Just because we’re smart people doesn’t always mean that we do everything perfectly, especially when it comes to getting a mortgage. Here are five common mortgage missteps by first-time buyers – and how you can avoid falling into the same traps.
1. Taking the entire loan amount that’s offered by your lender
A lender’s job is to look at your criteria as a borrower and to decide whether you’re a sound enough candidate for a loan as well as the amount of loan that your income can handle. A lender, however, doesn’t take into account all of your other financial goals and obligations, such as rebuilding your soon-to-be-depleted savings accounts, childcare costs, or repairing your car that’s about to break down. It’s your job to make sure that your mortgage isn’t the only thing that you can afford. So while your lender may decide to give you a hefty loan, don’t automatically start searching MLS listings for that amount. Make sure to do an honest and accurate assessment of all of the expenditures that your household income can support, and accept that amount from the lender. It’s almost certainly going to be lower than their offer.
2. Assuming the bigger (lender), the better
You may like BMO’s latest ad campaign or the fact that RBC’s closest branch is in a respectable limestone building – not to mention that you know all of these brands. But that doesn’t mean that their mortgages are more secure than any other lender. “Some people just feel more security with the big banks even though the big bank mortgages do have higher penalties and may not always be what’s going to be in the best interest of the client,” says Paul Meredith, a Toronto-based mortgage broker with CityCan Financial. “There’s a lot of misconception about that.”
3. Trying to gauge the housing market
Interest rates are falling, interest rates can’t possibly fall any lower, the housing market is going to stay hot for the foreseeable future, the housing market has to cool down soon . . . There are many analysts, economists, and real estate professionals who love to spew opinions about the current state and future actions of the housing market. When it comes down to it, though, there are so many factors that come into the when attempting to predict market activity that no one really knows with any certainty what will happen. All you can do is take an educated guess and obtain a mortgage that’s within your means. There will always be better and worse times to get a mortgage, but if you make sure that you’re getting an appropriate mortgage that fits into your financial goals at the right time for you, then market fluctuations won’t sting as much.
4. Assuming that your research yields your most favourable options
Seventy-two per cent of mortgage consumers looked to various online sources to find out about mortgage options and features, according to a 2016 survey of 3,006 recent mortgage consumers by the Canadian Mortgage and Housing Corporation (CMHC). As we all know, there’s a lot of information on the internet – and not all of it is accurate, trustworthy, appropriate or even reasonable. That doesn’t stop some people from repeating it far and wide, and some buyers from assuming that the latest mortgage feature that their neighbours used is the most appropriate or applicable to their current situation. By all means, do your research as to all of the options available, but be prepared to speak with a mortgage professional about the pros and cons to each, and how each relates to your current situation. If you don’t have any experience as a dentist, you don’t click on a few YouTube videos and expect to know how to fill your own cavities; don’t expect to do the same when it comes to mortgage products. Mortgage professionals have seen a plethora of issues that will arise down the line, and can advise you accordingly regarding scenarios that you may never have imagined.
5. Only caring only about the lowest mortgage rate available
This one may seem confusing because of course you want the lowest mortgage rate available – it will save you thousands of dollars in interest over the life of your home loan! But don’t forget to ask about penalties for paying more than your scheduled payment or when you want to refinance before your loan term has ended. Geoff Lee, president and senior mortgage director of GLM Mortgage Group, has seen it time and time again that clients will ask for the mortgage associated with a particular rate that they saw advertised online, not knowing any other specifics about that product. “I tell people it’s like buying a really nice-looking car without getting it inspected. A lot of times things that look really, really nice, once you own it, it’s going to cost you a lot of money because you were [only] attracted by what it looked like on the outside,” he says, neglecting the reality and costly consequences of what’s underneath the hood. “People live for the deal and don’t think of anything afterwards.”