Millennials:
Is buying a home in your five-year plan?
Buying a home is one of the largest and most important investments you’ll make in your lifetime; home ownership is still the single largest source of savings for Canadian households, as every payment you make builds equity. If you’re hoping to purchase a home in the next five years or sooner, there are some key steps you should take to ensure you’ll be able to reach your goal of home ownership. Know your current credit
score and improve it Many home buyers don’t realize the extent to which their credit score matters when buying a home. Ultimately, having a high credit score could mean you qualify for a higher mortgage. You can qualify for a good mortgage product with a credit score of 620 to 680, but if you have a credit score of 680 and above you’ll qualify for a significantly better mortgage.
Your credit score is made up of several factors, including payment history, utilization ratio, length of credit, types of credit and inquiries.
If your score is below 680, good news: you can improve it. If it’s low strictly because of debt utilization ratio, it could improve in as little as 30 days if you pay down your credit card balance to below 70 per cent of the maximum limit. Paying down your debt mid- month instead of waiting until the end of the month will also help increase your score faster. If your score is low because of your payment history, it should improve over about 12-18 months with on-time payments.
Unlike many of the mort-
gage rule changes that have come into effect over the past year, having a strong credit score is in your control. If you plan to own a home, it’s a good place to start.
Mogo will give you your credit score for free* without an impact to your score, along with free monthly updates on your score so you can track how much it’s improved. Figure out what you can
afford Many economists believe your monthly housing costs should not exceed 30 per cent of your gross monthly income. That should take into account all your housing costs, not just your mortgage payments. So take into account your property taxes, utilities and insurance on top of your principal and interest payments when you’re doing the calculation.
Lenders use a similar equation to determine how much you qualify for. They want to determine how much of your income will be used to pay down your current debt. The two ratios used are gross debt servicing ( GDS) and total debt servicing ( TDS). Typically they want your GDS to stay around 32 per cent. GDS is the percentage of your gross income required to cover housing costs. These costs include mortgage payment, property tax payment, heating expenses and strata fees.
This is where credit score matters, too.
If your score is under 680, your max GDSR is 35 per cent and your max TDSR is 42 per cent;
If your score is over 680 your max GDSR is 39 per cent and your max TDSR is 44 per cent;
Higher credit scores get rewarded with an additional
four per cent GDSR and two per cent TDSR.
Basically, a low credit score could knock off four per cent of qualifying room for a mortgage. Based on the median total income of Canadian families, listed as $ 79,000 (from Statistics Canada 2014), that could amount to a difference of about $27,000 on your mortgage.
Don’t forget to consider other debts. These matter when your lender determines your mortgage amount. For example, a $400 monthly car debt means $ 100,000 less in your mortgage qualification. A $ 100 monthly credit card payment could amount to $25,000 less in a mortgage loan, based on today’s rates. In some cases it’s better to pay down your debt than to put that money toward a bigger down payment.
If you do have debt, make sure you pay off your highest interest debt ( like credit cards) first. Save for a down payment
and closing costs A great way to ensure you’re in a mortgage situation you can afford is by putting down a decent down payment. Your down payment must be at least five per cent if your purchase price is under $ 500,000, but if you’re able to put down more this could make home ownership more affordable. An added benefit: If you’re able to put down 20 per cent you won’t have to pay the default mortgage insurance such as CMHC.
An option for your down payment is the use of RRSPs. If you’re using RRSPs for your down payment you’re able to withdraw up to $25,000 to be used toward your down payment without being taxed. Another option recently introduced in B. C. is the homebuyer’s loan program, a provincially backed loan program that will match the amount that first-time buyers have saved for a down payment — up to $37,500, or five per cent of the home’s purchase price.
There are also several closing costs associated with buying a home that you’ll want to be prepared for. These include property transfer tax (which you could be fully or partially exempt from as a first-time home buyer), GST, insurance, legal fees and property appraisal. These costs vary by province, so do your research early so you can start saving. Have other savings in place Mortgage lenders want to see you’re not living paycheque to paycheque, so ensure you have some kind of savings in place. This could be in the form of a TFSA (tax-free savings account), which is a great option because you won’t have to pay any tax when you withdraw the money. If you’re on a tight budget, the best way to save is to set up an automatic withdrawal plan and a set monthly amount. That way you won’t be tempted to allocate the amount to something else, come pay day.
Make sure to also consider other goals you have in your life. Do you want to retire? Do you want to take a trip every year? Ensure you not only have an emergency savings fund but are also saving for your other financial goals. Get pre- approved f or a mortgage A mortgage pre- approval is when your lender reviews your basic financial information ( credit score, income, etc.) and determines t he maximum mortgage amount they’re able to give you. You should consider getting pre-approved before you start looking for a home, as it will give you insight into what you can afford and will start the application process so you’re prepared when you find your dream home.
In the past, home buyers worked exclusively with banks when it came time to get a mortgage, but there’s been a shift toward the use of mortgage brokers as consumers become aware of the importance of ‘shopping around’ for the expert, unbiased guidance, competitive product analysis and a demand for a better user-experience.
There’s an even newer shift toward mortgages that are digitally focused, led by fintech companies looking to disrupt the dated industry and put a focus back on empowering the consumer. For example, Mogo recently launched MogoMortage**, a digitally- led mortgage experience that pairs marketleading interest rates with an online process, from pre-approval until the mortgage is renewed or fully paid off. The experience is supported by salaried mortgage specialists who will guide you through the process to closing.
Unlike any other mortgage experience in Canada, MogoMortgage focuses on keeping members on track through an interactive dashboard that is designed to encourage and reward members for paying down their mortgage.
Building wealth through home ownership is one of the smartest investments you can make. If owning a home is one of your goals, it’s important to plan ahead.
For more information on Mogo’s new MogoMortgage experience, visit mogo. ca/ mogo-mortgage.
* Free credit score is provided by Equifax and is only available to MogoAccount holders that have passed identity verification. The Equifax credit score is based on Equifax’s proprietary model and may not be the same score used by third parties to assess your creditworthiness. The provision of this score to you is intended for your own educational use. Third parties will take into consideration other information in addition to a credit score when evaluating your creditworthiness.
**MogoMortgage is offered by Mogo Mortgage Technology Inc. o/a MogoMortgage ( Ontario: FSCO License No. 12836).