With the holidays fast approaching, it’s time to start thinking about what you want this year. For some it may be an iPad or Xbox, while others may have a much larger gift in mind – a new home. So, grab a pen and paper, put up that stocking and fill it with your home buying wish list because Baby, it’s cold outside.
WISH #1: A 20% Down Payment
The average home buyer puts down 5-20% of the mortgage value for a down payment but if you can manage to increase this figure to 20% or more, you can save a lot of money. With a down payment of 20% or more, you can avoid paying mortgage default insurance (commonly referred to as ‘CMHC insurance’), due at the time of purchase and sometimes secure a more favourable mortgage rate and rate terms. In terms of long-term savings, a larger down payment reduces the amount of your monthly principal and interest payment and the total amount of interest you pay on the whole.
So, how will you source this money? Well, first look at more common sources such as saving a fixed amount from every pay-cheque, selling any stocks or bonds or personal property or reaching out to friends and family, for example. Another great option is the RRSP Home Buyers’ Plan (HBP) which lets first-time home buyers withdraw up to $25,000 from Registered Retirement Savings Plans (RRSPs) for a home purchase, tax-free. Many first-time home buyers take advantage of this opportunity and set up RRSP accounts well in advance of purchasing, with the intention to reap the rewards at a later time when they buy their first home.
Wish #2: A Flexible Mortgage
Another way to save money over the life of your mortgage is to select a mortgage with favourable prepayment options. Prepayment options outline the flexibility you have to increase your monthly mortgage payments or pay off your mortgage as a whole. A monthly prepayment provision is a percentage increase allowance on your original monthly mortgage payment, while a lump sum provision allows you to pay off part of your mortgage principal. For example, if your monthly mortgage payment is $1,000 and your monthly prepayment allowance is 25%, then you can increase your payments to $1,250. The lump sum prepayment option on the other hand, applies to the mortgage as a whole. So, a 25% lump sum prepayment privilege would allow you pay off a mortgage completely in four years.
You may gain access to cash flow you did not expect throughout the term of your mortgage in the form of a salary increase, bonus or inheritance. Such cash flow influxes are not uncommon; therefore, you may want to consider putting this money towards your mortgage as it will reduce the amount of interest you will pay over the life of the mortgage.
Wish #3: The Lowest Mortgage Rate
With mortgage rates at historical lows, it’s a great time to buy a home. Your search for the lowest mortgage rate begins by selecting the type of rate you want. Though variable mortgage rates have proven to be less expensive when examined historically, the majority of Canadians still opt for fixed mortgage interest rates. This can be partly attributed to a general aversion to interest rate uncertainty and the financial burden associated with fluctuating mortgage payments.
When comparing mortgage rates it is also important that you ‘shop around’. Look at both bank mortgage rates and those of mortgage brokers. Although banks are able to consolidate your services, brokers are often able to offer lower rates because they can access multiple lenders and pass on volume discounts.
So compare competitive mortgage rates, work on getting that down payment and you’ll be well on your way to a new home for the new year.
This article was provided by RateHub.ca, an independent, impartial mortgage rate comparison platform. We bring the most competitive mortgage rates to one place, so you can make informed and efficient decisions. We believe that finding the best mortgage rate should be straight-forward, and our website has been designed with that in mind. RateHub works with the top mortgage brokers and lenders in Canada to bring you the most competitive mortgage rates. We update our rates on a daily basis with accurate, real-time data. We also provide ongoing mortgage education and resources to assist you in your selection process.