As a first-time home buyer, mortgages are unknown territory. A mortgage is the loan you will need to buy a home. And the day will come when you will have to apply for one.
It is best to be informed about the mortgage process. As a first-timer in real estate, the process will be new and unfamiliar. To help you out, we are sharing some insider tips. Our mortgage tips can give you a push in the right direction as you jump into real estate for the first time.
Here are our mortgage tips for first-time home buyers:
1. Save for a down payment
A down payment is the first payment you will make on your home purchase. The typical amount to pay is 20% of the listing price. If you pay less than 20%, you are risking additional costs. Private mortgage insurance will be required, and higher interest rates are a possibility. Start saving early to reach 20%.
Worried about saving? Here are some tips to save for a down payment.
2. Research mortgage types
When you apply for a mortgage, you will have to explore different mortgage rates - and choose the best one for you.
The main two types of mortgage rates in the market are variable rate and fixed rate. The difference between them is that in one the interest rate will vary depending on the benchmark rate, while the other remains fixed for the mortgage term. Both have their advantages and disadvantages.
Research the common types of mortgage for home buyers in Canada to get started and talk to a professional about which one best suits your financial needs.
3. Choose the right amortization period
The amortization period is the time in which you will repay the mortgage in full. The longer your amortization period, the more interest you will pay in the end.
But everything depends on your monthly finances. If you can afford a small amount each month, then a longer amortization period (for example, 30 years) is the best choice. On the other hand, if you can afford to spend a little more without burning your monthly budget, then a shorter term of 20 to 15 years is a good fit.
And because amortizations periods last decades, take into account that interest rates can either increase or decrease during this time.
4. Explore accelerated payments
If you are want to pay off your mortgage faster, changing your mortgage payment frequency is the answer.
With accelerated mortgage payments you can save thousands and burn years off your amortization period. You frequency payment can be either bi-weekly or weekly.
Ask your mortgage lender for prepayment privileges to avoid any penalties.
5. Keep an eye out for the Bank of Canada
The Bank of Canada decides the benchmark interest rate. Every now and then, they like to announce what the interest rate will be depending on the country's economic outlook. Sometimes it decreases, sometimes it increases, and sometimes it remains the same.
Regardless of which of mortgage you choose, it is good to pay close attention to their announcements. When the time to renew your mortgage comes, knowing the benchmark rate can help you make an informed decision.
6. Know your budget
The number question to ask yourself during the mortgage process is: How much can I afford?
Knowing how much you can spend on housing every month is key to establish a reasonable budget. With a budget, you will (hopefully) avoid overspending.
You will be tempted to get the highest mortgage you can afford. But this might not be the greatest game plan. Consider the fact that change happens and your budget might shift to cover those unexpected expenses. Go for a mortgage that will leave you room to breathe every month.
7. Remember the new mortgage rules
In 2018, new mortgage rules came into effect. Now you need to pass a mortgage stress-test to qualify for your loan.
To qualify for a mortgage, your lender must test if you can afford the five-year benchmark rate of the Bank of Canada or 2 more percentage points in your current interest rate.
Have more questions? We got the answers here.
8. Work on your credit
Your credit score is an indicator of your creditworthiness based on your financial history. It will be one of the factors that affect your interest rate and loan terms.
It is important to check it regularly to make sure you are heading into the right path and avoid any surprises. Credit scores range from 350 to 850. The higher you score, the better. If you see that is getting low, it time to put some effort into it.
Check out our quick guide to credit scores.
9. Get pre-qualified for a mortgage
A mortgage pre-approval is a letter from the lender stating that you qualify for a loan. This confirms that you are ready to take on a mortgage based on your income and credit history. The written lender includes the term, interest rate and mortgage amount.
There are three benefits of getting a pre-approval. First, you will know exactly how much you can afford. This can help you narrow your home search. Second, you will look like a confident buyer to any seller. Once you find the right property, you will be ready to put an offer on the table and give you the upper hand in case you get into a bidding war. And finally, it locks your interest rate for a few months.
10. Connect with a mortgage broker
Sometimes, sticking with your bank is not the smartest move. They can offer great mortgage products, but the ones suitable for your needs.
A mortgage broker has access to more than one lender to shop around for the best rate. With their help, you can choose between more financing options for your new home.
11. Have your documents in order
Applying for a mortgage requires paperwork. Your lender will need a large amount of information for your application. Keep the original and copies of important documents like bank statements, tax returns, pay stubs, proof of employment and more.
12. Understand your mortgage terms
Before you agree to the mortgage rate and terms, you need to fully understand what you are getting into. Once you sign the mortgage approval, you are locked into a contract. If you are not satisfied with the terms, don't be afraid to negotiate!