Canada’s housing market keeps chugging along – fueled by rock bottom mortgage rates as far as the eye can see.
It’s tempting for anyone to jump in when mortgage rates are south of three percent, but here are some things to consider before you even begin looking at homes.
Scraping together a down payment
For starters, you need a down payment – the bigger the better. Homeowners who are buying-up or downsizing should be able to use the equity in their current homes as a sizable down payment.
First time home buyers with down payments of 20 percent or less will need to insure their mortgages. Contrary to what the term implies mortgage insurance actually protects the lender – not the home owner – in the event of default. The home owner still pays the premiums though, and that only adds to the regular cost of servicing the mortgage.
Getting a green-light on financing
Once you determine your down payment, meet with your financial institution or mortgage broker to arrange a pre-approved mortgage. Lining up a mortgage ahead of time can establish what you can afford, and zero in your house search. It can also give you a better bargaining position by letting the seller know you mean business.
A pre-approved mortgage involves calculating what the home buyer can afford to pay on a monthly basis, also called serviceability. It’s important to factor in scenarios with higher mortgage rates because rates have nowhere to go but up, and that could have a big impact on the size of the overall debt and monthly payments. To get an idea, run mortgage rates of five or six percent through an online mortgage calculator and see how payments balloon with a single percent increase.
If monthly payments are too high the lender can stretch out the length of the loan or amortization period. It’s in the lender’s best interest to extend the amortization period to generate bigger interest payments over a longer time.
The borrower may not be so comfortable being committed to a 25 year debt. When your friendly banker says you can afford a mortgage of a certain size he means you can afford to service it on a regular basis.
Whether you can afford it is something you need to decide.
Too rich for your blood?
If the numbers don’t add up, look for a lower priced home and climb the property ladder once you’ve accumulated more equity over time.
You can also wait and save for a bigger down payment. First time home buyers can borrow up to $25,000 from their registered retirement savings plan provided the funds are paid back to the plan within 15 years. If not, the outstanding amount will be taxed and the RRSP space will be lost.
A tax free savings account is another good way to save for a down payment on a house. Money invested in a TFSA and any gains can be withdrawn tax free at any time.
The important thing is; don’t rush into buying a home. The real estate industry tries to create a false sense of urgency because it makes money on quick closings. For the buyer, the perfect house will always be out there somewhere.
Need more information or advice on #mortgage_qualification, contact the The Ray McMillan Mortgage Team