Mortgages and What Potential Homeowners Need to Know About Them. | MyConsultant

Mortgages and What Potential Homeowners Need to Know About Them.

Mortgages and What Potential Homeowners Need to Know About Them.

As Canadians, we dream of owning our own homes.

Homeownership is an increasingly expensive goal, as the average home in Canada costs more than you’d like; however, it’s within the reach of most of us. In fact, 66.5% of Canadians own their home already.

If you are considering buying property in Canada and don’t have hundreds of thousands of dollars in expendable income, holding a mortgage may look like an attractive option to achieving your goal.

What a mortgage is and how to calculate its actual cost

Many of you may already know that a mortgage is a large loan used to purchase a property. Taking on mortgage debt allows you to move into your new home immediately—before you’ve saved hundreds of thousands of dollars required to own it outright. You might feel good about no longer owing rent to a property owner and feel even better about renovating the boot room to finally have those larger storage shelves you needed for the kids.

Some experts do recommend saving money in an account every month until you reach your goal. That’s especially true in places where rent is inexpensive, or you live with other family members. However, if you rent from a landlord, a mortgage allows you to invest the money you would typically spend on rent towards the cost of your new home.

When you do take out a mortgage, the Bank or lender uses the value of your home as collateral, meaning that your lender will own the property if you do not pay your mortgage.

Life gets messy.Mortgage insurance is available to help you achieve the mortgage period successfully. This special type of insurance will cover your payments when you are temporarily unable.

The term and amortization period of a mortgage

The amortization period is the amount of time your loan is open. As a result, you will pay additional interest on your loan for the entire period. Since monthly interest payments are extra money spent in addition to your original loan, the actual mortgage cost can add hundreds of thousands of dollars more than the amount you paid the real estate agent for your home.

For example, if the average selling price of a house is $640,479 with a 10% down payment, you will pay $336,002 in interest across a 20-year mortgage for a total amount of $961,491.

Try this mortgage rate calculator with amortization and mortgage insurance included to discover what your payments will be across the life of your mortgage.

Down payments

In most cases, you will need to set aside a minimum of 5% of the cost of a home to pay upfront. On a $500,000 home, that’s $25,000. The percentage required increases with larger mortgages—10% over 500,000, and 20% on mortgages more than 1 million.

First Time Home Buyer’s incentive and Home Buyers Plans

Making that first down payment can be challenging. Since access to secure, adequate housing is considered a fundamental human right, the Canadian Government steps in to offer incentives to raise the platform for first-time home buyers without down payment savings and allows home buyers to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP).

First-time Home Buyer’s Incentive encourages families to purchase their own homes. With the home buyer’s incentive, the Government of Canada pays 5 or 10% of the cost of your first home, which you repay without interest within 25 years.

Curious potential homeowners can follow these links to Find out if you’re eligible for the First-Time Home Buyer Incentive. Or Find out if you’re eligible and how to participate in the HBP.

Interest Rates Explained

If you are wondering what mortgage interest is and where it goes, interest is the money you pay a lending institution to lend you money based on the interest rate, which the Bank of Canada sets. So, when the economy is strong, interest rates are higher.

The interest you pay on your mortgage goes towards administration on the loan, overhead costs for the Bank, and profit to the lending institution. Therefore, you can think about a mortgage as a product. When you borrow money, the Bank sells you a product with all the costs of managing the product and a profit margin calculated into the price.

The differences between fixed and variable rates

A fixed-rate loan has the same interest rate from the day you sign your mortgage until the day you pay your last payment. Buyers who choose a fixed-rate mortgage may feel that a fixed rate is more secure because the rate is fixed for the entirety of the mortgage period, and it is not tethered to the economy. However, a fixed-rate mortgage ends up costing you more, as rates are set higher to make up for fluctuations.

A variable rate mortgage is a prime rate plus a percentage. Therefore, variable-rate mortgages often have a lower interest rate that fluctuates as interest rates rise and fall.

Extra fees associated with buying a home

Once you’ve seen the cost of taking on a mortgage, you may want to calculate another factor—the substantial fees associated with buying a home. These may comprise an additional two percent of the cost of the property. Extra expenses you need to consider are inspection fees, legal fees, insurance premiums, renovations, moving costs, and taxes.

Where to get a mortgage

A Canadian Bank is considered the most reputable choice for procuring a mortgage, although credit unions and private money lenders will also offer mortgages. Look for a mortgage from a trustworthy lender offering a reasonable interest rate.

How to know if you are qualified for a mortgage

A lender will check your credit history and look at your income when deciding whether to sell you a mortgage. First, they will need to see the appropriate down payment. Then, lenders will look at the mortgage amount and your ability to repay the loan.

So, do you think you’re ready to purchase a home? Take the stress test to find out. Mortgages look daunting, but they are relatively simple. A good mortgage broker will guide you to the right product. The dream of homeownership may be much closer than you realize.

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