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What is an Interest Adjustment Date? When do I make my first mortgage payment?

The Interest Adjustment Date (IAD) is the date set by the lender as the day you start your mortgage term. It usually falls on the 1st of the month after the mortgage funds have been advanced to the borrower.

Mortgage payments are made in arrears, which mean that lenders look back on every payment period that passed and calculate the interest based on the money owed during that period. If your closing date is sometime in the middle of the month prior to the interest adjustment date, then the lender will compute how much interest you owe from the closing date to the IAD. This interest payment is either collected from you as a check on closing day or deducted from the mortgage proceeds. Your first mortgage payment will then start one payment period after the IAD, on the first day of the following month if the payment period is monthly.

For example, if you close your mortgage on October 17 and have chosen monthly payments, then your interest adjustment date will most likely be November 1. December 1 is when the first mortgage payment is due and you pay interest that accrued from (the Interest adjustment date of) November 1 to 30 on that day. Before November 1, a pro-rated (per diem) interest is calculated from October 17 to October 31. The lender will charge a one-time payment to cover that interest-only payment which is called interest adjustment.

To avoid interest adjustments, you need to schedule your closing date exactly one payment period before your first mortgage payment.

When the lender pays the property taxes, how are the payments calculated?

The estimated property taxes owing can be added to your mortgage payment and the property tax is paid on your behalf when it comes due from the city you live in. Depending on the balance of property tax owing, your monthly payments may be increased or decreased to reflect the timing of the tax payments.

What are the closing costs involved when buying a home?

First of all, make sure you have enough money in your account for the down payment. This includes your initial deposit when your offer is accepted, as well as any additional deposit you may need to pay once the offer becomes unconditional or you remove conditions.

Second, you need to set aside 2 to 3 percent of the purchase price to cover costs such as:

Home Inspection – Paid prior to closing; A written report is prepared by a qualified inspector who assesses the property for any defects or poor maintenance. It helps to let you know what repairs and maintenance are required, and if the property is structurally sound.
Appraisal – Paid prior to closing or typically covered by the insurer if the mortgage is insured; A written appraisal is prepared by an appraiser usually chosen by the lender, or the insurer (CMHC/Genworth) who insures the mortgage. It is required to make sure the property is acceptable as a security for the mortgage, to determine what the property is worth based on sales of comparable properties, and if what you paid for is close to the appraised value of the property.
Legal Fees/ Disbursements – The lawyer/notary public will prepare mortgage documents for you to sign and register your name on the title as the owner of the property once the deal closes. Ask your lawyer or notary public for a quote on his/her fees to close the deal and mortgage, including disbursements (courier costs, registration fee, photocopying, etc.). You may shop around to see what other lawyers charge and choose whoever you are comfortable dealing with.
Title Insurance or Survey fees – ensures the property is acceptable as security for the mortgage. Survey fees can usually be avoided if you can get an acceptable copy of survey from the previous owner.
Interest Adjustments – the amount of interest that accrues up to the Interest Adjustment date; can usually be avoided by closing on a day that is exactly one payment period (i.e. one month if your payment is monthly) before your first mortgage payment.
Land transfer Tax – for certain provinces; usually based on the percentage of the purchase value.
Prepaid expenses – can include utilities, water, sewage, property tax, and oil in tank prepaid by the seller beyond your closing date.
Property Tax Holdback – Holdback required by the lender if the lender is the one collecting and paying for the property tax in order for them to have sufficient funds available to pay the next installment due.
Fire Insurance – usually required by the lender to be in place (as confirmed by the lawyer) by the time you go and sign the mortgage papers with your lawyer; ensures the borrower has adequate coverage to pay off the mortgage for the property in the event of fire or other damages stipulated in the policy signed up for.
Mortgage Protection Insurance Premiums – optional; paid monthly and covers the mortgage amount in case of death, disability, loss of employment or critical illness depending on the policy you choose.
Mortgage Insurance Premium – typically incurred if your mortgage amount exceeds 80% of loan-to-value; paid to the insurer as a one-time fee that could usually be added to the mortgage amount. In some provinces, the premium is subject to Provincial Sales Tax (PST) which must be paid on closing.
Mortgage Processing Fee – In unique situations, this is a fee brokers/lenders charge to process applications and is disclosed before an applicant signs the mortgage commitment. This usually applies when the deal proves extremely challenging to meet most lenders’ guidelines.
Other fees – GST (Goods and Services Tax) or HST (Harmonized Sales Tax) for new homes, utility connection charges etc.
Moving Costs

What is a home inspection and should I have one done?

A home inspection is a written report that is prepared by a qualified inspector who visually examines the property for any defects or poor maintenance. It helps to let you know the overall condition of the property, if it is structurally sound and what repairs and maintenance are required.

This is highly recommended to be done before removal of all conditions on the purchase contract as it protects the buyer, to a certain extent, from unknowns or unaffordable repairs. A proper inspection involves checking major areas like the roof, walls, floors, ceiling, foundations, crawl spaces, retaining walls, attics, etc, as well as essential systems such as electrical, plumbing, heating, drainage, weather proofing, etc.

Why do I need a survey?

A survey provides details of the property’s boundaries, measurements, structures and describes easements, right-of-ways, and encroachment by your property to other properties or adjoining properties to your property. Getting one helps you avoid disputes with your neighbors or the city. Survey fees can usually be avoided if you can get an acceptable copy of survey from the previous owner. Usually, satisfactory title insurance is acceptable to most lenders in lieu of a survey.

Should I wait for my mortgage to mature before shopping for a new mortgage?

Waiting for mortgages to mature before shopping for a new one is one of the most common mistakes made by at least 70% of Canadian mortgage holders. Most lenders will issue renewal notices only 30 days before their mortgages mature offering existing clients their posted rates. The rates they offer are usually not the best ones. Failure to let a mortgage broker shop your mortgage with other lenders can cost you thousands of dollars. The earlier you call a broker, the better. We recommend at least 120 days before mortgage maturity.

You don’t have to pay a higher interest rate. Simply give us a call before your mortgage matures or fill up our renewal form if you have a mortgage right now. We will secure and hold the best rate for you for up to 90 days before your mortgage maturity date so you don’t have to worry about higher rates. If the rate drops further before then, you will usually be given the lower rate. Also, for as long as you do not increase the mortgage amount you have, lenders usually will cover the costs of transferring your mortgage.

Is there ever a good time to "break" my closed mortgage and pay the prepayment penalties?

"Breaking" a closed mortgage makes sense if the penalty and legal fees are significantly smaller than what you will save in the long term getting a lower interest rate, as well as if you are switching to a significantly lower rate. If the difference between the old and new rate is huge enough, the savings with the improved rate should be able to absorb over the next couple years the fees (prepayment penalty, legal, etc.) you incurred for switching, plus put more money in your pocket over the months/years of lower payments. Sometimes, we also come across deals that reimburse some or all of the cost for switching.

It is important to note that there are actually two types of penalties that lenders usually charge on closed mortgages. One is a 3-month penalty for which you multiply the rate you got with the remaining balance, divide it by 12 months and multiply by 3 (months). The other is called the Interest Rate Differential (IRD) which is calculated on the amount being prepaid using an interest rate equal to the difference between your existing mortgage interest rate and the interest rate that the lender can now charge when re-lending the funds for the remaining term of the mortgage.

Closed fixed rate mortgages usually come with the greater of a 3 month interest penalty or IRD (interest rate differential). For Example:
3 month penalty = $200,000. Mortgage @ 5.75% with 3 years to go = $2,875.
IRD = Current 3 year rate @ 4.75% = 1.00% X $200,000. X 3 years = $6,000.

If the penalty is 3 months interest, it's almost always worth refinancing. If the penalty is IRD, it's usually not worth refinancing unless necessary to pay out other high interest debts. Always check the penalty with existing lender. Get the penalty quote in writing.

Note:Under the Interest Act of Canada, any consumer who took a term longer than 5 years can pay out their current mortgage with only 3 months interest as long as they have passed the 5th anniversary of the original mortgage term (ie 7 or 10 yr term). To find out more, check out the Interest Act on the website of Canada's Department of Justice.

When you fill-up the renewal alert form in our site, you will be informed of a lower interest rate to switch to whenever your mortgage is due for renewal or if it makes sense to "break" your existing mortgage. Because "breaking" a closed mortgage is not recommended for everyone, we will help you compute the fees and savings to see if switching to a lower rate might be good for you.

Is the lender obligated to renew my mortgage at the end of the term?

No, the lender is not obligated to renew your mortgage at the end of its term. They can choose not to renew it with you for any reason. The mortgage does not automatically renew and no excuse is necessary for a lender to call on a loan. That is why it is important to inform us way in advance (usually 60 to 120 days is recommended) before your mortgage matures. If your current lender does not renew your mortgage, you’ll have the peace of mind of securing a mortgage with another lender, often at a better rate as well.

Does a lender charge a renewal fee to renew your mortgage and do they always offer the best rate upon renewal?

Very often, lenders charge a renewal fee to renew your mortgage. They may not charge you at times to tempt you into renewing with them at their posted rate, which is not often the best rate. It is very rare to pay a renewal fee if you use a mortgage broker to shop your mortgage upon renewal. Moreover, most times, you also get the benefit of getting a lower rate when using a mortgage consultant to shop your deal with other lenders.

Are there always penalties when I switch my mortgage to another lender?

Not usually if you transfer at your renewal date or if it is an open mortgage. Sometimes even a closed mortgage can turn into an open mortgage after a number of years into the term of the mortgage. It all depends on what is stipulated in your mortgage contract. Do not assume it is always closed just because you signed for it that way at the beginning. It is important that you are aware of the rules of your contract. If not, you can always call your lender to find out or give us a call and we can give you useful advice and tips regarding this matter.

How can you pay off your mortgage sooner?

There are several ways to pay off your mortgage sooner and save money on interests. The following are few of the many strategies you may be able to implement:

Choosing an accelerated bi-weekly or weekly payment schedule
Making principal prepayments within allowable limits in your mortgage contract
Making double-up payments allowable in your contract
Selecting a shorter amortization period upon renewal.

Can I take my mortgage with me to another home if I sell my home?

Some lenders may allow you to "port" over your mortgage from one property to another if you buy the other property within a certain time period stipulated in the contract. If you have a lower interest rate on your current mortgage than what is available in the market and you want to avoid paying prepayment penalties, it is in your best interest to carry over your mortgage to your new place.

What is the difference between a co-signor and a guarantor?

A co-signor’s name is registered on the title. He/she is a co-owner of the property and is sometimes required to live in the property as well. On the other hand, guarantor personally guarantees the mortgage will be paid if the original applicant defaults on the loan. A guarantor does not have a right on the property because he/she is not on title.

Can my mortgage amount include the costs of improvements or upgrades to the property I buy?

If you can qualify for the amount, yes. A purchase-plus-improvement mortgage lets you add to the mortgage amount the cost of upgrades, repairs or improvements before you move into a property. Upgrades that are considered include – a new electrical service, furnace, roof, central air conditioning, siding, eaves, soffits, fascia, doors, windows, new kitchen, carpet flooring - or any other renovations that could increase the value of the property. An appraisal of the property is normally required to confirm the work to be done.

Before the mortgage application is submitted, written quotes for the renovations or upgrades must be obtained from licensed contractors and/or suppliers like Home Depot and Rona if you are doing renovations yourself. The renovation cost is added to the purchase price. If you are approved for 95% financing, the loan amount will be 95% of both the purchase price and renovation costs. A common misunderstanding is that most people think they will get the full mortgage amount and complete the work after they close the deal using the extra money. The truth is, the percentage of the renovation costs approved by the lender to add to the mortgage amount is not released to the borrower until all the work has been completed and confirmed by an appraiser to the solicitor via an inspection report. This amount is held back by the solicitor as required by the lender, and only released after all work is completed. The borrower, therefore, might need to first pay for the materials and labor themselves. They may use their own funds, or borrow from family, their line of credit or credit cards, and/or negotiate with the contractor for payment after funds are released.


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