This is a great article for first time buyers, written for IFP by Mike Baldinelli, president of the London Home Builders’ Association:
The Bank of Canada’s effort to jump-start the economy by cutting interest rates to historic lows has made the cost of a mortgage the most affordable in decades. With interest rates available for under 4% from many financial institutions, home ownership doesn’t have to be a dream.
To help those hoping to make the move from their parents’ home or out of rental accommodation, consider this as a quick mortgage seminar – or Mortgage 101.
It’s an unusual sounding word, but simply put a mortgage is a loan to buy a home, secured by the home you are buying.
There are many kinds of mortgages and choosing the right one for your circumstances can save you thousands, even tens of thousands, of dollars over the time you are paying off the loan. It might seem bewildering at first, but with a little thought and some comparison shopping, you will quickly find a mortgage that suits your needs.
I encourage you to consult a mortgage specialist as soon as you decide you are serious about buying a home. Without expert guidance, you may wrongly assume you don’t qualify for a mortgage when you do or vice versa. It’s also comforting to know how much you have to spend when you’re looking at homes. No sense falling in love with a home and then being disappointed that you can’t afford it.
First, let’s understand the meaning of the key terms.
Down Payment: An amount you must contribute, which is usually 15% of the purchase price. ( Editor’s note: A downpayment can be as low as 5% of the purchase price). The higher the down payment, the less you have to borrow, the less interest you will pay over the years and the less cost you will incur in fees.
Mortgage: A loan that covers the amount of the purchase price that remains after you make your down payment.
Principal: The amount borrowed.
Interest: Your cost of borrowing the money. There are a variety of ways the interest can be set. Fixed rate means the rate is set at the current interest rate for the term of the mortgage. Variable rate means your interest rate follows any fluctuations in the interest rate charged by the bank. While it can be a winning strategy long term to have a variable rate, in the last few years of incredibly low interest rates, choosing a fixed rate mortgage would insulate you against rate increases expected in in 2011 or 2012.
Amortization period: The length of time the money is loaned to you, normally 15 to 30 years. Recently the federal government reduced the maximum amortization period from 35 to 30 years.
Terms: The time during which the interest rate and other conditions are covered, normally six months to five years. The mortgage is renewed at the end of each term, meaning conditions of the contract, including the interest rate. may change.
Cashback: An option that raises the monthly payment, but provides cash back to you to purchase new appliances, drapes, furniture or moving costs. Due to recent reforms, cashback can also be used toward the down payment, thus eliminating what can be a hurdle for first-time buyers.
A few money-saving tips from financial experts:
A shorter amortization period will mean higher monthly payments but will substantially reduce the amount of interest you ultimately pay; If you have the flexibility, increase your regular monthly payment or make lump sum payments whenever your financial circumstances and your mortgage terms permit; Change your payment schedule from monthly to bi-weekly or even weekly if you can as this too will save you significant interest over the life of the mortgage.
Recently the federal government has expressed concern that although today’s historically low interest rates are helping Canadians to enter the housing market or to enhance their level of housing, there still needs to be caution about the amount of debt buyers assume. Making sure you can afford what you want is a wise exercise. Stress-test your financial budget using a mortgage payment based on a higher interest rate. Total housing costs (including mortgage payments, property taxes and energy costs) should not consume more than one-third of household income.
There are other terms such as open mortgages, closed mortgages, equity and so on, that you may run across in your search for a mortgage, but now you know the basics. Don’t hesitate to ask your mortgage coach or lender to define any term that you do not understand.
For your convenience!
First Foundation actually specializes in first time buyers and we can offer you plenty of educational tools both online and in our office – we try our best to make you feel comfortable and at ease so you can ask us questions, get the information you need and make confident, informed choices about your mortgage – even the first time around.
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