Understanding the Complexity
Buying a home or property is a complex and long-term financial decision. Location, type of home, market value, buying price, cost of renovations and additional (often hidden) legal expenses should all be taken into account. For these reasons, many people choose never to buy a home, preferring to rent or lease instead. See: to Rent or to Own Property
What are the advantages to buying a home?
Purchasing a home is an investment that, if done wisely, will enable you to build asset value as the mortgage is paid down and (hopefully) the property increases in value. Owning your home provides security that you will always have a place to live and gives you the flexibility to renovate or change your home to meet your needs.
What costs should I consider?
Initial Costs:
- Down payment
- Legal fees
- Local taxes
- Transfer taxes
- Mortgage / house insurance
- Initial costs of renovations and repairs
Monthly Expenses:
- Property taxes (usually paid semi-annually)
- Mortgage payment (principal and interest)
- Utility costs (hydro, water, gas etc.)
- Condominium, or "strata" fees
- Savings for unforeseen or planned maintenance
Additional costs that you may need to consider:
- Costly structural repairs (the older the house, the more unforeseen issues that could arise, especially if renovating)
- Equipment required to maintain the home (gardening equipment, power tools, ladders, etc.).
- Increases in mortgage rates at time of renewal
How do I choose the right mortgage plan?
In most cases, homes and properties are financed with the help of a mortgage that is paid back monthly or semi-monthly. The mortgage amount of a home is generally calculated by deducting the down payment from the purchase price of the home, but may also include an allowance for renovations or upgrades. Prospective buyers should start by understanding the percentage of down payment required. Find out about government grants—they are often special first-time home buyer grants that can lessen the percentage of down payment required.
Consulting a mortgage broker, though they will have fees, can be a very good investment. They can ensure that you take advantage of all incentives available at the time and are fully aware of all additional costs of the transaction.
The larger the down payment, the less the mortgage will be, and thereby the interest payments. In some countries, paying less than the recommended down payment will require you to have mortgage default insurance, which can amount to several thousand dollars, depending on the situation, to be charged to the buyer at the beginning of the process. However, since this means added security for the banks, insured mortgages often come at lower interest rates.
Mortgages are amortized over a period of years, typically 20-25. In some countries, mortgage interest rates do not change over the amortization period (making budgeting simpler). Market values and interest rates can fluctuate and it is always possible to rewrite a contract for a lower interest rate. However, if your original terms are not up for renewal, a fee may be charged for rewriting the contract.
In some countries or states, mortgages require that the contract be renewed periodically. A term can be as short as 6 months and as long as 5 or 10 years. It can make budgeting more difficult, as can deciding what term conditions to choose—especially when rates are fluctuating wildly—but this way the terms of the mortgage can stay in-tune with current market values.
The Your Budget Plan Mortgage Planning Calculator includes a section that allows for various costs, such as legal fees and post-sale costs, taxes and (if applicable) monthly condominium strata fees and gives you options to add other costs particular to your investment.
Once you work on your Budget, you should get a Financial Mortgage Stress Test. ++link++ This test will make sure that you can still pay the mortgage if by chance the rates increase significantly the next time you need to renew your mortgage. The way to do a stress test is to rerun your mortgage using a much higher interest rate. While interest rates are usually in the 7-8% category they do get above 10% occasionally. Test your ability to keep paying your mortgage at several percentage points above the going rate first then test it at a much higher rate. These tests will give you a better perspective of what might happen if rates go up. You can do the test yourself or you can get the bank to do it. They should do it as part of their due diligence but you should do it as part of your due diligance.
+++link to a sample of the property planner+++
What type of mortgage is right for me?
There are essentially two types of mortgages: fixed rate mortgages and variable rate mortgages.
Fixed Rate Mortgages:
Fixed Mortgages have an interest rate for a set term. If you choose 3-year term, the payment will remain the same for 3 years. Locking-in to your mortgage rate has the advantage of predictability. No matter how the national / regional interest rates develop over the period of the set term, your interest rate will stay the same.
Lending institutions will have a list of fixed terms. The longer the term of your mortgage, the higher your interest rate will be. This is because the longer the mortgage provider guarantees a certain rate, the more they will want to ensure that they are able to account for movements in the financial market. If your country or state requires mortgage renewals periodically than a new rate may apply for the period of the renewed mortgage making it harder to budget. A payment stress test can help you prepare for this.
Variable rate mortgages:
Variable mortgages have fluctuating interest rates. They can change every month based on the current “prime” rate. It usually doesn't change radically but can move up or down. Since the mortgagee (you) carries all risk of fluctuating interest rates, the provider can offer lower base interest rates. The financial institution is responsible for informing the mortgagee of changes as they occur, but this can create some anxiety in times of gyrating interest rates. However, if the rates start to climb, it is possible to re-negotiate terms to a fixed mortgage, though not without associated costs or fees.
To benefit from lower rates (which can potentially save you money over the long term), it is advisable to have a savings account to cover for unpredictable increases. While the variable rate can save you a lot of money on a long-term mortgage, suggest to get a fixed rate the closer you are getting to paying off the mortgage. This increases predictability and security. Your mortgage broker can advise you what to do depending on the market at time of purchase.
Fixed rate mortgages are often advisable for first time buyers who are not familiar with the gyrations of mortgage interest rates, while a variable rate can be a money-saver over the long term. The average fixed rate mortgage rate is about 2% above the cost of a variable rate mortgage.
www.ratehub.ca/variable-or-fixed-mortgage
www.whichmortgage.ca/article/mortgage-basics-fixed-vs-variable-118752
https://www.whichmortgage.ca/enquiry/get-help-choosing-the-right-mortgage#page2
How can I pay off my mortgage faster?
Make extra mortgage payments:
Most mortgage agreements offer an 'extra payment' option. These are not utilized often enough! Making extra payments, when you can afford to, helps you reduce your mortgage, because these payments go directly against the principal, not the interest.
Schedule your payments:
Every payment you make hastens the end of the mortgage and saves you money. How much, depends on how often you pay and when. Paying down the principal with extra payments brings down the amount of interest paid on the principal. Check with your provider to find out how your payment schedule can pay off the most principal in the least time, i.e.: bi-monthly payments, vs. monthly. This can reduce the total amortization period and therefore the total cost.
In Canada, Mortgages are rewritten periodically.
If you have a very low rate you must be aware that the interest rates may go up next time the mortgage is rewritten.
Many people think that getting a “great low rate” means they can buy a more expensive property. But, keep in mind that if the rates go up, the mortgage payments will also increase—a situation than can create a lot of pressure on your budget and payment default.
Consider the concept of a 7-8% (the historical long-term average) mortgage rate. You can put the savings (the difference between the low rate and the high rate) away for a future time in case interest rates go up. The extra money can be put away in an investment portfolio left for future necessity. If interest rates don’t go up you can use it later on to bring down the cost of the mortgage. Budgeting for the future in this way can save you a lot of financial stress later on.