First-time homebuyers Vancouver BC – Questions and Answers
First-time homebuyers Vancouver BC – Questions and Answers
After reading this article yesterday in 24 hours, I thought I would address the questions and misunderstandings that many first-time homebuyers have.
You can see the article here.
- Which payment frequency pays down a mortgage fastest? – To date most people have made their mortgage payments monthly. However, most lenders offer additional options for payment frequency. “Accelerated bi-weekly” payments can take years off of your mortgage vs. if you were to make monthly payments. It achieves this by taking what would be an equivalent monthly payment, dividing it in half, and paying that amount every 2 weeks. So what ends up happening is that 2 extra payments are made each calendar year that go directly towards the principal, thus reducing the mortgage amount faster and saving on the interest that would have been accumulated otherwise. Going to an “accelerated weekly” payment frequency does not provide significant incremental savings over the bi-weekly option.
- By how much will making just one extra mortgage payment each year will shorten the life of a 30-year mortgage – The answer here is “it depends” as several factors (mortgage amount, interest rate, & remaining amortization period) will affect the answer. However, by putting any lump sum amount against your mortgage each year is by far one of the most significant means by which one can save on their mortgage and take years off of it.
- How much can a first time homebuyer withdraw from their RRSP to put towards a down payment – The quick answer is up to $20,000 in a calendar year. For full plan details please refer to the Canada Revenue Agency’s web pages for this program.
- Something that was not widely known by those interviewed was that one factor used in qualifying for a mortgage is that lenders do now want total monthly expense obligations (e.g. credit card bills, car loan/lease, mortgage, property tax, strata fee) to exceed a certain percentage of your gross income. This percentage used can vary from lender to lender and situation to situation but is typically in the 40% range.
- A common misunderstanding among those polled was the difference between the term and amortization period of a mortgage. The amortization period is the length of time that it would take to totally pay off the mortgage based on the terms (mortgage rate, mortgage balance) today and assuming everything remained the same over that time. However, the term of the mortgage is the length of time of the contract that the person is committing to (e.g. 1, 3, 5, … year fixed rate mortgage). At the completion of the term of the mortgage the client will need to renew/refinance their mortgage and re-commit to another term length of their choice.
- Several mortgage terms were also not clear to first-time buyers.
- Credit rating – If you have ever applied for or had credit (e.g. credit car, car loan, car lease, line of credit) you will have a credit rating/report. Your credit information (payment history, limits, balances, length of time had credit, missed payments, credit collections, etc.) is consolidated in a report that all future institutions that who are considering extending credit or granting a loan/mortgage to you will review as part of your application. So, having a good report will help when applying for new or additional credit.
- Mortgage term – See above
- Variable/Fixed interest rates – When obtaining a mortgage there is a choice between having a variable or a fixed rate. A variable rate means the rate of your mortgage can vary over time (the term of your mortgage). The variable rate is set with respect to a bank’s “prime” rate. A bank’s prime rate can fluctuate over time and a change is usually timed closely with if or when the Bank of Canada changes their overnight lending rate. The Bank of Canada meets about 8 times a year to review their overnight rate and either decide to change or not change it. So at any one time the rate may not change by much but has the possibility of varying more over a 5 year term. This is in contrast to a fixed rate mortgage where the rate at the beginning of the term will be guaranteed for the full length of the term. The difference here is that ones payment will be the same for the entire term vs. in a variable rate scenario ones payment can fluctuate throughout the term as or if their is a change to the prime rate.
- Bi-weekly accelerated payments – See above
- Mortgage amortization- See above
- Mortgage default insurance – When less than 20% of the purchase price is provided as a down payment or if in a refinance situation if the new mortgage amount exceeds 80% of the current property’s value, mortgage default insurance is required. This is the same for all banks. This protects the lender for the amount of the mortgage should payments be missed or stopped by the customer. The amount of the insurance is a percentage of the mortgage amount and increases the less the down payment is or the higher the mortgage amount is with respect to the property’s value (as it is considered higher risk). The insurance amount is included in the mortgage amount which is nice in that it does not require the client to have this money in cash and they can finance it along with the mortgage which makes it more affordable.
- Refinance loan payments – This is simply the mortgage payments made in a refinance situation
- Closed/open mortgages – “Closed” means that the term of the mortgage is set in that the lender is expecting you to keep the mortgage for the length of the term you chose and if you want out of it (e.g. want to pay off the mortgage in full before the end of the term), there will be a fee/penalty to do so. An “open” mortgage is one that allows you to pay it off in full at any time with no fee. As open mortgages provide much more flexibility, you pay for this in a much higher rate. Open mortgage are common when ones needs a mortgage now but knows in the short term they will be making a significant change to it. Closed mortgages are not so rigid in that there is some allowance for changes (e.g. pre-payment privileges, portable, assumable, etc.) during the term so as not to penalize a client for “normal” life changes.
- Conventional versus high ratio down payments – This is related to the mortgage default insurance point above in that if the down payment is 20% or greater the mortgage is considered “conventional” and if the there is less than a 20% down payment the mortgage is considered “high ratio” and requires insurance.
- Debt service ratio – This is the ratio referred to above when talking about the percentage one’s gross income that is allowed to be used for monthly expenses.
For more information on any of the above or any other mortgage related question, please contact me at (604) 603-2520 or email me at Maury@MauryLum.com.
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