Many buyers are not aware or prepared to pay the Sales Tax on the Mortgage Default Insurance Premium - this is when you’re putting less than 20% down payment on a purchase. This is also in addition to your down payment and other closing costs. Sales Tax in Ontario is 8% eg. on CMHC premium. Check within your province.
Lenders will deduct the sales tax prior to advancing funds to your lawyer. This is a good piece of information to help buyers be better prepared.
There are 3 insurers in Canada -CMHC, Genworth and Canada Guaranty - See scenario below.
1. Purchase Price: $470,000 x 5% down = $23,500. Now subtract the down payment from your purchase price - you’ll be left with a loan amount of $446,500.
2. Since you’ve put 5% down - the mortgage insurance premium is 4% of the loan amount if the down payment is traditional. Non traditional is 4.50% according to the insurer eg. CMHC - https://www.cmhc-schl.gc.ca/en/finance-and-investing/mortgage-loan-insurance/the-resource/mortgage-loan-insurance-and-premiums
3. Your Loan Amount: $446,500 x 4% mortgage insurance premium = $17,860 therefore $446,500 + $17,860 = $464,360 so this includes the premium capped.
4. Sales tax ( Ontario) 8% is charged on the mortgage insurance premium of $17,860.
👉 $17,860 x 8% = $1,428.80 therefore the Lender will deduct $1,428.80 from the loan amount $446,500. As such, your lawyer will only receive $445,071.60.
👉 The loan of $446,500. subtract the sales tax amount $1,428.80 = $445,071.60.
👉 Remember $464,360 is inclusive of the insurance premium. So $464,360 subtract $17,860 = $446,500 subtract $1,428.80 sales tax = $445,071.60.
👉 You got the $446,500 loan amount because you have put 5% down-payment of your purchase price $470,000 as per #1
5. Lenders need to see 1.50% of the purchase price in addition to your down-payment which goes towards the closing cost. However you may use less or more contingent on your legal fees and disbursements/ land transfer tax amount/ sales tax/ title insurance costs etc.
6. If you’re a first time home-buyer then you’ll get a financial break on the land transfer tax ( LTT) - you just get an adjustment up to a certain amount. Speak with your lawyer on this.
7. Legal fees and Disbursements. Disbursements meaning title insurance and searches, registration of mortgage ( it’s call a Charge), wire fee for your lawyer to send funds to the seller’s lawyer or courier charges etc + applicable taxes.
8. Statement of Adjustment is a document that the lawyer prepare. ALWAYS ASK YOUR LAWYER for copy and to explain as it provides you with the breakdown use of funds received from the lender, expenses and what amount you need to provide a draft or certified cheque for closing to your lawyer.
9. Some lenders may want to hold back some months of property taxes prior to advance so ensure your mortgage broker review the commitment for these clauses.
Contact us for more information or help with your next purchase scott@thewestlaketeam.com