1. Start saving
The global economic crisis has made lenders a little more gun-shy when it comes to lending. Gone are the days of 100% lending. Depending on the type of mortgage, down payments range from 5% to 20% of the purchase price. For a conventional mortgage, borrowers are expected to ante up a down payment of at least 20%. Anything less than 20% and you will be required to pay mortgage default insurance, which protects the lender in the event you default on the loan. It’s a one-time premium and can range from 1.00% to 3.10% of the total amount of the loan. A second incentive for saving, is the larger your down payment, the more you save over the life of your loan. A larger down payment reduces the amount of your monthly principal and interest payment and reduces the total amount of interest you pay over the life of your mortgage.
Before you start visualizing the backyard pool, you’ll have to take a realistic look at your finances. This means drawing up a budget – don’t worry, no artistic skills are needed for this. All you need to do is list your total monthly income and balance that against your anticipated monthly expenses. You will need to factor in costs associated with owning a home, such as council rates, insurance, strata fees, maintenance costs and mortgage repayments. You should also include an amount for unexpected or infrequent expenses such as car repairs, birthday gifts and dental visits. Only you have intimate knowledge of your lifestyle and what you need to live comfortably. Lenders sometimes approve you for a mortgage that is higher than actually need or want. But just because you have the green light to spend more, doesn’t mean you should. It is wise to give yourself some breathing room should rates increase or your life circumstances change. Think about your future plans. Are you looking to start a family? Would you like to take some time off to travel? These life goals need to be factored into your mortgage plan.
3. Reduce your debt
Debt is a major downer, especially when it comes to applying for a mortgage. According to Statistics Canada, the ratio of household credit market debt to net worth has increased to 24%. TransUnion reports that Canadians hold $25,597 in credit and retail card debt on average. Banks use strict guidelines to determine how much debt you can carry and the magic number for total monthly debt payments – including the mortgage – cannot come to more than 40% of your gross income.
4. Keep cool
The knock-on effects from the GFC continue to create global economic uncertainty, but at the end of the day you have to live your life according to your own goals. It’s frightening to hear forecasts such as the one recently presented by Capital Economics which predicted Canada’s housing prices will collapse by as much as 25% over the next three years, but doom and gloom reports should be balanced by other sources. According to the CMHC, there will not be a correction in price in 2011 and prices should actually rise 1.3% to reach $372,400 in 2012.
“Despite recent financial uncertainty, factors such as employment, immigration and mortgage rates remain supportive of the Canadian housing sector,” said Mathieu Laberge, deputy chief economist for CMHC.
The best thing you can do is focus on your own home ownership goals – if you wait for the perfect moment to join the market, you could end up sitting on the sidelines forever.
5. Catch a break
There are government programs and grants for first time home buyers such as the federal government’s First Time Home Buyers’ Tax Credit or RRSP Home Buyer’s Plan. Under the Home Buyer’s Plan you can withdraw up to $20,000 ($40,000 per couple) from your RRSP with no tax withheld. Read more about homebuying incentives on the CMHC’s website www.cmhc-schl.gc.ca.
6. Be aware of the extras
There are lots of additional costs associated with buying a home such as closing costs, which include fees for surveys, inspections, taxes, lawyers, insurance and more, and can add from 1.5% to 2.5% to the purchase price of a home.
7. Get pre-approved
A letter from your financial institution verifying that you are pre-approved for a mortgage will go a long way when you start negotiating with home sellers. To get a pre-approval, the lender will need to review your income, the source of your down payment, your assets and liabilities, and inspect your credit report to determine your credit worthiness. Bear in mind that the pre-approval will be for the maximum mortgage amount you qualify for. The letter typically guarantees an interest rate for 60-120 days.
8. Save money on your mortgage
You can speed up the repayment of your mortgage (and save thousands of dollars over the life of your loan) by making more frequent payments. By switching your monthly payments to weekly payments you can actually take four years off your mortgage. On a $100,000 mortgage that amounts to an interest savings of $28,785 over the life of the loan.
9. Determine your borrowing style
There are many different mortgage products on the market. You should choose a mortgage that reflects your borrower profile and financial goals. (You can use your different mortgage calculators or check out our compare home loans page to find the right mortgage for you). You need to determine whether you’re looking for flexibility with your loan and how sensitive you are to interest rate fluctuations. A mortgage adviser can help you work through your options and find a product that suits your needs.
10. Round up, pay up
You can pay off your mortgage more quickly by rounding up your repayments. You will hardly notice the difference and over the life of your loan you could save thousands. In addition, you should make lump sum payments whenever possible. And increase mortgage repayment amounts as your income increases.
Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate