A mortgage is the most significant financial obligation a borrower will undertake in their lifetime. If we compare the costs associated with loans such as student and car loans, for example; a mortgage loan is not only exponentially higher but also a lot more expensive.
Not many borrowers understand what’s involved in paying a mortgage besides their principal and interest payment and, of course, the mortgage rate they receive. Unfortunately, mortgage terms and conditions are generally poorly understood by a large percentage of mortgage borrowers, which contributes to costly mortgage fees.
In many instances, mortgage terms are not explained in enough detail to borrowers by the professionals who originate or administer them, which leads to confusion.
If you plan to buy a home soon, here are some of the potential fees attached to home loans to watch out for:
Mortgage Insurance or High-Ratio Mortgage Insurance
Many borrowers do not have 20% available to put down towards their purchase price to avoid paying mortgage insurance. According to the Government’s rules, if a borrower does not have a 20% downpayment, their mortgage loan must be insured through CMHC (Canada Mortgage and Housing Corporation) or another insurance corporation such as Genworth or Canada Guaranty Insurance Company. High-ratio mortgage insurance can cost up to 4 percent of the total loan amount and in some cases, 4.5 percent. On a $300,000 mortgage loan, it could cost borrowers $12,000 in insurance fees.
The total loan amount would be registered for $312,000.
High-ratio mortgage insurance does not have to be paid up front, although it can be. Most of the time, borrowers keep the insurance premium attached to the original mortgage amount, and the total loan gets amortized out to 25 years. Unfortunately, because the premium is amortized with the loan, borrowers will pay interest on their insurance premium.
PST (Provincial Sales Tax) on the insurance premium will need to be paid up front and therefore, will get deducted from the mortgage advance on closing.
What other fees do borrowers look consider?
Some lenders will deduct a processing fee or mortgage administration fees from the net advance to the solicitor on closing. Sometimes, this fee can be between 200-350 dollars. We find these fees are applicable for lenders using a third party administration company such as First Canadian Title who acts as the middleman between the lender and the lawyer. First Canadian Title is also a title insurance company and can title insure the property.
If the lender does not use a third-party company such as First Canadian Title, then there won’t be any extra processing or administration fees deducted from the net advance on closing.
Property Taxes: Pay on your own or let the lender pay for you?
Borrowers will often allow the lender to pay their property taxes on their behalf, so they don’t have to worry about it. One less thing to think about, right? Well, not really.
Often, if the lender is collecting property tax money on your behalf, two things will happen.
First, you will most likely have to pay more each month for your taxes so the lender can accumulate an ‘in-house tax account’ for you. To keep up with increasing property taxes each year and not have to keep negotiating your mortgage payment, they will need to collect more than what’s owing to create a buffer. Many people are surprised to learn their lender has thousands of dollars sitting in their tax account.
Secondly, the lender may charge you a yearly administration fee for collecting taxes on your behalf.
Avoid these additional costs and fees by setting up a pre-authorized payment directly with your Municipality.
When setting up a mortgage and signing any associated documentation, ensure the prepayment penalty gets explained to you. If you decide to pay off your mortgage earlier than your contract allows and for more than your prepayment privilege, you will get charged a penalty. Different lenders use different calculation methods, and some are more expensive than others. Ensure you discuss how the penalty gets calculated so you can plan for any associated fees with breaking your mortgage down the road.
As a senior mortgage agent, I can help you sort through the fees to ensure you save money and get the best mortgage product for your situation.
Mortgage Broker or Bank?
There is often a misconception that brokers charge fees that banks don’t. Usually, if a borrower is getting a prime mortgage product and has excellent credit and enough qualifying income, not only is a brokerage fee not applicable, but the interest rates are usually more competitive. Mortgage brokers get paid an origination fee by the lender directly and they do not charge the borrower.
Of course, if a borrower is getting charged a brokerage fee, they should always double check the price and ensure it is just for their situation.
By: Sarah Colucci
411 Queen St.
15 Wertheim Court, Suite 210
Richmond Hill, Ontario
Sarah A. Colucci, Mortgage Agent Lic. M14000929
Mortgage Edge, FSCO Lic. 10680