14 Mar

Renewal of a Mortgage & Refinancing a Mortgage….There are Differences

Mortgage Tips

Posted by: Chanele Langevin

As a Mortgage Agent one thing I have noticed when dealing with clients is that many people confuse the words renewal and refinance as they pertain to mortgages.

I would like to break down the basics of what refinancing a mortgage means and what the steps are to go through the process of refinancing a mortgage.  I will then explain what it means to renew a mortgage and what is entailed with that process.

Mortgage Refinancing:

There are many different reasons why someone would want to refinance their mortgage.  This can become an option when there is equity built up in a home.  Refinancing allows borrowers to take out a loan that can be as much as 80% of the appraised value of their home.  It is typically a much better option than taking out a random loan as the interest rate will be much lower.

There are options to how the refinancing would be set up.  It could be a primary mortgage, secondary mortgage and/or a Home Equity Line of Credit (HELOC).

A Second Mortgage

  • With a second mortgage you can borrow up to 80% of the appraised value of your home minus the balance still owing on your mortgage.
  • The loan is then secured against the equity in your home and you will then have monthly payments for your first mortgage as well as payments for your second mortgage.
  • Interest rates can be slightly higher on a second mortgage 
  • There are also administrative costs for appraisal fees, title search and legal fees

A Home Equity Line of Credit (HELOC)

  • This works similarly to an unsecured line of credit but the HELOC is secured against your home.
  • It is there to use as needed and can be paid back and borrowed against as needed.
  • Interest rates with a HELOC are variable and fluctuate with prime rate.
  • There may also be administrative costs for appraisal fees, title search and legal fees

Frequent Reasons Why Homeowners May Want to Refinance

  • Planning a home renovation
  • The need for funds to pay for education
  • Start up of a new business and needing capital to proceed
  • Using the funds to consolidate all debts into one at a much lower interest rate than most debts are at
  • To lower monthly mortgage payments if there is a lower interest rate that makes sense

Mortgage Renewal:

Mortgage renewal comes up at the end of a mortgage term. Lenders generally will send out a mortgage renewal contract to their clients asking them to sign up for another term with them.  There are many people that do not realize that once that term is up, they are not obligated to continue with that lender.  It may be the right choice depending on what the current lender offers or it may be in the clients’ best interest to enlist the expertise of a mortgage broker, to research all available options.  It is best to connect with a mortgage agent at least 60 days before the renewal date but lesser time can still allow for a successful transaction to be completed. 

There is also the option of completely paying out the full mortgage amount at the renewal date.  With the mortgage at the end of its term there would be no payout penalty for payment in full. 

If the best option moving forward is to move to a new lender it will be treated as a new mortgage and the client goes through the application process specific to the chosen lender.

30 Jan

Different Insurances Involved When Securing Financing

Mortgage Tips

Posted by: Chanele Langevin

As a Mortgage Agent, I noticed that many clients get confused with the different insurances products available to them when securing a mortgage.

Mortgage Loan Insurance

The first insurance is the Mortgage Loan Insurance or Default Insurance.  This insurance takes place when there is a home purchase with down payment being less than 20% of the purchase price.  Mortgage loan insurance helps protect lenders against mortgage default and enables borrowers to purchase homes with a minimum down payment starting at 5% for most competitive interest rates.

The minimum down payment requirement for mortgage loan insurance depends on the purchase price of the home.  For a purchase price of $500,000 or less, the minimum down payment is 5%.  When the purchase price is more than $500,000, the minimum down payment is 5% for the first $500,000 and 10% for the remaining portion.  Mortgage loan insurance is available only for properties with a purchase price or as-improved/renovated value below $1,000,000.

The premium is added to your mortgage loan amount and included in your monthly payments.  The amount of the mortgage loan insurance premiums range from 0.6% to 4.5% and are based on Loan to Value percentages.  The Loan to Value amount is determined by the percentage of the purchase price you choose to deposit in the form of a downpayment.  The more downpayment there is, the less your insurance premium will be.

The default insurance works in tiers. 5% downpayment attracts a 4% premium, a 10% downpayment attracts a 3.1% premium and a 15% downpayment attracts a 2.8% premium of the loan amount after downpayment .

There are 3 companies that lenders deal with regarding the mortgage loan insurance.  They are:

  • Canada Mortgage and Housing Corporation (CMHC) which is a government department
  • Canada Guaranty which is a Canadian-owned private mortgage insurer
  • Sagen (formerly Genworth), also a private mortgage insurer

Life & Disability Insurance

The next insurance that is involved with home financing is life and disability insurance.  Being a mortgage broker with Dominion Lending Centres HT Mortgage Group in Grande Prairie, Alberta, we have a specific life and disability insurance we offer through Manulife.  This insurance is called Mortgage Protection Plan (MPP).  What many do not realize is that this is a “debt” insurance which means Manulife would pay the amount left owing on the mortgage in the event of death.  In the event of disability Manulife would pay your monthly payments on the mortgage as well as property tax monthly payments.  MPP is a unique debt insurance in that it is portable.  If the borrower decides to sell their house and purchase a different house, with a different mortgage, the insurance is ported to the new mortgage; even if it is a different lender than the previous mortgage.

Fire Insurance

Another insurance that gets brought up once mortgage financing has been approved is referred to as either home or fire insurance.  In Canada, anyone purchasing a home MUST be able to prove they have a fire insurance policy in place before they will be allowed to take possession of the property.  This insurance is purchased through a home insurance company.  In Alberta we have insurance brokers who are similar to mortgage brokers in that they do the “shopping around” with all of the different insurance companies to find the best policy for the borrowers situation.

***Reference CMHC website:  https://www.cmhc-schl.gc.ca/

30 Dec

Co-Signing vs Being a Guarantor on a Mortgage

Mortgage Tips

Posted by: Chanele Langevin

Have you ever been asked to co-sign or become a Guarantor for someone on a loan or mortgage?  This is generally something that is considered very personal to people and usually involves close family members or parents and children.  Having sufficient income is not all that is necessary to obtain a mortgage.  The borrower must also have a certain level of credit to be approved.  When a client has sufficient income but too much debt, as a mortgage agent, I will recommend they have someone co-sign or be a guarantor on their mortgage to be approved.  There are differences between being a co-signer and being a guarantor.  It is important to know these differences and make sure you are comfortable with your responsibilities when you agree to help someone secure a mortgage.

Co-signer:

When purchasing a property in Canada and requiring a co-signer to secure the mortgage, the co-signer must reside in Canada; there may also be even stricter stipulations depending on the lender.  Some lenders will require the co-signer to reside in the same province as the initial borrower and or of the property being purchased as well.  Although a relative can commonly co-sign on a mortgage, it is not a requirement that the co-signer and borrower be related.  Also, the co-signer does need to qualify for the mortgage in order for the loan to be approved.  This means that they must have sufficient income and excellent credit history as if they were applying for their own financing.  It is important to keep in mind that any other mortgages the co-signer has will be part of the debt load.  A co-signer will be legally registered as an owner of the property. They sign legal documents regarding the property and are liable for mortgage payments in the event the borrower defaults on loan payments.  For a co-signer to be removed from legal ownership of a property, the borrower must reapply for the mortgage (covenant release) and be successful at qualifying without the co-signer.

Guarantor:

A Guarantor is someone that guarantees to pay any mortgage payments that the borrower does not follow through on paying.  Therefore, the guarantor must have a source of income and also have excellent credit to be approved.  Guarantors are NOT listed as a titleholder on a property.  If mortgage payments are not made by the borrower, the guarantor is responsible for making the payments while not having any rights to the actual property.  Many Guarantors are parents helping children secure a mortgage because they either do not have enough credit history or have small delinquencies on their credit history.

Co-signers and Guarantors must also keep in mind that all loans they have signed onto will be taken into account when applying for any other type of credit.  100% of the payments will be included in debt ratios by all lenders when considering any type of financing.

With the current stipulations in place for home buyers, it can make home ownership seem unattainable, especially if there has been any kind of credit issues or delinquencies in the past.  Having someone become a co-signer or guarantor on a mortgage can make all the difference and may be the best scenario for many people that are capable of making the payments required.

As a co-signer or guarantor it is important to research and understand the responsibilities but also important that you have full trust in the person you are helping out.  For the majority of situations, it is very rewarding to help someone accomplish their home ownership dream while also strengthening your own credit history.

 

1 Dec

The Facts of Mortgage Life and Disability Insurance

Mortgage Tips

Posted by: Chanele Langevin

One of the responsibilities I have as a mortgage agent in Grande Prairie, Alberta is to ensure that my clients are aware of and understand the importance of having life and disability insurance on their mortgage. There are so many different types of insurances that we are offered throughout our lives that it can be very confusing and frustrating. I am very proud to let people know that Dominion Lending Centres has teamed up with Manulife to offer a very straight forward life and disability insurance called Mortgage Protection Plan® (MPP). There are many aspects to MPP that enable it to stand apart from other insurances offered through other companies.

Whether you are a first time home buyer or an experienced home buyer, a mortgage is most likely the largest debt you will have to your name. No one likes to think about the possibilities of themselves or their significant others dying or encountering a disability that prevents them from earning income. The reality is that the mortgage payments still need to be paid. Many people are under the impression that they have life and disability insurance through their work if they have health benefits. That is a different type of insurance and is just a lump sum that is paid in the event of death. Mortgage and disability insurance are called a debt insurance and covers off the actual cost of the debt.

When I secure a mortgage for a client, I have the ability to offer MPP which is a portable insurance and goes with the client from house to house and lender to lender. If you move and your mortgage amount increases, you have the option to top up on the insured amount. Adversely, when a client goes to a financial institution for their mortgage, they will be offered life and disability insurance. The insurance offered is generally specific to the mortgage on the home you are purchasing. This is a way for financial institutions to try to retain the client. If the client moves or chooses to leave for a new financial institution, they will lose the insurance they had been paying for.

Benefits of Manulife Mortgage Protection Plan®

  • Coverage begins as soon as your application is submitted
  • You choose your payment option: monthly, semi-monthly or bi-weekly
  • Coverage moves with you: house to house, lender to lender
  • Your premium is locked in at the age you were when you applied, there are no increases due to your age moving forward
  • Every eligible applicant is approved. For those that do not qualify due to pre-existing health conditions there is the option to apply for accidental death and accidental disability at reduced premium amounts
  • There is a 60 day money back guarantee. If you change your mind, you will be refunded
  • All mortgages are protected including private mortgages and Home Equity Lines of Credit
  • In the event of a death, Manulife pays the monthly mortgage payment and property tax payment until all paperwork is handled for the claim

Facts about the MPP Disability Insurance

  • Disability is not just physical, mental illness is also covered
  • Premiums remain the same throughout the lifetime of the policy
  • Disability benefits are not reported as income and are not subject to income taxes
  • Disability insurance does not have to be combined with life insurance (many insurance companies will not allow disability insurance to be purchased without also having life insurance purchased)
  • Coverage is portable from house to house and lender to lender
  • Provide up to $10,000/month for 24 months of coverage. If client returns to work before the 24 months of coverage have been used, Manulife will pay an extra month payment to help the client build up some hours at their job
  • There is no limit to how many claims can be made over the lifetime of the policy. If 24 months has been used up and then the client has another situation with disability down the road they will be eligible for another 24 months of coverage
  • All occupations are covered
  • There is no financial review or verification as it is based on the client’s mortgage and not on their income. This makes it especially beneficial for clients who are self-employed.

Two Additional Benefits Offered by Mortgage Protection Plan®

  • Terminal Illness: If you are diagnosed with a terminal illness after 6 months have passed from the insurance start date, Manulife takes over your mortgage payments (terminal illness means progressive in nature, cannot be cured and cannot be treated and therefore it is expected to result in death within 12 months of diagnosis)
  • Waiver of Premium due to Job Loss: If you involuntarily lose your job after 6 months from insurance start date, your life and disability insurance premiums will be waived for 3 months

With our world ever changing it is very important that anyone investing in a home know what realities come along with having a mortgage. Many people do not understand insurance as a whole and by dealing with a mortgage broker like myself it can give great comfort knowing that your best interests in the entire process are always my first priority.

24 Oct

Questions To Ask Your Mortgage Broker

Mortgage Tips

Posted by: Chanele Langevin

Choosing a Mortgage Broker/Mortgage Agent is a critical first step when you are planning to purchase and finance a home. A mortgage broker is an intermediary between the borrower and the pool of lenders. Using a mortgage agent eliminates the need for you to shop around trying to find the best rate and mortgage product to suit your short-term and long-term needs and goals. Why not leave it up to a professional that deals with lenders daily and is educated in every aspects of the mortgage industry? Most people looking to purchase a home do not know all the details that go into applying for a mortgage & securing financing; therefore it is important to be confident and trust your mortgage broker. Many questions will come to mind throughout the process.  Some of the most common questions are as follows:

What is the best price range for me when looking for a home?

Your mortgage broker will be able to do a pre-approval for you.  A true pre-approval requires the borrower to provide specific income documents. Additionally, a credit bureau will be pulled to evaluate what the debt situation is and what the credit score is sitting at.  These elements are better to be evaluated upfront because lenders are specific as to a minimum credit score and debt ratios in relation to income.  The credit bureau will also show debt repayment and utilization. Once a mortgage agent assesses the overall file, a maximum purchase price amount will be released.

How much money should I use for my down payment?

There are a few things to consider when deciding on your down payment amount:

  • The minimum amount you must have for a down payment in Canada is 5% of the purchase price of the property.  The more money you use for a down payment the less your mortgage loan amount will be.  Any amount between 5% and 19.9% is called a High Ratio Mortgage and requires the lender to get approval from a default insurance provider for the mortgage.  For more information on the different types of insurances associated with mortgages stay tuned for an additional blog post I will be doing, specifically on insurances.
  • What can you afford? You do not want to leave yourself “cash poor” as you always need to keep cash on hand for unexpected emergencies. 
  • You will need cash for the closing costs at the end of your transaction.  These would be things such as lawyer fees, possible appraisal fee, home inspection, home insurance, utility hook-up fees, etc.  Be sure to ask your mortgage agent what the approximate costs would be for your particular scenario.  As a mortgage broker in Grande Prairie, I prefer to get a few different quotes from lawyers for my clients so they can choose the best option if they do not already have a specific lawyer in mind.
  • There are options for coming up with the funds for a down payment.  You may have enough cash in a savings account, a family member may give it as a gift (that is not expected to be paid back), proceeds from the sale of a property, RRSP’s…always confirm with your mortgage broker or agent for what would be acceptable for a down payment.

Should I choose a fixed interest rate or a variable interest rate?

Going with a variable interest rate means your rate can fluctuate throughout the term of your mortgage.  The variable rate is based on the Bank of Canada’s prime rate, meaning the payment amount can vary throughout your term.  With a fixed interest rate your rate is just that, fixed.  It means the payment amount will always be the same for the length of your term.  There are pros and cons to both and it does come down to personal situations as to what would be best.  As a mortgage agent, I go through several options with my clients by finding out what their plans are and assess their situations to determine the type of rate that will best suit their needs.

What is a prepayment penalty?

Each lender has their own stipulations when someone wants to pay off their mortgage in full or put a lump sum of money towards their mortgage principal.  This is referred to as prepayment privileges and it will be stipulated in your mortgage commitment.  If prepayments are allowed with your lender they will state a percentage of the loan amount that may be put towards the loan each year that would be considered penalty free.  Once you go over that amount with a lump sum or pay your mortgage off completely, you will be charged a prepayment penalty.  Each lender is a little bit different and it is important for you to understand how your particular amount would be calculated as it can end up costing you thousands of dollars.  It is very beneficial to make lump sum payments on your loan but it is critical to know how much money those payments need to be and when they should be paid.  Make sure you have your mortgage agent break down the different options and possible penalty amounts for you.

Should I use a Realtor for a home purchase?

The answer to this question is simple…absolutely YES, always enlist the services of a trusted realtor when purchasing a home.  A home purchase is a huge investment and can be a very emotional transaction.  Realtors are professionals in home sales the same way that a mortgage broker is a professional with home financing.  Home buyers do not pay a commission to real estate agents, their commission is paid by the seller, so there is really no reason not to use a realtor and have them handle the negotiations, paperwork and legalities of your home purchase.

Acquiring the services of a realtor, mortgage broker and lawyer are very important steps in the process of purchasing a home.  They work solely for you, the client, and will provide you with great advice and guidance throughout the process, eliminating much of the stress and definitely saving you countless hours of time.

25 Sep

Which Mortgage Payment Frequency Is Best For You?

Mortgage Tips

Posted by: Chanele Langevin

Many people do not realize that there are options when it comes to paying off a mortgage faster than the actual Amortization period of the loan while also saving thousands of dollars in interest.

Most mortgages have an Amortization period of 25 years.  This means that the time it will take you to pay off the Mortgage in full would be 25 years.

As a Mortgage Agent, I am strictly looking out for the client’s best interests.  It is important to me to make sure that the homebuyer is aware of all options to save money within their mortgage.  There are a few ways that you, the homebuyer, can shorten the 25-year period and potentially save thousands of dollars that would have been interest payments on your mortgage loan.

The following payment frequencies are typically offered by most financial institutions:

  • MONTHLY – One payment per month for 12 months per year
  • SEMI-MONTHLY  – Two payments per month for a total of 24 payments per year
  • BI-WEEKLY – One payment being paid every 2 weeks.  The monthly payment is multiplied by 12 and then divided by 26
  • WEEKLY – One payment per week, total of 52 payments per year. The monthly payment is multiplied by 12 and divided by 52

These are the payment frequencies that save you the most interest over the life of your mortgage and as a result, shorten the Amortization Period:

  • ACCELERATED BI-WEEKLY – One payment of ½ the monthly payment every 2 weeks.  This is the equivalent of making one extra monthly payment per year
  • ACCELERATED WEEKLY – One payment of ¼ of the monthly payment every week.  This is the equivalent of making one extra monthly payment per year

Scenario

*The following is a scenario to show the differences in dollars:

A homebuyer has a $260,000 mortgage that has an amortization period of 25 years with an interest rate of 4%

Payment Frequency

# of payments per year

Payment Amount

Total Payments Per Year

Interest Saved on Mortgage

Monthly

12

$1,400

$16,800

$0

Semi-monthly

24

$700 ($1,400/2)

$16,800

$197

Bi-Weekly

26

$646 ($1,400×12/26)

$16,800

$212

Accelerated Bi-Weekly

26

$700 ($1,400/2)

$18,200

$21,273

Weekly

52

$323 ($1,400×12/52)

$16,800

$305

Accelerated Weekly

52

$350 ($1,400/4)

$18,200

$21,509

Choosing an accelerated payment frequency is the equivalent of making one extra payment each year and can result in paying off a mortgage 4 years sooner, while also saving $21,000 in interest over the entire amortization period.

For many people a mortgage is the largest financial investment they will make, as well as the longest period of time that they will be making payments.  I’ve had great success as a mortgage broker in Grande Prairie mainly because my priority is assisting my clients to make the best decisions with their mortgage. Find the mortgage payoff calculator under the “Refinance” tab of my website to gain an idea of what numbers and payment frequencies might work for you.  It is always best to consult a mortgage agent with questions as they will give an unbiased opinion and provide you with the best scenario for your needs.

*Reference

24 Jun

Fixed vs Variable Mortgages | What’s The Difference?

Mortgage Tips

Posted by: Chanele Langevin

What is a Fixed Interest Rate Mortgage? 

A fixed interest rate mortgage means that the interest rate will remain the same throughout the term of your mortgage.  This means you will know exactly what your payments will be, what amount of that payment goes toward your principal, and what amount goes toward the interest portion.

If you are someone that does not like to take any risk or is particular about payments being consistent, the fixed mortgage is a more comfortable option.  You will always know what your payment will be and there are no surprises for the length of your term.

Now more than ever, consumers are faced with a lot of changes in their lives.  If you have a situation that requires you to “break your term” such as moving to a different location, or if you take advantage of a lower interest rate by refinancing, your current lender will charge you a “payout penalty”.  That penalty calculation is another important factor when choosing a fixed vs variable mortgage. A fixed rate may imply a penalty of 3 months interest or an “Interest Differential Penalty”, depending on which is the greater of the two.

What is a Variable Interest Rate Mortgage?

A variable interest rate mortgage may also be referred to as an Adjustable interest rate mortgage. 

With a variable interest rate, the rate will fluctuate according to the current Prime interest rate.  It can go higher, and it can go lower than the initial interest rate you signed off on with your mortgage contract.  The discount on Prime is what will remain consistent.

Historically, variable rates are the most cost-effective for the consumers. However, with higher rewards come higher uncertainty. Another aspect of variable rate is that you can “lock-in” your rate if the prime rate does begin to increase. The lender would then lock your rate to a fixed rate structure for the remaining months of your original term.

A variable rate will always accrue a 3 month interest penalty which is usually the most favourable penalty calculation if the mortgage term had to be broken due to the sale of home or refinance.   

As an experienced Mortgage Broker with Dominion Lending Centres, I am equipped with the knowledge and expertise to assess each clients’ situation and advise as to which option would be the best fit for your needs. Contact me with any questions or concerns, regarding all your mortgage lending needs.

28 Nov

Millennials and Home Buying- **You need expert advice. The first person you should talk to is an accredited mortgage professional. ** 

Mortgage Tips

Posted by: Chanele Langevin

TOP 5 THINGS MILLENNIALS SHOULD KNOW WHEN BUYING REAL ESTATE

Top 5 Things Millennials Should Know When Buying Real Estate

There are 9 million Millennials in Canada, representing more than 25 percent of the population. Born between 1980 and 1999, the eldest are in the early stages of their careers, forming households and buying their first homes. Buying a home is a daunting process for anyone, but especially so for the first-time home buyer. This is the largest and most important financial decision you will ever make and it should be done with the appropriate investment in time and energy. Making the effort to be financially literate will save you thousands of dollars and assure you make the right decisions for your longer-term financial security.

  1. Don’t rush into the housing market–do your homework: learn the basics of savings, credit and budgeting.

Lifelong savings is a crucial ingredient to financial prosperity. You must spend less than you earn, ideally saving at least 10 percent of your gross income. Put your savings on automatic pilot, having at least 10 percent of every paycheck automatically deducted. Money you don’t see you won’t spend. Contributing to an RRSP, at least enough to gain any matching funds your employer will provide, is essential. The Tax Free Savings Account (TFSA) is an ideal vehicle for saving for a down payment and now you can contribute as much as $10,000 a year.

You also need to establish a good credit record. Lenders want to see a record of your ability to pay your bills. As early as possible, get a credit card and put your name on cable, phone or other utility bills. Pay your bills and your rent in full and on time. Do not run up credit card lines of credit. The interest rates are exorbitant and the only one who benefits is your bank. Keep your credit card balances well below their credit limit.

Do a free credit check with Equifax every six months to learn your credit score and to see if there are any problems. Equifax tracks all of your credit history, which includes school loans, car loans, credit cards and computer loans.  Equifax grades you based on your responsible usage and payments.

Budgeting is also essential and it is easier than ever with online apps. You need to know how you spend your money to discover where there is waste and opportunity for savings. The CMHC Household Budget Calculator helps you take a realistic look at your current monthly expenses.

  1. Make a realistic projectory of your future household income and lifestyle and understand its implications for choosing the right property for you.

Top 5 Things Millennials Should Know When Buying Real Estate Millennials are likely relatively new to the working world. Lenders want to see stability in employment and you generally need to show at least two years of steady income before you can be considered for a mortgage.  This also applies if you have been working for a few years in one career and then decide to change careers to something completely different. Lenders want to see continuous employment in the same field. If you are self-employed, it is more challenging, and you need professional advice on taking the proper steps to qualify for a mortgage.

Assess the stability of your job and the likely trajectory of your income. Millennials will not follow in the footsteps of their parents, working for one employer for forty years. In today’s world, no one has guaranteed job security. Take a realistic view of your future. Will your household income be rising? Will there be one income or two? Are there children in your future? Will you remain in the same city? The answers to these questions help to determine how much space you need, the appropriate type of residence, its location and the best mortgage for you.

Financial planning is key and it is dependent on your goals and expectations.

  1. This is not a Do-It-Yourself project: build a team of trusted professionals to guide you along.

“You need expert advice. The first person you should talk to is an accredited mortgage professional. There is no out-of-pocket cost for their services. Indeed, they will save you money.”

These people are trained financial planners and understand the ever-changing mortgage market. Take some time with them to understand the process before you jump in and find your head spinning with all the decisions you will ultimately have to make. They will give you a realistic idea of your borrowing potential. Before you fall in love with a house or condo, make sure you understand where you stand on the mortgage front. Mortgages are complex and one size does not fit all. You need an expert who will shop for the right mortgage for you. There are more than 200 mortgage lenders in Canada and they will compete for your business.

It is a very good idea to get a pre-approved mortgage amount before you start shopping. This is a more detailed process than just a rate hold (where a particular mortgage rate is guaranteed for a specified period of time). For a pre-approval, the lender will review all of your documentation except for the actual property.

There is far more to the correct mortgage decision than the interest rate you will pay. While getting the lowest rate is usually the first thing on every buyer’s mind, it shouldn’t be the most important. Six out of ten buyers break a five-year term mortgage by the third year, paying enormous penalties. These penalties vary between lenders. The fine print of your mortgage is key and that’s where an expert can save you money. How the penalty for breaking a mortgage is calculated is key and many monoline lenders have significantly more consumer-friendly calculations than the major banks.[2] A mortgage broker will help you find a mortgage with good prepayment privileges.

The next step is to engage a real estate agent. The seller pays the fee and a qualified realtor with good references will understand the housing market in your location. Make sure the property has lasting value. Once you find the right home, you will need a real estate lawyer, a home inspector, an insurance agent and possibly an appraiser. Make any offer contingent on a home inspection and remediation of significant deficiencies.

  1. Down payments, closing costs, moving expenses and basic upgrades need to be understood to avoid nasty surprises.

Top 5 Things Millennials Should Know When Buying Real Estate The size of your down payment is key and, obviously, the bigger the better. You need a minimum of 5 percent of the purchase price and anything less than 20 percent will require you to pay a hefty CMHC mortgage loan insurance premium, which is frequently added to the mortgage principal and amortized over the life of the mortgage as part of the regular monthly payment.

Your lender will want to know the source of your down payment. Many Millennials will depend on the largesse of their parents to top up their down payment.

The down payment, however, is only part of the upfront cost. You can expect to pay from 1.5-to-4 percent of the purchase price of your home in closing costs. These costs include legal fees, appraisals, property transfer tax, HST (where applicable) on new properties, home and title insurance, mortgage life insurance and prepaid property tax and utility adjustments. These amount to thousands of dollars.

Don’t forget moving costs and essential upgrades to the property such as draperies or blinds in the bedroom.

  1. Test drive your monthly housing payments to learn how much you can truly afford.

Affordability is not about how much credit you can qualify for, but how much you can reasonably tolerate given your current and future income, stability, lifestyle and budget. Most Millennials underestimate what it costs to run a home, be it a condo or single-family residence.

The formal qualification guidelines used by lenders are two-fold: 1) your housing costs must be no more than 32 percent of your gross (pre-tax) household income; and, 2) your housing costs plus all other debt servicing must be no more than 40 percent of your gross income.

Lenders define housing costs as mortgage payments, property taxes, condo fees (if any) and heating costs.[3] But homes cost more than that. In your planning, you should also other utilities (such as cable, water and air conditioning), ongoing maintenance, home insurance and unexpected repairs. Taking all of these costs into consideration, the 32 percent and 40 percent guidelines might well put an unacceptable crimp in your lifestyle, keeping in mind that future children also add meaningfully to household expenses and two incomes can unexpectedly turn into one.

The best way to know what you can afford is to try it out. Say, for example, you qualify for a mortgage payment of $1400 a month and adding property taxes and condo fees might take your monthly housing expense to $1650.  A far cry from the $500 you pay now to split a place with 3 roommates. Start making the full payment before you buy to your savings account and see how it feels. Do you have enough money left over to maintain a tolerable lifestyle without going further into debt?

Keep in mind that this is not a normal interest rate environment. Don’t over-extend because there is a good chance interest rates will be higher when your term is up. Do the math (or better yet have your broker do it for you) on what a doubling of interest rates five years from now would do to your monthly payment.  A doubling of rates may be unlikely, but it makes sense to know the implication.

Do Your Calculations Look Discouraging?

If so, here are some things you can do to improve your situation:

  • Pay off some loans before you buy real estate.Top 5 Things Millennials Should Know When Buying Real Estate
  • Save for a larger down payment.
  • Take another look at your current household budget to see where you can spend less. The money you save can go towards a larger down payment.
  • Lower your home price — remember that your first home is not necessarily your dream home.

Footnotes:

[1] I would like to acknowledge and thank the many mortgage professionals of Dominion Lending Centres who made contributions to this report.

[2] People break mortgages because of job change, decision to upsize, change neighbourhoods, change in family status or refinancing. The last thing you want to discover is that discharging a $400,000 mortgage 3.5 years into a 5-year term is going to cost you $15,000.

[3] Lenders now also assess your qualification compliance if interest rates were to rise meaningfully, a likely scenario in this low interest rate environment.

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

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