It’s often the largest purchase canadians will make, but many enter into the great adventure of homeownership without completing the proper financial homework.
Before embarking on your house hunt, you should determine what you can afford first. A common rule of thumb is that your household expenses should not add up to more than 40% of your household income before taxes.
Next, you’ll have to decide on the type and size of mortgage that best suits your needs. The two basic options are a conventional mortgage, which requires at least a 20% down payment, and a high ratio mortgage, which is designed for people who do not have the 20% down payment. If you purchase a home with a high ratio mortgage, you will pay mortgage default insurance which transfers the risk of default from the lender to the mortgage insurer. (See Understanding Mortgage Insurance on page 13 for more details).
“Mortgage default insurance helps buyers own a home more affordably and stay in their residence during difficult financial times,” says Peter Vukanovich, President and Chief Operating Officer for Genworth Financial Canada. “Our priority is to provide first-time homebuyers with the information they need to make good decisions and achieve their homeownership goals.”
Other decisions about a mortgage involves the choice between a variable rate, which involves a fluctuating interest rate; and a fixed-rate mortgage, which as the name implies, means you pay a fixed interest rate for a set term such as three, five or 10 years. If you choose a variable rate mortgage, it’s important to understand that your monthly payments may increase if interest rates rise. By selecting a mortgage with prepayment privileges, such as lump sum, accelerated bi-weekly or monthly payment options, you can reduce your amortization period and save thousands of dollars in interest in the long run.
To help you understand your choices and ensure you’re financially prepared, many websites including HomeownershipHelp.ca offer a wealth of financial information for homebuyers. Speaking to a mortgage professional will also help you work through your specific needs.
- Banks, credit unions and mortgage companies lend money to home buyers. This loan is called a mortgage. Your lender will ask you to fill out a loan application form that includes information about your income, employment and debts, and will use this information to determine your eligibility for a mortgage.…
- For many people, the hardest part of buying a home is saving enough money for a down payment. The bigger the down payment, the smaller the amount of your mortgage loan. If you've arrived in Canada within the last 36 months or less, you may qualify for Genworth's New To CanadaTM product,…