The busy spring buying season is nearly upon us and if you’re a first time homebuyer preparing for your first house hunt, be sure to spend some time addressing these points before hitting the pavement.
1) Know your credit score
A credit report is a record of your credit history and current financial situation. A good credit rating and a positive report can improve your ability to get loans so it’s a wise idea to find out for yourself what shape yours is in BEFORE applying for a loan. Visit Equifax.ca or Transunion.ca to get access to your report and then talk to an experienced mortgage broker to find out how it measures up against mortgage lenders requirements.
2) Be sure to budget for the costs of home ownership
Being a homeowner brings new expenses, including property taxes, higher insurance costs, regular upkeep and an emergency fund for repairs. You many even need to factor in the cost of any renovations your new home may need if you’re looking at the fixer-upper market. Investigate these expenses before house hunting to be sure your budget can handle the these extras on top of your mortgage payment.
3) Research down payment choices
Lenders typically require CMHC mortgage default insurance if you make a down payment of less than 20 per cent, and premiums for that insurance can be as high as 3.25 per cent of the value of the loan.
Under the Home Buyers’ Plan, first-time buyers can use up to $25,000 of their RRSP savings ($50,000 for a couple) for a down payment, tax free. This may be a wise move as a larger down payment may allow you to bypass default insurance or at the very least, it will save thousands of dollars in interest over the life of your mortgage.
It’s also possible to use gifted or borrowed funds as a downpayment or have your downpayment refunded to you with a Cashback mortgage. With so many mortgage options available, it’s a good idea to talk to your mortgage broker in advance of house hunting – you may have more options than you realize!
4) Don’t focus only on interest rates
First-time home buyers often rush in to the market when interest rates are low. While rates are important, other things have a greater bearing on the overall cost of home ownership, including the cost of the house, type of mortgage, length of term, amortization period and payment options.
5) Give some thought to payment schedule
Paying off your mortgage sooner saves you interest costs, while a longer amortization period reduces your regular payment and frees up cash flow. You can save thousands of dollars in interest by choosing a shorter amortization period, paying fortnightly instead of monthly, or increasing the amount of payments by even a small amount.
You can use online mortgage calculators to run the numbers and be sure to talk to your mortgage professional about the “pre-payment privileges” that will come with your mortgage and how they work. Using these privileges properly can allow you to meet your goals to pay off your mortgage sooner while ensuring that your required monthly payment stays manageable, should life get a little bumpy.
6) Don’t forget about closing costs
When calculating closing costs, assume you will need an additional 1.5 per cent of the purchase price to cover such things as the home inspection, legal fees, land transfer tax, property tax, property insurance, utility hook-ups and moving costs. Depending on the cost of your home, this amount may exceed more than these things will actually cost you but lenders will require you to have this amount set aside, regardless, as part of your mortgage qualification. These funds cannot be borrowed or gifted, so they must consist of your own savings, even if your actual downpayment is being gifted to you.
Obtaining a pre-approval from a licensed mortgage broker before you begin your search will give you an opportunity to address these important points before the excitement and stress that comes with making an offer on that perfect home.