DOWN PAYMENT VERIFICATION – 5 KEY POINTS

One of the essential aspects of every mortgage application is the discussion pertaining to your down payment. Home purchases in Canada require a minimum down payment of your own funds to be put towards the deal. Your stake in the purchase. It is important that during the discussions with your Mortgage Broker that all the cards are on the table pertaining to your down payment. Be upfront about your down payment and where it is coming from. Doing so can save you time and stress later on in the process.

Most home buyers are aware that they will require a certain amount of money for a down payment. What many do not realize is that lenders are required to verify the source of the funds to ensure that they are coming from an acceptable source. Here are a few facts to keep in mind:

1. Lenders require a 90-day bank account history for the bank account holding the down payment funds. The statements must include your name, account number and statement dates.

2. A common hesitation that we often hear from clients is that their bank statements include a lot of personal details. As professionals, we completely understand our clients concerns pertaining to your personal information and we always ensure that information is protected. Statements provided with blacked out names, account numbers or any other details are not acceptable. Unaltered documents are a requirement of confirming the down payment funds.

3. All large or unusual deposits need to be verified to ensure the source of those large deposits can be confirmed and can be used towards the down payment.

• Received a gift from an immediate family member? Easy, Gift Letter signed.
• Sold a vehicle? Easy, provide receipt of sale.
• CRA Tax Return? Easy, Notice of Assessment confirming the return amount.
• Transfer of funds from your TFSA? Easy provide the 90-day history for the TFSA showing the withdrawal.
• Friend lent you money for the house purchase…. Deal Breaker.
• A large deposit into your account that you cannot provide confirmation for…. Deal Breaker!

4. You were told that your minimum down payment was 5%, great! However, did you know that you are also required to show that you have an additional 1.5% of the purchase price saved to cover closing costs like legal fees?

5. Ensure that the funds for the down payment and closing costs stay in your bank account once you’ve provided confirmation. Those funds should only leave your account when they are provided to your lawyer to complete the purchase. Lenders have the right to request updated statements closer to closing to ensure that the down payment is still there. If money is moved around, spent or if there are more large deposits into your account, those will all have to be confirmed.

The last thing that anyone wants when purchasing a property is added stress or for something to go wrong late in the process. Be open with you Mortgage Broker, we are here to help and to guide you through the process. Not sure about something pertaining to your down payment funds? Ask us. We are here to work you through the buying process by making sure you know exactly what you need to do.

Thinking about buying a home, rental or vacation property? Talk to a dedicated Dominion Lending Centres Mortgage Professional in your area to find out about what your down payment requirements will be.

THE TWO TYPES OF MORTGAGE PENALTY CALCULATIONS

We have all heard the horror stories about huge mortgage penalties. Like the time your friend wanted to refinance her home so that she could open a small business only to find out that it was going to cost her a $13,000 penalty to break her mortgage. This should not come as a surprise. It would have been in the initial paperwork from the mortgage lender and seen again at the lawyer’s office. A mortgage is a contract and when it is broken there is a penalty assessed and charged. You will have agreed to this. The institution that lent the money did so with the expectation that they would see a return on that investment so when the contract is broken there is a penalty to protect their interests. If you think about it, there is even a penalty to break a cell phone contract so the provider can recoup the costs they incurred so it stands to follow that of course there would be a penalty on a mortgage.

The terms of the penalty are clearly outlined in the mortgage approval which you will sign. The onus is on you to ask questions and to make sure you are comfortable with the terms of the mortgage offer. With so many mortgage lenders in Canada, you can very easily seek out other options if needed.

There are two ways the mortgage penalty can be calculated.

1. Three months interest – This is a very simple one to figure out. You take the interest portion of the mortgage payment and multiply it by three.

For instance: Mortgage balance of $300,000 at 2.79% = $693.48/month interest x 3 months or $2080.44 penalty.

OR

2. The IRD or Interest Rate Differential – This is where things get trickier. The IRD is based on:

• The amount you are pre-paying; and,
• An interest rate that equals the difference between your original mortgage interest rate and the interest rate that the lender can charge today when re-lending the funds for the remaining term of the mortgage.

In Canada there is no one size fits all in how the IRD is calculated and it can vary greatly from lender to lender. There can be a very big difference depending on the comparison rate that is used. I have seen this vary from $2,850 to $12,345 when all else was equal but the lender.

Things to note:

• You will be assessed the GREATER of the 2 penalties.
• You should always call your lender directly to get the penalty amount and do not rely on online calculators
• You can avoid the penalty by porting the current mortgage if you are moving or waiting until the end of the term
• A variable rate mortgage is usually accompanied by only the 3 month interest penalty

Given that 6/10 mortgages in Canada are broken around the 36 month mark, wouldn’t it be better to find out before you sign how your mortgage lender calculates their penalty just in case??…and the best way to get more information is to contact you local Dominion Lending Centres mortgage professional.