Financial facts buyers should know
Get expert guidance, save well, and shop for best mortgage rates
For first-time homebuyers, the road to home ownership can be a twisted and daunting one.
Knowing the state of your finances, how to save money for the down payment, how to get a mortgage, and how to best pay it off are the four main areas you need to consider before taking the leap.
Ste p One : Meet with a financial adviser
Before you consider buying a home, you need to know where you stand financially. This is where an industry professional — an independent financial adviser, a mortgage expert from a bank, or a mortgage broker — comes in. They will help you understand the process and figure out what you can afford.
In other words, get educated about your finances and mortgage options.
Jessy Bilodeau, mobile mortgage specialist with TD Canada Trust, says the last thing you want to do is get in over your head.
“You want to make sure your finances are balanced and manageable. You have to know what your financial situation is to find out if you have the money for a down payment, and whether you even qualify for a mortgage. Sitting down with a financial expert will help you figure that out.”
Here is what an expert can help you with: ❚ Assess your income and debts: They’ll crunch the numbers to determine what you can afford and what you qualify for. Knowing how much you can afford will help narrow down the price range of your home. ❚ Develop a savings plan for the down payment. ❚ Develop a personal budget: You may qualify for the purchase price of $400,000, but keep in mind the hidden costs of home ownership. “This is often overlooked,” Bilodeau says. “Remember, you not only have mortgage payments, but also condo fees if buying a condo, utility bills, home insurance, and ongoing maintenance costs, as well as costs related to buying the home such as legal fees, home inspection and land transfer costs.”
Ste p Two: Do wn payment
The minimum for a down payment is five per cent. Bilodeau recommends putting down more if you can, to reduce the monthly payments. Meeting with a financial expert will help determine how much you should put down to be safe. They will also offer suggestions on how to save for the down payment: ❚ Get an RRSP loan. Under the federal government’s Home Buyers’ Plan, first-time buyers may qualify to withdraw funds from their RRSP to use toward the down payment. You can withdraw up to $25,000 tax free, and you must repay the RRSP over a 15-year period. ❚ Set up a regular automatic savings plan. ❚ Invest carefully to grow your home savings fund. Options can include high-interest savings accounts, GICs, Canada Savings Bonds, or short-term money market funds. ❚ Save any monetary gifts you receive, your tax refund, or work bonuses to put toward the down payment. ❚ Work out an arrangement with parents. They may be willing to help either by gifting money or letting you live rent-free (or nearly rent-free) with them while you save.
Ste p Three : Mortgage
Once you’ve got the down payment secured, the next step is applying for a mortgage. You can get a mortgage one of two ways: through a financial institution or through a mortgage broker. ❚ Mortgage from a bank: If you decide to go through a bank, be prepared to do all the legwork to find the mortgage that best fits your financial situation. You’ll want to shop around to find the best rates, terms and payment options. ❚ Mortgage broker: A mortgage broker does all the work for you and doesn’t cost you a dime.
Collin Bruce of Collin Bruce Mortgage Team says his firm finds the best mortgage for homebuyers.
“The advantage of using a mortgage broker is that we offer unbiased advice, and we get the best rate possible for your situation,” he says. ❚ Pre-approved mortgage: Both Bruce and Bilodeau recommend getting a preapproved mortgage. The advantage is that you will know how much you can afford, so you’ll only be looking at houses within that price range. Being pre-approved also means your mortgage rate is locked in against increases for 120 days.
Ste p Fo ur: Paying the Mortgage
Amortization is the life of your mortgage, typically 25 years. Bilodeau says if you can, pay off the mortgage sooner than later because the longer you have your mortgage, the more interest you pay.
Pay it off more quickly by taking advantage of various payment options: ❚ Make annual lump-sum payments on the principal; ❚ Increase monthly payments; ❚ Make bi-weekly or weekly payments. Paying an extra $50 bi-weekly may be more manageable for some; ❚ Choose a shorter amortization period to save on interest costs.
If you are thinking about buying a home, the federal government’s Financial Consumer Agency is an excellent place to start learning about the process and mortgages. Information can be found online at fcac-acfc.gc.ca.