Posts Tagged ‘Down payment’

Becoming A Single Homeowner – Part 3 “Mortgage Options”

Posted: February 25, 2013 in Real Estate and Mortgage
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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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Becoming a Single Homeowner – Part 2 “Property/Down Payment”

Posted: February 20, 2013 in Real Estate and Mortgage
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Nice House Canada

In the last post, part 1 Becoming a Single Homeowner-The Plan I talked about how Single people are looking to become homeowners and the preliminary step in making a plan and the aspects to consider with your credit. Once these are in place – it is time to look at how to come up with your down payment and the type of property you are eligible to purchase.

Down Payment Considerations

This is an area where my Single clients are usually deficient. The demands of a Single person’s budget can be unrelenting and there are always important areas that your dollars are required. This is another reason why planning and budgeting are going to be the cornerstone of your Home Purchase plan. There are essentially four ways to achieve the down payment and they are to get it gifted, save it, borrow it, or qualify for a forgiveable loan.

  • Get a gift – well we would all like to have a well endowed benefactor in our corner however the reality is that unless our parents or grandparents are looking to help us make the jump to becoming Homeowners – this one is a pipe dream.
  • Save it – the minimum down payment as stipulated by the government for Home Purchases is 5% of the final negotiated price of the property. On a 250K home, this will end up being 12.5K and can be saved either as cash or your personal RSPs. Unless you have this already saved up in RSPs – this can be a long road in saving after tax on a single income. 
  • Borrow it – although frowned upon by the new conservative media on prudent mortgage borrowing – if your purchase is made in an economically growing area of Canada then borrowing your down payment can still make sense. This mortgage product is only be offered by Provincially regulated financial institutions and the lender’s requirements are quite strict so ensure your credit and employment status are strong before inquiring.
  • Forgiveable loan – the federal and various provincial governments have also instituted programs in select municipalities where down payment loans of up to 10% of the purchase price is made available towards the purchase of a principle residence of lower to middle-income families. This loan is forgiveable after 20 years and if you were to sell prior to this time – the gain or loss is split proportionally with the government making this a fair program. Check with your local municipality to see if they have a program like this available.

Property Options

An area where my Single clientele have been found to be savvy is in weighing their property options. A surprising number have explained to me that having an investment portion of the property – ie. in-law suite or a basement apartment for income was a high priority. Although there are again additional concerns with security – if done right this can be a profitable idea.

  • Single family home – this is the obvious choice although it may be a detached home all the way to a 50 storey condo on the Vancouver skyline.
  • Investment property – if you are looking to occupy a portion of the home then you are still able to treat a two family dwelling as a single family home for all intents and purposes. The only other consideration is – are you going to need the rental income to qualify for the mortgage and if so how does the lender view this income. Some will consider a percentage of the market rent and others will not at all.
  • In Law Suite – another option of increasing popularity is the legal in law suite where you can either bring your family with you to live or derive additional income as well. As a single person – ensure the units are completely separate for security and privacy reasons without violating any local fire codes.
  • Fixer Upper home – the final consideration is to find a property that is under the current market value for the area and purchase it with the intention of doing some improvements. The main distinction with the majority of my Single purchasers is that you want to look for a property with cosmetic improvements vs. major damage (ie. structural, major home systems) as lenders are hesitant to provide a mortgage on a property that is not in a somewhat marketable condition

In our next and final part – I will be explaining your mortgage options and how to determine what the best mortgage is for you as a potential Single homeowner.

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. Find me at www.mortgagetruth.ca

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