a home
Relying on a realtor
Using online realtor services
Negotiating a price
Focus on ethics
LO 6: Show how to compare the costs of purchasing versus renting a home
Quote:
“The ache for home lives in all of us, the safe place where we can go as we are and not
be questioned.”
- Maya Angelou
Lesson Objectives
1. Explain how to select a home to purchase (LO 1)
2. Describe the transaction costs of purchasing a home (LO 2)
3. Describe the characteristics of various mortgage options (LO 3)
4. Describe the characteristics of a fixed-rate mortgage (LO 4)
5. Describe the characteristics of a variable-rate mortgage (LO 5)
6. Explain the mortgage refinancing decision (LO 7)
LO 1: Explain How to Select a Home to Purchase
How much can you afford?
When selecting a home, you should first determine how much you can afford to pay for
a mortgage. Most individuals pay for a home with a down payment between 5 and 20
percent of the purchase price and obtain a mortgage loan to finance the remaining cost.
A pre-approval certificate provides you with a guideline on how large a mortgage you
can afford based on your financial situation.
It provides a mortgage interest rate guarantee that is valid for 60 to 120 days.
However, mortgage approval is not guaranteed.
A mortgage stress test is required to obtain a mortgage:
The mortgage rate guaranteed on the pre-approval certificate is not the rate used to
determine your mortgage eligibility.
© May not be copied or duplicated
without the permission of the owner. 1
, Under the test, the qualifying rate for a mortgage loan is the higher of:
The posted Bank of Canada 5-year fixed insured mortgage rate (5.25% as of June 1,
2021), and
The rate negotiated with the financial institution, plus 2%.
Financial institutions apply two ratio tests to qualify for a mortgage:
Gross Debt Service (GDS) ratio
The maximum acceptable GDS rate is often 32%.
Total Debt Service (TDS) ratio
The maximum acceptable TDS ratio is often 40%.
What is the affordable down payment?
What is the market value of the assets you will use to make your down payment?
Common sources for a down payment include personal savings, TFSA funds, proceeds
from the sale of a prior home, gifts and withdrawals from your RRSP under the Home
Buyers’ Plan (HBP).
The Home Buyer’s Plan (HBP) can help first-time home buyers reach their goals:
Allows each home buyer to “borrow” up to $35 000 from their Registered Retirement
Savings Plan (RRSP), interest-free.
Allows buyers up to 15 years to pay back this HBP “loan”.
Certain conditions must be met:
You must be considered a first-time home buyer.
You must have a written agreement to buy or build a qualifying home.
You must be a resident of Canada.
© May not be copied or duplicated
without the permission of the owner. 2
Lesson 6 Purchasing and Financing a Home
Lesson/Chapter sections not subject to examination:
LO1:
Criteria used to select a home
Relying on a realtor
Using online realtor services
Negotiating a price
Focus on ethics
LO 6: Show how to compare the costs of purchasing versus renting a home
Quote:
“The ache for home lives in all of us, the safe place where we can go as we are and not
be questioned.”
- Maya Angelou
Lesson Objectives
1. Explain how to select a home to purchase (LO 1)
2. Describe the transaction costs of purchasing a home (LO 2)
3. Describe the characteristics of various mortgage options (LO 3)
4. Describe the characteristics of a fixed-rate mortgage (LO 4)
5. Describe the characteristics of a variable-rate mortgage (LO 5)
6. Explain the mortgage refinancing decision (LO 7)
LO 1: Explain How to Select a Home to Purchase
How much can you afford?
When selecting a home, you should first determine how much you can afford to pay for
a mortgage. Most individuals pay for a home with a down payment between 5 and 20
percent of the purchase price and obtain a mortgage loan to finance the remaining cost.
A pre-approval certificate provides you with a guideline on how large a mortgage you
can afford based on your financial situation.
It provides a mortgage interest rate guarantee that is valid for 60 to 120 days.
However, mortgage approval is not guaranteed.
A mortgage stress test is required to obtain a mortgage:
The mortgage rate guaranteed on the pre-approval certificate is not the rate used to
determine your mortgage eligibility.
© May not be copied or duplicated
without the permission of the owner. 1
, Under the test, the qualifying rate for a mortgage loan is the higher of:
The posted Bank of Canada 5-year fixed insured mortgage rate (5.25% as of June 1,
2021), and
The rate negotiated with the financial institution, plus 2%.
Financial institutions apply two ratio tests to qualify for a mortgage:
Gross Debt Service (GDS) ratio
The maximum acceptable GDS rate is often 32%.
Total Debt Service (TDS) ratio
The maximum acceptable TDS ratio is often 40%.
What is the affordable down payment?
What is the market value of the assets you will use to make your down payment?
Common sources for a down payment include personal savings, TFSA funds, proceeds
from the sale of a prior home, gifts and withdrawals from your RRSP under the Home
Buyers’ Plan (HBP).
The Home Buyer’s Plan (HBP) can help first-time home buyers reach their goals:
Allows each home buyer to “borrow” up to $35 000 from their Registered Retirement
Savings Plan (RRSP), interest-free.
Allows buyers up to 15 years to pay back this HBP “loan”.
Certain conditions must be met:
You must be considered a first-time home buyer.
You must have a written agreement to buy or build a qualifying home.
You must be a resident of Canada.
© May not be copied or duplicated
without the permission of the owner. 2
