I recently came across this great article in the Globe and Mail in regards to 10 tips for home buyers seeking a mortgage. This article does touch on some of the key pieces of our comprehensive planning process when we are working with our clients. There are many different factors that go into choosing the right mortgage product for yourself and while rate is usually the one driving factor, it’s not always the most important.
Buying a home is a daunting process. And for most Canadians, a mortgage, is one of the biggest financial undertakings of their lives. Here are some handy mortgage tips to consider before taking one on:
Expert advice: First-time home buyers need the right information to make informed decisions. A mortgage broker can help them understand various elements of homeownership and walk them through the purchase, finance and legal aspects of the process. Most mortgage brokers have a network of experts to help home buyers with the transaction. “Brokers are very knowledgeable and they have access to more than 30 lenders,” said the Alberta broker. “Their relationship with them can really add value for the client whether they are buying their first home or renewing their mortgage.”
Payment calculators: There are many online affordability calculators, like this one, where home buyers can plug in numbers for interest rates, principal amount and amortization period and get an idea regarding monthly mortgage payments.
Terms and glossary: Many Canadians struggle with industry terms such as interest rate differential, term or maturity date. First-time home buyers — take the time to learn the terms — in order to make an educated decision.
Mortgage Default Insurance: First-time home buyers, who have less than a 20 percent down payment, must purchase Mortgage Default Insurance. Depending on the purchase price of the home, the fee can total thousands of dollars. To avoid this see if it’s possible to make at least a 20% down payment.
Type of mortgage: Whether purchasing, renewing or refinancing your mortgage, one of the key decisions is choosing between fixed and variable-rate mortgages. Fixed mortgages come with a set interest rate that remains unchanged throughout the term of the loan; whereas, interest rates on variable mortgages are typically set below fixed rates, but vary over time.
Down payment: The bigger the down payment, the smaller the mortgage loan and monthly payments. However, if you’re a first-time home buyer and are struggling to come up with the minimum five percent down payment, don’t despair. “Many people don’t know that if they don’t have cash for a down payment, they can borrow it from a non-traditional source like a line of credit or a personal loan,” said an Alberta-based broker.
Portable mortgage: Portability is a feature that allows moving the mortgage, with its current rate and terms, to a new property without penalty. “Portability is extremely important if you expect to upgrade in the foreseeable future,” said the Alberta broker. Most lenders do offer a portable mortgage that help homeowners save on penalties for breaking the mortgage when they move to another property.
Prepayment option: The prepayment privilege allows borrowers the flexibility to increase monthly payments or make a lump sum payment to pay off their mortgage before the maturity date, without penalties.
Stripped-down mortgage: If you don’t foresee moving, refinancing or making big prepayments in the next few years, consider a low-frills mortgage. They are cheaper mortgages without the bells and whistles and, therefore, offer lower rates. A viable option if you’re willing to make the trade off between smaller prepayment privileges and bigger penalties for leaving the mortgage prior to renewal.
Fallback plan: Have three to six months worth of mortgage payments in a savings account to help with unexpected home expenses, such as a collapsed roof, or life events, like job loss, that have financial implications.