Applying for your first mortgage can seem like trial by fire. Writer Carla Wintersgill shares what she learned in the process
By Carla Wintersgill, Toronto Star
We own the house and the bank owns us.
That’s the joke my boyfriend, Jesse, and I like to tell when we talk about our first home, for which we started mortgage payments at the beginning of April.
We’d rather laugh than cry about the biggest debt commitment we’ve ever made in our lives.
Our first mortgage has been a lesson in how to budget and plan for our financial future.
Jesse is a scrupulous saver and fiscally responsible. He pays his credit card off in full each month and it’s not unusual to find stashes of cash tucked away among his things.
My own financial history is a little more tumultuous. I have significant student loan debt following a master’s degree and it’s only within the last year that I’ve made a greater effort to keep my credit card balance at $0 and contribute to my savings. If you’ve had financial wrongdoing in the past, the bank will know about it. I was mortified when an overdue payment from 2007 on a Visa card was flagged when we applied to be pre-approved for a mortgage.
Mary Stergiadis of the Canadian Mortgage and Housing Corporation recommends potential buyers get a copy of their credit reports before applying for a mortgage. Not only will it give them an idea of what the bank is going to see when they look at their credit history, it’s also an opportunity to spot and clear up any inaccuracies.
A credit report “might be a chance for the consumer to stop and think about managing the debt that they currently have before they get into financing a property, ” Stergiadis says.
At the bank, we were told that my one past-due bill wasn’t a big deal. But the mortgage specialist did say he had witnessed many fights in his office between couples whose financial skeletons popped out of the closet during the credit check.
We were ultimately approved for a $400,000-plus mortgage. We didn’t want to take it.
Our mortgage currently sits at $320,000 and we find that, with the payments, property tax, mortgage insurance, and other costs, we wouldn’t want to have taken on a greater financial burden.
“Even though the bank says you can afford it, the consumer needs to recognize what those other expenses are, ” Stergiadis says. “The kind of lifestyle you like to live is not taken into consideration.”
Our lifestyle doesn’t include a lot of cooking. Living in a smaller, more affordable home allows us to keep our takeout budget intact.
Stergiadis recommends a number of tools provided by the CMHC, including a household budget calculator and a mortgage payment calculator. The mortgage calculator is an especially useful tool for comparing payment plans.
Because Jesse and I both have stable, full-time jobs, we opted for a four-year, fixed mortgage, which allows us to stick to a regular monthly budget. We also took advantage of the recent 2.99 per cent interest rate mortgages.
However, Stergiadis warns against chasing after the lowest interest rate available.
“Comparing interest rates is not comparing apples to apples,” she says. “You really need to understand the terms and conditions.”
What to remember when applying for a mortgage
Consider your lifestyle. You may qualify for a large mortgage, but you may not be able to afford it. Take into account all your monthly expenses, such as cell phone bill, premium cable, entertainment, and decide if a larger house is worth cutting out the extras.
Know your credit. A spotty financial past can come back to haunt you. Addressing your credit score ahead of time can clear up any inaccuracies and provide a reality check for the amount of debt you can take on.
Compare apples to apples. All mortgages are not created equally. Before opting for the one with the lowest interest, make sure to understand the conditions attached and the financial institution you’ll be dealing with!
Get informed. There are many online mortgage calculator tools available that can give you a better idea of the real cost of your dream home.
First published in the Toronto Star on April 26, 2012.