Becoming a homebuyer and applying for a mortgage can seem overwhelming, especially if it’s your first time. To help you feel more confident and prepared for becoming a first-time homeowner, we’ve enlisted the help of John Hudey, RBC mortgage specialist, to put together a list of eight of the most common pitfalls to avoid.
1. Thinking you won’t qualify for a mortgage
Dreaming of owning your own home but not sure if you qualify for a mortgage? Even if your credit history is less than perfect, speaking to a mortgage specialist can help you find a solution.
2. Not knowing all the downpayment choices
You’ll be glad to know that there are different options available depending on how much of a down payment you can afford:
- Conventional mortgage or RBC Homeline Plan® (20% down payment)
- Low down payment mortgage (minimum 5% down) Low down payment mortgages require mortgage default insurance. The premium can either be paid up front or added to the amount you borrow.
Under the federal government’s Home Buyers’ Plan, first-time homebuyers are eligible to use up to $25,000 in RRSP savings per person ($50,000 for couples) for a down payment on a home. The withdrawal is not taxable as long as you repay it within a 15-year period. To qualify, the RRSP funds you plan to use must have been in your RRSP for at least 90 days.
3. Focusing too much on the interest rather than the overall solution
All too often, first-time homebuyers give more thought to interest rates than the mortgage solution itself. While rates are a valid consideration, the different types of mortgages, their payment structures, terms and flexibility will have a much greater bearing on the overall cost of homeownership.
Fixed rate mortgage
Fixed rate mortgages offer the security of locking in your interest rate for the term of your mortgage, and your payment amount stays the same, providing ease of budgeting. The main advantage is that the interest rate stays the same during the term of the mortgage and you know exactly how much of your payment will be applied to principal and interest.
Variable rate mortgage
With a variable rate mortgage, your payments remain the same, regardless of fluctuating interest rates. When rates go down, more of your payment goes to pay the principal and less to interest, enabling you to pay off your mortgage sooner. When rates go up, the reverse happens: less of your payment goes toward the principal and more to interest, extending the amortization period.
Combined fixed and variable rate mortgage
With the RBC Homeline Plan, you can enjoy the advantages of both variable and fixed rates by diversifying your mortgage. That means the variable portion allows you to take advantage of potential long-term savings, while the fixed rate portion protects you if rates rise. Your mobile mortgage specialist can help you decide which mortgage solution works for you, based not only on your budget but also on your future plans.
4. Being unrealistic about how much you can afford to pay for your home
You may be under- or over-estimating how much you can afford to pay for your home. RBC’s online mortgage calculators make it easy for you to get a quick estimate of your monthly mortgage payment. For a more personal touch, contact John Hudey to discuss your options. He can quickly help you determine how much you can afford and answer any questions you might have.
5. Not considering a mortgage pre-approval
Knowing the amount you will be approved for gives you the confidence to begin looking at homes within your price range. Real estate agents will serve you better because they’ll know you’re a serious buyer.
You can easily make an offer to purchase as soon as you find the right home.
At RBC®, your pre-approved mortgage rate will be guaranteed for 120 days. If rates go up during the period, you’ll be protected. If they go down, you will automatically get the lowest rate for the term selected.
6. Not choosing your own mortgage payment schedule
Customize your amortization period depending on how much you can afford. Paying off your mortgage sooner saves you interest costs, while a longer amortization period reduces your regular payment amount and gives you more room to manage your cash flow.
For most people a 25-year amortization is a good starting point. Keep in mind that stretching your amortization further will increase your interest costs over the life of your mortgage.
In order to qualify for a longer amortization, you must make a down payment of at least 20% of the purchase price of the property. The maximum amortization is 30 years. If you choose a longer amortization, you may wish to consider a strategy to reduce the time it takes to pay off your mortgage, as your cash flow allows.
Regardless of the mortgage option you choose, buying and owning a home is likely to be one of the biggest financial investments of your life. Creditor insurance can help protect that investment from life’s uncertainties and give you the confidence that comes with knowing your investment is well protected.
7. Forgetting about closing costs
By this time, you’ve selected a house, picked your mortgage options and are getting ready to finalize everything and make an offer. This means getting down to certain details and their associated costs. It helps to know what these are up front so you can minimize any last-minute complications. When calculating closing costs, it’s fairly safe to assume you’ll need an additional 1.5% of the purchase price to cover such things as:
- Professional home inspection: Always make an offer conditional upon a home inspection. As long as your offer is conditional upon the home inspection, you can have the purchase price reduced to offset the cost of needed repairs or cancel the agreement. You should also inspect the home before moving in to make sure its condition has not changed. A newly built home is usually covered by a builder warranty program.
- Lawyer or notary fees: Make sure you work with an experienced real estate lawyer/notary so that all legal aspects of your house purchase are properly completed.
- Land transfer tax: British Columbia levy’s a one-time tax, which is based on a percentage of the purchase price.
- Property tax/utility bill adjustments: The purchase price of a resale home is always payable subject to the usual adjustments at closing. This means that any amount that the seller has prepaid will be adjusted so you pay the excess amount back to the seller, and vice versa. The most common adjustments occur on property taxes and utility bills that have been paid ahead of time. The best way to take control of your property tax payments is to pay them directly to your municipality where applicable. You can pay your tax bill by a variety of methods: a cheque to your municipality, through online banking or (if your municipality allows) an automatic debit from your chequing account.
- Property insurance: Your home is probably the biggest investment you will ever make in your life. Property insurance is all about protecting the things you value: your home, your personal belongings and even your financial future. When choosing an insurance company, make sure they offer a range of choices, allowing you to personalize your insurance to suit your needs.
- Moving costs: Budget for a professional mover, decorating costs and fees for setting up your cable, telephone and other utilities.
- Ongoing costs: Don’t forget to budget for the cost of maintaining a home, such as heating, electricity, water, repairs and taxes. A good suggestion is to budget at least 1% of the home’s value for yearly maintenance expenses. Owning your own home is a milestone as well as an exciting experience! How often do you get to live in and enjoy your investments? Don’t forget that John Hudey is available to guide you through the process.
8. Not knowing your credit rating
A credit rating is a record of your credit history and current financial situation, which typically translates into a credit rating score. Lenders can use your credit rating to verify your repayment history. A good credit rating can improve your ability to get loans and mortgages. If your credit rating needs improvement to help you qualify for a mortgage, you can improve it by always making at least the minimum payment on your credit card, loan and utility bills on time. Checking your history is easy! Simply ask for a copy of your credit rating at either www.equifax.ca or www.transunion.ca.