Mortgage mistakes can be some of the costliest errors you could possibly make! For first-time buyers especially, navigating the mortgage landscape can be tricky but you can avoid making mistakes with the right advice from a mortgage agent. Mortgage brokers specialize in looking at the big picture, financially speaking. Together we can find you the best deal for your unique budget. This week on the blog, I have created a list of the most common mistakes people make when choosing a mortgage.
1. Skipping the Down Payment
In Canada, as of February 2016, conventional and high-ratio down payment rules have changed. With a conventional mortgage your down payment is 20% of the list price when the property is listed for $500,000 or less. A high-ratio mortgage is for properties listed at $500,001 – $999,999, where your down payment is 5% of the first $500,000 and 10% on the remainder. Even though it is possible to get a no-down payment mortgage, it’s not the best idea in the long run. Keep in mind that the down payment you make ultimately lowers your monthly mortgage payments. Saving money for a downpayment means that you’re serious about working harder to pay off your mortgage as fast as possible, because you’ve already invested some of your equity in the property. By skipping the down payment, the money you “save” up front will be lost to higher monthly charges and a longer amortization period. For example, a 35-40 year amortization period instead of a 20 year, could mean that you have to push back your retirement. In any situation it is best to work towards paying off your mortgage as soon as possible and making that initial down payment takes the pressure off of your long term finances.
2. Forgetting About Your Closing Costs & Property Taxes
There are always financial factors to consider beyond the list price of your property. Forgetting about things like closing costs can put you behind in your mortgage payments right off the bat. Closing costs are tallied at the finalization of a real estate deal and can include legal fees, title transfer and land transfer taxes. Property taxes must also be taken into consideration but are often overlooked because first-time home buyers who are former renters have their property taxes factored into their monthly rent. Property taxes are usually determined by the municipality you live in so they vary across provinces, but they are always based on the value of your property. These are expenses that you cannot avoid as a homeowner and you don’t want to go house poor trying to make your payments. “House-poor” is a term that means your monthly housing expenses including mortgage payment and utilities, exceed your budget so you divert your funds to make the payments. By underestimating your costs in this situation, you can afford to keep your house but you can’t afford much else. Beyond the fixed costs of living expenses, it is always valuable to plan for life’s emergencies, whether it’s money for unexpected car repairs or immediate travel. Emergency funds are important and they should be left intact throughout the mortgage process as it is unwise to be left without a safety net after investing so much in your future.
3. Not Knowing Your All of Your Mortgage options
This is where mortgage brokers really shine in comparison to bankers and loan officers. Keeping you informed about all your possible loan and lending options is a core component of my job. Shopping around for the best rate is important. In some ways, finding the best mortgage is like buying a new smartphone, you should look around in more than one place to find the best deal. Presenting you with options and encouraging you to shop around is something a bank won’t do because it could cost the bank a sale. You can read more about this in my recent blog about brokers vs. bankers.
Knowing that you have the option of choosing between a mortgage with a fixed rate or a variable rate is a helpful starting point. With fixed rate mortgages, as the name implies, your monthly rate stays constant for the mortgage term. Fixed rate mortgages are easier to budget and plan for because you can completely rule out changes in the market. Variable rate mortgages are subject to change and are riskier, but they have the advantage of lower interest rates. You also have the option to set your monthly payment rate anyways and continue to pay the lower interest, which means you can conceivably get the best of both options.
There are also multiple options for mortgaging a home that you are having built. Completion mortgages are fast and flexible options in which your financing is arranged when construction of your home is completed. Completion mortgages are not official until 30 days before you take possession of your built house, which means you have the option to change your mortgage so you get the most competitive rate. Progress Construction Draw mortgages break up the funding for construction into 4 phases that are determined by the progress made on your house. You can read more about new build construction mortgages here. No matter your situation, the best way to know all of your options is to talk to a mortgage broker.
At the end of the day, the best mortgage for you is based on your income, your lifestyle and how comfortable you are taking on risk. The best way to avoid making mistakes when choosing your mortgage is to talk with a mortgage broker. I would also encourage you to take a look at your finances and prepare a detailed long term and short term budget plan. Consider your savings: if you need a car and a house, can you afford payments on both? Are you thinking about starting a family? Consider your job satisfaction: are you thinking about a career change or is there potential for downsizing in your company’s future?
It’s impossible to try and predict each and every one of life’s challenges, but the more you have considered them the better prepared you will be if they eventually come to pass. Talking to a mortgage broker means you’ll get helpful advice and you can easily avoid making theses mistakes.