It’s fun to think about all the great design elements you’re hoping to have when you buy your first home. Thinking about mortgages might need a little more persuasion, but it is essential to your new home dreams. By learning more about what to expect from a mortgage and preparing yourself to qualify for one, you’ll be in a good position when it comes time to apply for your first mortgage.
The Basics of Your Mortgage
First, you need to understand all of the components of a mortgage. The “mortgage” itself refers to the total amount of money borrowed.
The “term” is the amount of time you have before your mortgage is up for renewal, while the “amortization” is how long you have in total to pay back your loan. Common mortgage terms in Canada are from 3-5 years. A typical amortization period might be 20-30 years.
The “mortgage rate” is the interest rate you’ll pay to borrow the money.
There are “fixed rate” mortgages and “variable rate” mortgages available. A fixed rate loan has an interest rate that stays constant throughout the term of the loan, while a variable rate loan has an interest that can go up or down with the current rates in the market.
When looking at your mortgage payment schedule it’s important to understand the difference between interest and principal. Your regular mortgage payment isn’t divided equally between the interest and the principal (the amount of money you actually borrowed). In the early years, a higher percentage of the payment goes toward interest, although this will shift with time and more of your payment will be going towards the principal.
Qualifying for a Mortgage
Lenders look at a variety of factors when it comes to qualifying for a mortgage:
- Your ability to repay the loan (income)
- Credit-worthiness (credit score)
- Your current debts
- The home you want to purchase
The ideal candidate has little debt, has consistently made on-time payments with other creditors, and has an income that’s high enough to support the monthly payments. These types of people are likely to get the best rates. If your credit has some blemishes, you could still qualify for a mortgage, but you may have to pay a premium on your rate.
Lenders are also looking at the value of the home because if you default on the loan, they’ll want to sell your home to recoup their losses. This means that they won’t approve you for more than the house’s appraisal value. When you’re buying a brand new home, it can be difficult to get the actual appraisal value when you need a mortgage. Thus, it’s often better to work with mortgage specialists who are familiar with the building company and the process of funding a new build.
There are two people determining whether a mortgage is affordable – you and the lender. Lenders have specific formulas based on income and debt. Often, there’s very little wiggle room when they use this formula, even if you know you can afford an extra $50 a month.
On the other hand, lenders sometimes come up with an “affordable amount” that’s higher than you reasonably want to spend. They’re not taking things like your entertainment budget or your vacation fund into account when doing their calculations. Practice restraint. Seek out homes in your price range rather than basing your search on the maximum amount the lender will allow.
You’ll need to put at least 5 percent down to get an CMHC-insured mortgage. On a $300,000 home, this means that you’ll need to have $15,000 in cash, and your mortgage would be for $285,000. Of course, it’s better to put down 20% or more if you can so you don't have to pay for mortgage insurance. Doing so means you'll have more equity in the home and a lower monthly payment.
Most people save diligently for a few years to get the money they need for a down payment. However, you can also borrow up to $25,000 from your RRSP. A combination of saving and borrowing could be your best option.
Builder’s Mortgage Specialist or Regular Mortgage Broker?
You’ll get your first mortgage through a bank or a mortgage broker. It’s smart to shop around for the best deal by applying with a few different companies and comparing offers. However, if you’re buying a new home, check out the builder’s preferred mortgage specialists.
Since the process of funding a new build home is slightly different than the process of funding a loan for a resale home, it’s nice to have a lender who’s familiar with the process. Not only can they help you set realistic expectations, they’ll also be able to lock your rate in for 12 months, the amount of time that it typically takes for the house to be built.
When you’ve researched your mortgage options and go into the home buying process with a good understanding of your responsibilities, you’ll be ready to purchase your first home.