Becoming A Single Homeowner – Part 3 “Mortgage Options”

Mortgage Options

In our previous post Part 2 of this 3 part series- our potential Single Homeowner had their budget, credit, downpayment, and type of property all mapped out. But what about the mortgage itself? Understanding your mortgage options is the final and a critical step in order to increase your shot at owning your own home and not one to consider lightly.

Related: Becoming A Single Homeowner – Part 1 “The Plan”

Mortgage Options 

With over 400 different mortgage products available to the Canadian consumer – it can be overwhelming to navigate this marketplace. I will cover off some of the major differences in the mortgage products here.

  1. Fixed vs. variable rate mortgage – when considering the potential savings of a variable rate mortgage we need to consider that this is tied to the Bank of Canada’s prime rate and the fact that this can change from time to time. Outside of this – on both fixed and variable rate mortgages – it is very important to ensure that we get the deepest discount to the interest rates available for the mortgage term on closing. One way to accomplish this is to wait until 30 days before the closing date of the property and then to shop the market for any promotional offers made available which in this marketplace is commonplace.
  2. Open vs. closed mortgage – for the majority of mortgage holders – the open mortgage is not a feasible product as lenders build in a premium to the interest rate for the sake of the fact that you can pay it off at anytime without penalty. If you have an inheritance that you will be receiving in the first two years of the mortgage – you may want to do the math to see if this is worthwhile vs. the traditional mortgage penalties of an early payout with a closed mortgage.
  3. Line of credit vs. standard mortgage – some Canadians enjoy the freedom of holding their mortgage in a line of credit for the reason they may pay down the balance owing at anytime. Additionally, they may borrow back the amount of principle they have paid off without having to requalify for the new debt. The downside here is that without a serious amount of discipline – many Canadians end up in financial hot water as it becomes too tempting to use the line of credit as a piggy bank for unnecessary expenditures. One important note is part of the new Federal Mortgage rules has put additional restrictions on home equity lines of credit allowing them to only be placed up to 65% of the value of the home
  4. Pre-approval vs. pre-qualify – being in a 60 year historical low-interest rate environment, the role of the traditional pre-approval has changed. In years past, the pre-approval was the best way to ensure you qualified for your mortgage and protected you from rising interest rates. Today, the Bank of Canada is towing the line saying interest rates to stay flat for the foreseeable future – pre-qualification has become much more important. The difference here is in the way your business gets shopped around. A pre-approval gets you the best rate at the time of application with a conditional document. What is not so apparent is that most lenders build in a premium to their pre-approvals as they have to set aside these funds from their investable pool. With a pre-qualification – we complete all the necessary due diligence on your mortgage approval – but in addition there is a monitoring of the markets to ensure that we capitalize on any improvements as we move to closing.

Buying a home is an exciting proposition – but it need not be stressful. As a Single person, you will have more questions and will take extra steps to ensure you are going to make the right decision. This is a given. Taking the time to budget properly, understand your credit, gather a downpayment, and determine your mortgage and property options will be the key to increasing your shot at Homeownership.

Editors Remarks:

I just want to thank Michael for dropping in to hang out with us here at Canadian Budget Binder to share his expertise in home ownership. One thing I enjoy doing is getting the professionals around to tell us the right way to do something. Home ownership although not for everyone doesn’t have to be a dream. I wanted Michael to tell you that you too can own a home as a single person like I did when I first started out buying real estate. You can make owning a home a reality but you need to have your plan in place, set goals and work towards them. I bought my first home just turning the age of 21 and only because I really wanted to be a single homeowner and didn’t want to have to pay rent with my money.

This isn’t for everyone but it was right for me. That was my dream and now I’m on my third home which will be fully paid just 4 years after purchase although we saved for a decent  downpayment  on this house. Don’t be in a rush because home ownership may well be the biggest investment you will make in your life so invest in your personal finances, do your homework and make the decisions that are right for you. -Mr.CBB

About the Author- Michael Smele: I am a passionate educator about mortgage and finance. I also am an investor in asset backed and real estate based investments. My wife and three boys live with me on a 30 acre horse farm up in Barrie, Ontario where we enjoy all four seasons.  You can find Michael at Mortgage Truth in Canada.

All Photos purchased and owned by Michael Smele.

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Mr. CBB
I’m from the UK and now a recent permanent resident in Canada. I bought my first house at the age of 21 after University then my second at the age of 24. I’ve always been fascinated with personal finance, savings, learning to make money and watch it grow while combating debts along the way. Canadian Budget Binder is a place where I get to share my experiences with personal finance and learn about yours along the way. I hope you stick around and check me out on Twitter, Facebook and Pinterest where I am active on all social media sites. Cheers, Mr.CBB
Mr. CBB
Mr. CBB

Comments

  1. I’m not familiar with mortgage options in Canada. After reading your post leads me to believe that most mortgages in Canada have penalties associated with them if you pay them off? I’m curious on that point as in the U.S. most mortgages do not have penalties if you elect to pay them off early.

    • Well I think it depends on the provisions of the mortgage agreement (although I’m no pro). When we go to pay our mortgage off in April that will be 4 years of a 5 year term. We will have to pay a penalty for paying it in full yes. They tell you the rate when you go to break the mortgage and pay it in full. Silly really if you ask me but at what is left it looks to be around $2000… with admin fees.

  2. That’s interesting there are pre-payment penalties to paying off early, in general. I know we want to try and pay ours off early, but are also in no huge rush to do so. We went with a fixed rate ourselves. The variable was tempting, but we knew that we’d sleep much better at night knowing that nothing could happen with our rate.

  3. Hey Jose – the only mortgage in Canada that can be paid off without penalty is an open mortgage. This mortgage is usually priced a full percentage or more higher than a closed mortgage for the express reason that a lender has committed to provide the borrower with the specified amount of the mortgage for the term (usually 5 years) and is expecting to get the interest agreed upon. With an open mortgage – you can pay it off after a month without any penalty meaning the lender has committed time and resources (translated dollars) towards determining if you are a good risk and have less of a guarantee of being repaid. They price this in to the loan. Open mortgages are not very popular in Canada as most people like the lower interest rates that closed mortgages afford and don’t understand the bank’s fine print when it comes to the potential penalties to break it early.

  4. Didn’t know about the pre-payment penalty. Probably why my mortgage states in big, bold letters “no pre-payment penalty!” Thanks for the write-up, and great point all around for this series. Now, i didn’t follow all the recommendations here when buying my place, but definitely will fo rthe next place. But hoping to have 50% down on the next one :)

    • I can prepay up to 20% per year and I can pay an extra payment each month if I want with our mortgage. When we come to pay it in full though come April we will get nailed for breaking our term which should be in and around $2k… ah well… nothing compared to the amount of money we will save in interest considering it was a 25 year mortgage… ha! Cheers Jake!

  5. Allison Rehel says:

    PC is working fine for me.

  6. good read! hoping to be a single homeowner one day!

  7. AverageJoe says:

    Great series. I really like how the difference between preapproval and prequalify is spelled out. That’s an important difference.

  8. Educating yourself is certainly a very important step in the home buying process. It can get overwhelming, but knowing all the options is the best way to proceed.

  9. Good stuff! I enjoy this series. We love ourselves some real estate, so you roped me in at “homeowner” :)

  10. It took me some time, but I finally got down the whole mortgage game thing. I got killed on my first home, but armed with the proper knowledge, I have made some sound investments since then. Thanks for the reminders CBB!

    • You know Tony, you seem like you are miles ahead of where you were in your debt living past. Reading your posts and comments tells me that you are on a mission and I know you WILL succeed. One thing I can do is feel passion in words just like people can feel hate and other emotions in the written word with you, I feel desire, a desire to succeed! keep up the good work my friend.

  11. Mr. CBB et al – thank you for the opportunity to share and you can always find me at http://www.mortgagetruth.ca for more help with your specific questions. Cheers!

  12. I’d be very interested to know where Michael thinks the Canadian housing market is headed. We’re seeing a lot of pretty jaw-dropping stories about receding sales volumes and, when transactions dissipate, prices tend to follow. e.g. http://business.financialpost.com/2013/02/26/toronto-home-sales/

    • Hey TF, I do not believe in a ‘Canadian’ housing market. We have many smaller regional markets. This is important as you may buy a home in Calgary today and receive an annual market appreciation of 5% where as certain areas of Toronto will be flat or even show a real negative percentage annually. Sales volume is directly affected by people not being able to qualify for the mortgage and this is where the new federal mortgage rules are playing a much larger role than the individual regional market. Where do I see the market heading? This is the billion dollar question and if one could answer this definitively – in the next few years they would make Warren Buffet look like a poor man.

  13. InnovativeRealEstate says:

    This is a great post series. A couple of other points I just wanted to add to the discussion. One is the consideration of an assumable mortgage, @Michael might be able to chime in on that, but it could potentially be a selling feature of a property depending on where property values go in your part of the country over the coming years. The second point, is that often lenders will allow you to increase your monthly payment as well. So for instance bumping your payment by say 25%, the max allowed with PC, you’re paying lump sums each and every month. It’s a nice “forced” savings plan for those of us counting on equity in our homes.

    • We can do that with our mortgage bump it up from $243.03 to $303. I believe which ends up being one extra $243.03 per month. It all adds up… Thanks for your input! Mr.CBB

    • Thanks for the comment here IRE. Agreed on having a fully featured mortgage (assumable, portable, prepayment privileges) however this is a whole post in and of itself. What is an important point to your comment though is that mortgage planning is so very important. This means that regardless of your best case/worst case financial scenario – your family is able to function without the fear of having an unmanageable mortgage. I write more about this here: http://mortgagetruth.ca/mortgage-planning-before-a-crisis-hits/ Good read!

  14. It is very true. The emergency fund is so important, but even more so when you are a homeowner.

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