10 Mistakes Canadians Make With Their Mortgage
The COVID-19 pandemic has made quite an impact on the Canadian real estate market. Ever since interest rates reached an all-time low last year, Canadians have been investing heavily in real estate. And there aren’t any signs of this trend slowing down any time soon.
At a time of massive financial disruption — with many people being either furloughed or outright made redundant — the Canadian Real Estate Association reported a record of over 550,000 properties sold in Canada last year. Thankfully, the boom in the housing market provided a much needed boost to Canada’s already gasping economy.
Choosing to purchase a home is one of the biggest and most expensive decisions a Canadian will ever make, so obtaining a mortgage isn’t something that should be done hastily. And yet, it is all too common for people to buy the very first home that catches their eye, without due diligence and proper research, resulting in overwhelming debt.
If you’re a first-time homebuyer or just looking to refinance, here are ten of the most common and costly mistakes that most Canadians make when applying for a mortgage:
- Failing to check your credit score
Before you consider applying for a mortgage, you should know your credit score. A low score will most likely result in either a rejection or a much higher mortgage rate.
You should check your credit score using an online mortgage calculator at least six months prior to applying for a mortgage. This would allow you ample time to spot and tackle any issues before they arise and take all the required steps to improve your credit score.
- Not making a down payment
The minimum recommended amount for a down payment is 20 percent of the property cost. And while you don’t have to make one quite that high, making a zero down payment can be a huge disadvantage.
Typically, many Canadian homebuyers obtain a mortgage without making a down payment. This isn’t generally a great move as you would automatically miss out on many benefits, including lower monthly payments, an increased credit score, and instant equity in your home.
Take some time to save up at least 20 percent of the total purchase price for your down payment.
- Failing to budget appropriately
If you’ve been pre-approved for a mortgage, just know that it’s only the first step in being able to actually afford a home. Mortgage approval only considers the cost of financing and purchasing the property, and not other potential expenses such as renovations and repairs.
Therefore, as mentioned in the Financial Post, you need to ensure you can actually afford the total cost of homeownership by reviewing your net income against other expenses such as utilities, property taxes, furnishings, maintenance, car payments and many others. It’s important to see the big picture when applying for a mortgage.
- Buying the first house you like
It can be very tempting to just go for the first property that matches your criteria, along with the offer of a relatively low interest rate. However, criteria being equal, there are other important factors to consider besides the interest rate.
Review your prospective purchase using a Canadian mortgage calculator. Factors involved in this calculation include the total cost of ownership, cost of the property, amortization period, and default penalties, among other things. Doing this will help you come to terms with the financial implications of your mortgage, especially in the event you’re made redundant at work or any other financial crisis arises.
- Choosing the wrong amortization period
In Canada, once you have a variable mortgage rate you’ll need to select a particular amortization period ranging from 25 to 40 years.
A shorter amortization period would have you pay off your mortgage more quickly with higher monthly payments and lower interest rates. A longer amortization period would result paying off your mortgage more slowly through lower monthly payments but with higher interest rates.
It’s important to determine which amortization period works best for you to avoid incurring unnecessary debt.
- Failing to secure a mortgage rate
Once you have found the most suitable mortgage based on your current financial status, it’s important to contract a broker who will provide you with a written guarantee of the length of time they are willing to secure or fix the interest rate for you.
This would allow you to lock down your interest rate and not have to worry about any sudden increases. Nonetheless, when applying for a mortgage, you should weigh the pros and cons of choosing a fixed or variable interest rate.
- Not obtaining a mortgage pre-approval
Without applying for a mortgage pre-approval, you can’t be certain of how much of a loan you qualify for. This information is vital for your house hunting since it allows you know the price range of houses you can afford right now and thus save you time.
Another advantage of getting pre-approved is that it strengthens the trust between you and the seller since being approved for an appropriate mortgage makes you a certified buyer. This can be a huge competitive edge over other buyers vying for the same property.
- Failing to budget for closing costs
A lot of home buyers fail to include the closing costs when preparing a budget for purchasing a new home. You should always anticipate spending approximately 3 percent of the property’s purchase price on things such as insurance, property tax, home inspection, utilities, relocation costs, land transfer tax and legal processing fees.
- Unnecessarily obtaining a reverse mortgage
There is absolutely no need for any home buyer to consider getting a reverse mortgage except as a last resort.
Typically, reverse mortgages are reserved for senior citizens who already have equity in a home but want to use it to acquire an income source. If you enter into a reverse mortgage unnecessarily, there is a risk of losing your home to your lender.
- Providing false information
When you apply for a mortgage using false or inaccurate information — which some Canadians are guilty of — you’re only doing harm to yourself in the long run
Ultimately, even if your mortgage gets approved, you may quickly start defaulting on your payments and be forced either to a foreclosure on the property or a declaration of bankruptcy.