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.
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.
- 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.
- 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.
- 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
- 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.
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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