It’s wise for house hunters to not only to narrow down their wish list for neighbourhoods and housing features, but to apply the same systematic approach to getting the financing for their home.
“Given that a mortgage is the biggest loan that you’ll ever have, house hunters really need to be well-versed with their options. They have a number of choices available to them, most of which could have financial implications on their whole financial picture,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
First step: the down payment
“Although it may not necessary influence your rate, you should aim to accumulate as much as you can for a housing down payment. What having a larger down payment will do is grant you more control, which is advisable when it comes to taking on this much debt,” says Schwartz.
With a more sizeable down payment, you’re less sensitive financially in the event of an interest rate hike, or if you experience life events that interrupt your income. It also means that you’ll have more cash flow, which will mean more savings to keep you from falling into more debt, just for the privilege of owning a home. And what’s more is that with a larger down payment, you won’t have to pay as much (if at all) for mortgage loan insurance, which you are required to take out if you are financing 80 per cent or more of your home purchase. This amount is built into your mortgage and accumulates a great deal of interest over time- which will come out of your pocket.
Once you’ve got a down payment amassed, visit your lender to start the pre-approval process so that you can get an idea of what your housing budget should be like based on your income. Note: pre-approvals set your high budget, so aim your own budget to be considerably lower for wiggle room.
The rate question
Mortgage rates are, often to a certain extent at the discretion of the lender, so it makes good sense to shop around. But rate isn’t the only criteria you should balance out when trying to determine what is the “best deal.”
Know that your rate will also hinge on your own personal qualifications (e.g. stronger mortgage applications get lower rates because of a lower perceived risk). If you have issues with your credit report or a low credit score, you can expect to have a higher mortgage rate. There are other things that will influence your rate, like where the home in question is located and what term you choose. You generally have a choice of 6 months to five years, and fixed rates or variable rates (e.g. will fluctuate, up and down over time).
When you meet with your lender, ask about getting the lowest rate and what their policy is on matching rates from other lenders (plan to visit at least three for rate quotes). How long will they hold the rate for you? Do they automatically adjust in the event of a rate fall during your house hunt?
Consider all the benefits
Like we said, rates aren’t the only factor that will influence how much your mortgage will cost you. For instance, if you are going with the lowest possible rate, you may be giving up some other benefits.
Ask about restrictions. What sort of penalties are you on the hook for if you want to do a pre-payment? What happens if you move or if you need to refinance? What if you want to renew early? Often rock-bottom rates require that you forfeit these options entirely and you can be paying substantial fees (thousands of dollars) to act on these items. It’s worth doing some test scenarios before you lock in.