On the surface, having a plan to get a mortgage seems a little unnecessary. Surely the plan is to save money and get a mortgage with the lowest interest rate available, ensuring that you pay as little as possible. But getting a good mortgage with a competitive interest rate doesn’t just happen overnight. It can take months, even years of preparation, saving money and studying the housing market, waiting for the right time to jump in. So even if you aren’t going to get a mortgage immediately, it’s never too early to formulate a plan.
If you’re living a comfortable lifestyle, you might not think you even need a mortgage plan. If you have a stable job with a healthy income, good credit, and a sizeable down payment, then you may think you can just waltz into a pre-approval and buy whatever home you want – and you’d probably be right. But a good mortgage plan can be much more than planning to buy a home right now. It’s planning to buy a home that will suit your needs for the foreseeable future.
This is the part of home buying, though, that’s the least attention-grabbing. There are no television shows about people being responsible with money or sitting down with an Excel spreadsheet. Nor is the idea of mortgage planning second nature to many buyers because those people who are getting in to the market now have never known anything but the apparent ease of being able to buy a home.
“It’s boring, I’ll be honest with you,” says Claire Drage, a mortgage broker with Mortgage Alliance. “There is definitely a sense of entitlement – because let’s face it, with how easy it’s been to get credit, no one’s said no . . . So sometimes the extra planning comes from the reality check because you can’t get what you want.”
It’s never too early to start planning to get a mortgage. Some of that planning begins by learning and practicing responsible borrowing techniques, such as making on-time payments for all of your debts, maintaining your available credit, and the consequences of only making minimum payments. But starting early can also mean taking a look at the long-term trajectory of your finances.
If you have poor credit, a lot of unsecured consumer debt, or both, and you know you want to buy a home, then you probably already know that you need a plan to improve your credit.
“If you don’t qualify now or you have too much debt, we need to get a handle on your net disposable income per month so we can start to maybe focus on paying down some of that high interest debt that might stopping you buy the home that you want or qualifying for a mortgage based on the new legislation,” Drage says. “It’s never, ever, too early.”
Drage is a huge fan of “forced saving,” in which money is diverted into savings vehicles before it lands in your everyday spending account. “It also is never too late, either. People who hate where they live, they’re miserable, we can start planning now.”
While you’re taking steps to do that, however, there may still be options out there for you, such as a private lender.
The successful execution of a mortgage plan ends with you sitting on a couch in your new home. Right? Well, yes, and no. Just because you are in a house doesn’t mean the planning ends there. What are your plans for the rest of your mortgage term? Are you in a position to make extra payments? Do you want to? (If not, why not?) Everyone knows that priorities change, and what you want when you’re 25 years old isn’t necessarily what you want at 30.
“Every year we want to touch base with our clients and ask them, what are their plans? Has their income changed? Are they saving? Are they expecting any big expenditure, so we can plan for the life moments: babies and university expenses, and things like that,” Drage says. “So during those sort of yearly check-ups, if you’d like, we’re always sort of monitoring what their plans are.”
And, she adds, there’s a wealth-growth strategy for everyone, so even if you’ve never thought of becoming a real restate investor, planning ahead with a mortgage broker can at least give you the ability to explore options that fit within your existing mortgage and goals. As you build equity in your home, you start to have more options, such as becoming a lender for greater returns as opposed to settling for underperforming RRSPs, Liras, or TFSAs.
You can plan on your own, of course. You’re the person who knows your finances best, and if you can be honest with yourself about your goals and your current reality, then doing your own planning might be the way to go.
When planning with your mortgage broker, however, you can benefit from their experience and insight into common pitfalls and mistakes that people tend to make – or just things that they tend to overlook when getting a mortgage. One of these things is thinking that you’re going to stay in your home for at least five years. But most people buy their first home at a particularly unpredictable stage in their life and it’s hard to plan for three years ahead, let alone five. So rather than getting the five-year fixed rate mortgage, for example, because the interest rate is .5 per cent lower, they’d be better off going with a mortgage that has a shorter term.
“The added value from a mortgage broker is someone who can look beyond just getting a mortgage. It’s about current planning, and is your income going to go up or down in the next five years. Do you plan to move up or down? Are you expecting any large expenses coming up? Sometimes you’re not planning ahead, knowing what’s going to come down the road; a good mortgage broker can help with the budgeting and the forced savings and setting them up now to become happy homeowner. And also to get into the market sooner than expected,” Drage says, adding, “We’re not taught in school how to buy a home.”
Plenty of buyers don’t know that they can withdraw $25,000 from my RRSPs and for a down payment, or get an RRSP now and then in 90 days you can use it for a down payment as well as getting a tax credit. Mortgages also don't function in a vacuum; obviously that monthly mortgage payment is important, but so are your other monthly payments, and these other expenses need to be monitored closely to make sure that they don’t put you out of the housing market when you’re ready to buy.
“It’s like a holistic approach – that sounds a bit tree-huggerish, but I guess it is,” Drage says. “It’s the whole picture. Your financial planner might look at your retirement stocks and bonds, your insurance person looks at if you die or get disabled, let’s protect your income. A good mortgage broker can really not do those things, but really looks at the entire financial picture today, and for the future. Because we want clients for life – or until they’re mortgage-free.”
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