Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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Every recurring event has a first time. Buying a home can be one of many or just one time experience for all the home buyers. Home buying is an expensive process. So, naturally, buyers do their best to eliminate mistakes. Here we have tried to list few mortgage tips for the first time home buyers.

Cost and affordability:

Generally banks allow 30 ~ 40% of your income to be used to service housing/shelter cost. The cost normally includes mortgage, interest, municipal tax, heating and condo fees.

Using the normal rule you may qualify for an expensive home. Needless to say, that you should not overlook other expenses of life. The formula used to qualify a borrower (Gross Debt Service and Total Debt Service Ratio) does not take care of expenses like income tax, health or child care and much other real life expenditure a person has.

If in case you are looking for a conservative approach then you should calculate your debt service abilities by using your after tax income. Only use the number you are comfortable with.

Try to stay away from bidding wars. Without proper experience you risk overbidding on a property.

Do not calculate future value of your home:

Admittedly we all have this little wish of our home being appreciated 100% every year. It is just a dream. Your home should not be looked at as an investment. The reason it sucks as an investment because all your eggs are in only one basket.

Calculating rosy future return generally misleads us to take higher risks. Even though the property has a potential of higher gains in future –keep that away from your math for now.

Rather, you should pay more attention to the other obvious factors – like location, neighbourhood, crime rate, insurance rates, facilities, transports, schools etc.

Interestingly – rate of insurance tells you many things about a location.

Down payment:

 Minimum down payment is 5% if you are getting the mortgage from an A lender. It goes without saying – bigger the down payment – better it is.

Down payment can be from various sources. A gifted down payment will require a letter from the benefactor.

Withdrawal (maximum of $25,000) from RRSP is also possible under certain conditions. It is possible under Home Buyers Plan.

Try to distance yourself from borrowed down payment. They can ruin your financial life.

Proof of income:

If you are self employed or you are a contractor then it is necessary that you have the ability to establish the numbers. An income reasonibility check is now required for all the self employed and stated income borrowers.

If you are a salaried employee than make sure that you have a job letter and last three paystubs. Keeping them handy will save you some time.

Credit Score:

Credit score is a measure of how trustworthy a borrower is in terms of making the loan payment. It is important to have a good credit score to get a good mortgage. Pay attention to regular bill payments and not to default any credit card payment.

Mortgage Options:

Talk to an experienced mortgage professional. There are many options to choose from. Fixed, variable, short term, long terms and more.

Depending upon your future plans and present conditions – it is important that you select the right mortgage.

If your mortgage amount is within your comfort limit then pay attention to the pre-payment options. Having a higher pre-payment flexibility is useful for especially for the mortgage with low amount.

If your mortgage amount is really low then think of taking a line of credit or an open mortgage. A home Equity Line of Credit is a good mortgage alternative with higher payment flexibility.

Buy insurance:

If you have a CMHC insured mortgage then the lender is insured if something bad happens to the borrower.

No one will take care of the loved ones but yourself. It is a good idea to have a plain life insurance (enough to cover for the mortgage and more) or a mortgage life insurance.

 Apart from those mentioned above there are many more points to review and consider. Most importantly – take your time and evaluate all the options.