in Mortgage Financing by David Iverson

The Millennial population consists of those who were born between 1980 and 1999, totaling approximately 9 million people.  The oldest of this demographic are now at a common age when first time home buyers consider the purchase of their first home.   This will very likely be the biggest and most important purchase in their life time so it is easy to understand that the process can be humbling and intimidating.   That being said, the more time a person spends educating themselves with the financial side of a real estate transaction the greater the opportunity there is to make wise decisions that have the potential to save thousands of dollars.

1) Make a plan for saving your down payment and build a foundation of good credit

It might take a while to save the minimum 5% for a down payment but there is no good reason to rush into such a large investment.  In 2007 I watched people climbing over top of each other to purchase homes when the 5 year fixed rate ranged between 5.79% and 6.25%.  A good chunk of those buyers believed housing prices would continue to rise until they could no longer afford to enter the market.   And then September of 2008 occurred, buyers did a reality check, homes sales dropped significantly and prices tumbled.

One way to save a down payment is to contribute regularly to an RRSP.   This is a good strategy for a number of reasons: Salaried employees typically see a one third return from Revenue Canada for every dollar invested.  ($3K towards the RRSP should return a $1K from CRA)  Eventually when you do use the funds towards your down payment it becomes an interest free loan.   Yes it has to be repaid or you will be taxed on it but you get a year grace period, up to 15 years to repay it, its interest free, and it’s an asset when you are done.

Go to Equifax Canada’s website, pay the $24 and do a credit check complete with Fico score.  Good credit is imperative to getting the best rates and could easily mean the difference between qualifying and being declined.   People generally believe they have good credit, but I can tell you from experience that most have no idea what makes it work, and paying cash is not building credit.   Credit is all about having credit and what you do with it.

2) Put together an accurate budget of your combined incomes and expense. This will help you choose an affordable property according to your lifestyle.

The newer you are to employment the more scrutiny your application will receive.  The Lender is going to be looking for a stable work environment with a minimum of two years experience in the same field, and better yet, with the same employer.  If you have been working at one occupation for some time, you don’t want to change careers prior to applying for a mortgage.   For those who are self employed there is a greater degree of difficulty and scrutiny from the Lenders.   This is quite involved so you are best to consult me so you don’t waste your time.  dave@davidiverson.ca

3) Don’t go it alone: I have a team of experts to help you through every aspect of this process

Choosing the right experts will save you time and money.   As your Mortgage Professional you need to speak to me first and my services are free.  What I can do for you:

  • Determine what size of mortgage you qualify for
  • Determine what kind of mortgage best suits your needs
  • Check, analyze and explain your credit bureau to you
  • Advise you of the documentation the Lender will want to see
  • Obtain a rate hold when the time is right
  • Provide support services as needed; Realtor, Notary/Lawyer, Building Inspectors etc

4) Expenses; down payment, property transfer tax, property tax, legal fees, property insurance, etc all need to be adequately understood so you aren’t taken off-guard.  

 The greater your down payment is the better off you are.   The Minimum allowed for an owner occupied property is 5% and with that will come a sizeable CMHC mortgage insurance premium which is added to your mortgage.   If you can achieve 20% for your down payment, then with most Lenders under most circumstance you won’t need CMHC insurance.  The Lender will want to know the source of the down payment and will request a 90 day history detailing the where it originated.   Also required:

  • 1 ½% of purchase price for closing costs – along with 90 day history explaining origin
  • Title insurance – arranged by your Notary / Lawyer
  • Property insurance company contact
  • Property tax up to date – arranged by your Notary / Lawyer

5) Spend a couple of months living within the projected housing expense

Most first time home buyers underestimate what it actually costs to keep up with the expense of owning a home whether it’s a house or a condo.  The important message is “how much can you comfortably afford keeping in mind your employment income; now and 3 years from now, the stability of your employer, your family situation, kids, and lifestyle.

The calculations used to debt service a mortgage application are reasonably straight forward and divided into two criteria:  1- GDS) all costs directly related to home payments, (principal, interest, property tax, strata fees, heat) can’t be more than 32 % of your gross (before tax) *qualifying family income.  2- TDS) the previously mentioned home costs PLUS all other monthly debt payments, credit cards, lines of credit, loans etc can’t be more than 40% of your gross family income.   *Ask me, David Iverson, what types of income qualify and what won’t.

I’ve pointed out expense Lenders will take into account when debt servicing a mortgage, however there are other costs you will need to pay that greatly affect your bottom line and ability to afford a home.   (home insurance, water, electricity, phones, cable tv, internet, general maintenance)   You will encounter life style changes and possibly kids in your future.  Have you budgeted for maternity leave if having children is a goal sometime in the future?   Life and disability insurance become a key component that you need to include.

If you are currently paying $800 a month in rent and the mortgage you qualify for has a monthly payment of $1,500 once you add in property tax, utilities and other expense you could easily end up around $1,800 a month.  Can you afford that?   How comfortable are you now and how much of an adjustment would it be to maintain that much ongoing expense.    While you are still renting at $800 per month, try tossing another $800 per month into a special savings account and see if you are able to maintain a healthy lifestyle that doesn’t affect your ability to pay all your bills on time.

If that wasn’t enough to keep your calculator up at night, remember that we are currently experiencing historic record low interest rates.   One day that will change and as the rates go up so does your mortgage payment and the interest on all your debt obligations.   Typically a hike in interest rates signifies inflation and a growing economy which also can mean that most everything will go up in price.   David Iverson can show you what a monthly mortgage payment will look like if interest rates rise by any amount and you do need to be prepared for that because rates will eventually go up.

Last minute tips to make your mortgage experience a better one

  • Pay off any credit cards and loans
  • Don’t make any large purchases on credit or otherwise prior to moving into your home.
  • Carefully go over the budget you have prepared and see if you can make any improvements
  • Purchase a more modestly priced home with a lower mortgage payment.  Think of it this way; if you can put more money towards your mortgage and pay it down quicker, your equity becomes the down payment for your next home.   You can keep moving up this way.
  • Lastly try saving more money towards your down payment.   If possible you want to increase your down payment by 5% increments because CMHC discounts its insurance premium for every 5% you add.

The foundation of this article contributed by Dr. Sherry Cooper, Chief Economist of Dominion Lending Centres, expanded and rewritten by David Iverson Mortgage Broker at White House Mortgages.

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