It was just over a year ago that I purchased my first home and with it came my first mortgage. As a personal finance expert, I was quite familiar with mortgages, so there were no surprises for me. However, many first-time homebuyers may not be familiar with the process of getting a mortgage which is why I wanted to share some advice.
You would think that looking into mortgages is one of the first steps for first-time home buyers, but with rising real estate prices in Canada, some people have decided to prioritize other things during their search. The key thing to understand is that mortgages aren’t that hard to understand and if you follow these tips, you’ll be just fine.
Use a mortgage broker
This is honestly the only real tip you need to know about mortgages. A mortgage broker deals with multiple lenders which means they negotiate rates on your behalf. Although a mortgage broker may have access to 50+ lenders, quite often they work with just a handful of them because they know how the lenders work and which one would offer the best rate.
The big banks have their own mortgage brokers on staff who say they can get you the best rate, but that usually means that they may just beat their own posted rate. If you work with a mortgage broker that’s not associated with a single lender, then you’ll get access to those lower rates. Of course, if you go back to your bank after with your quote, they’ll usually match it.
To prevent you from using the services of a broker and then going to your bank with the rate they got you, they’ll usually make you sign a contract for their services. This is perfectly normal, they did do all the work after all. If you prefer to get your mortgage from a major lender, just let your broker know and they’ll negotiate with them for you.
Although I speak highly of mortgage brokers, there are a few who are not honest. Be sure to interview them to see if they’re a good fit and if they ever suggest questionable tactics to help you purchase a home, drop them immediately.
Understand the different types of mortgages
Your first step when thinking about buying is to get a pre-approved a mortgage. Yes, that means you’ll most likely start working with a mortgage broker before you find a realtor. A pre-approved mortgage is a “promise” from a lender that they will lend you a certain amount of dollars. With that number in mind, you can start your house hunt.
Now assuming you’ve bought your home, you’re going to need to decide on the type of mortgage you’re going to get. Generally speaking, you should always pick a conventional mortgage over a collateral mortgage. A collateral mortgage may sound good since the lender will register an amount higher than what you’re borrowing so you can access it later, but it may end up costing you more in the long run. Just stick to a conventional mortgage.
You’ll also have to decide if you want a fixed or variable mortgage. Fixed mortgages have a set rate for a set term e.g. 2.49% for 5 years. That means you’ll be paying the same rate for 5 years. On the other hand, variable rates change based on the posted rates (your payments often stay the same, but how much goes to your principal may change). For assuming this risk, you get a lower rate than the current fixed rate. But if rates go up, you might pay more later. Traditionally, homeowners who got variable rate mortgages paid less 80% of the time compared to fixed rate mortgages, but there’s no guarantee of that especially in this low rate environment.
Don’t borrow the maximum amount
When you get your mortgage pre-approval, you might be shocked at the number lenders will extend you. Some people take this literally and start looking for a home in that price range. However, by doing so, you may cripple yourself financially.
Lenders use a formula to calculate how much they’ll lend you. They essentially look at your savings, debts, and income to come up with their number. What they don’t factor in are things such as if you plan on having kids in the future or how you plan on saving for your retirement. If you take the maximum amount from your lender, how exactly do you plan on affording anything else in the future?
It’s in your best interests to figure out exactly how much you can reasonably afford and then set your own max number when buying a home. How do you know what that number is? Well, that’s entirely up to you, but I do admit that with the price of real estate in Canada these days, it can be really hard to figure that out.
The above is very basic first mortgage advice. If you want to learn more about mortgages, read my post on mortgage basics now. Understand what you’re getting into when you start your home search and never rush things.