August 8, 2011
The First-Time Home Buyer Advantage
A Canadian Guide for Obtaining Your First Mortgage
Home ownership is a process many Canadians still don’t know can be as easily done as said. The first step is knowing the requirements. The second is narrowing your options down to the best fit for you.
If you are currently renting a home or apartment, have a steady income, and are keeping up with payments in ease, the likelihood is high that home ownership is within your reach. Competitive mortgage rates are available with as little as no money down, though accumulating a minimum 5% down payment is most optimal.
Down Payment and Amortization
For any mortgage attained with less than a 20% down payment, mortgage insurance will be required. Mortgage insurance is incorporated into your monthly payments; it is not an out-of-pocket expense. The attainment of this insurance ensures your lender that should you default on your payments, they will still be covered. The trade-off is that you are still eligible to receive superior rates with less money down. A Canadian mortgage calculator will allow you to customize your scenario and add this fee to your prospective monthly payment.
In Canada you have several options from whom to attain this insurance. The top three are the Canada Mortgage and Housing Corporation, Genworth Financial Canada and Canada Guaranty. All three companies offer informative websites, and usually a rebate on premiums for energy efficient properties or properties on which you make required energy efficient renovations.
The overall cost of insurance will vary depending on the amount of your down payment and your selected amortization. Amortization is the length of time in which you select your mortgage to pay out. In Canada, 30 years is the max. While a lengthier amortization spreads your principal payments out over a longer time span, lowering your monthly mortgage payments, it also assures a longer time span over which you will be paying interest.
Thus a first-time home buyer who puts 15% down with a 25-year amortization will be attributed a lower insurance premium than a person who puts 5% down with a 30-year amortization. Your mortgage broker can further explain these numbers to you and help you decide what size of down payment and amortization length is in your best interest to contribute and select.
Even if you have no money to put down there are still several mortgage options available to you. Attaining 100% financing will, however, require that your current credit score resides no lower than 650, if you choose to go through an independent mortgage broker, and 680 if you opt to go through a major bank.
As a first-time home buyer you also have the advantaged opportunity to utilize funds in your RRSP toward down payment, tax free, so long as the funds are repaid within the specified time length allotted. The Government of Canada permits up to a $25,000 withdrawal per first-time home buyer from their RRSPs toward down payment. This means that if you and the person you are purchasing property to reside in with are both doing so for the first time, up to $50,000 from RRSPs could be used toward down payment. A mortgage broker can explain the homebuyer’s plan to you in more detail.
Mortgage Pre-Approval and Budgeting Strategy
There is no sense in beginning your property hunt without a firm grip on what you can afford. Search online for a mortgage qualification calculator to help you ascertain this, and get your mortgage pre-approved. Mortgage pre-approval is free and simple, gives you a concrete budget to work with, and usually a best rate guarantee from the time you submit up to 90 days.
Now, within that pre-approved budget, you must find a home that meets all of your objectives. Remember that mortgages can also be attained that allot you cash for improvements upon purchase. If a home within your budget meets all requirements but for an unfinished basement, outdated appliances or flooring that needs replacement, this might be the mortgage option for you.
A broker with whom you are comfortable should also be able to help you book your home inspection (est. $350), a home appraisal if needed (est. $300), and a lawyer to observe the closing and title transfer (est. $1,000). In certain circumstances a mortgage broker may be able to waive some of these fees depending on the mortgage product chosen.
Securing the Finances
Finding the right mortgage is just as vital as choosing the right home. If there is a financial institution with which you already have a good history, approach their mortgage department for a pre-approval inquiry. Remember that the posted rate is not the best rate available. Negotiate for a discounted rate, and terms that allow pre-payments toward the principal and accelerated payment options.
Independent mortgage brokers are also available for your inquiry. Independent mortgage brokerages can usually offer you a better product than your bank, especially if your financial track record has been a bit bumpy. Mortgage brokers have access to many lending pools, not just one.
Mortgage Rates and Terms
Both mortgage rates and terms will vary depending on lender or financial institution. Five-year terms are the most commonly selected among Canadians, meaning that at the end of five years your mortgage is up for renegotiation. Note the difference between term and amortization. Amortization is the overall time in which your mortgage will pay down (first-time buyers most often select 25 years), while term is the length of contract between you and the lender in which you are committed to a specific rate. When rates fall significantly, it can be in your best interest to break that contract and attain a new term with a lower rate.
The rate selected can be fixed or variable. Fixed rates will remain constant through to the end of the term, while variable rates will fall or rise in line with the economy. A variable rate can be set as a discount below prime for a specified term length. For example, you may qualify for a variable rate that is 0.75 below prime for a five-year term.
Choosing the right mortgage options can save you thousands of dollars. Take the time to ask questions and do the necessary research; being mortgage savvy will work to your advantage.
This article was provided by CanEquity.com.