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Home Cents

Don't let rising rates rush you into a bad decision Add to ...

When RBC announced a 25-basis point hike on fixed rate mortgages on Tuesday, the news triggered a flurry of calls to mortgage brokers around the country. Homebuyers are worried they're running out of time to lock in to an affordable interest rate in a heated housing market.

"I say, don't panic," said Jeff Mayer, a mortgage broker with Mortgage Intelligence in Toronto. "People tend to have this theory that they won't be able to buy, but there are a lot of options."

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The fear of rising rates is keeping Mr. Mayer's office busy these days. "We were doing 40 deals a month about two months ago. Now we're doing 75," he says.

But the frenzy to buy can lead some to risk rushing the process and missing or misunderstanding important steps. First-time homebuyers are especially vulnerable.

"A lot of first-time buyers can't wait to get out there and house hunt, but they need to understand that this is not a decision to enter into lightly," says Mr. Mayer. "With things changing rapidly in the marketplace, it does get confusing and you have to make sure you're prepared."

He prepares first-time buyers by explaining all the steps in the process and pointing out the pitfalls.

Here are some of Mr. Mayer's tips:

- Get your down payment and deposit ready. A down payment must come from your own resources, and in most cases must have been held in your account for at least 90 days. If you're using a gift from your parents or other family member for a down payment, you'll need a letter stating that it is actually a gift and does not need to be re-paid. These funds will likely need to be deposited in your account two weeks before your purchase closing date.

- First-time buyers shouldn't forget that they have the ability to finance their homes through The Home Buyers' Plan. It allows you to withdraw up to $25,000 ($50,000 per couple) from your RRSP to buy or build a home.

- Figure out what you can afford. The best way to do this is get pre-approved for a mortgage. Not only will it help you figure out your monthly payments and home buying costs, the financial institution may also offer to lock-in the interest rate for up to 120 days.

"This is very helpful if you're buying in a rising rate environment," says Mr. Mayer, but he cautions that many lenders are not offering this lock-in option anymore.

He also warns that a pre-approved mortgage is not a guarantee that the financial institution will actually lend you the money. Your application will still be subject to a full review when it comes time to sign the papers. Even if your application is approved, you need to be careful not to change your debt-to-income ratio, through a job change or a large purchase, or you may no longer qualify for the mortgage.

"Until you close and the money is transferred, you're not fully approved. The bank can always pull that approval."

- Get in touch with the professionals. A lot of work goes into getting you into a new home. You will need a team of people, which may include a mortgage broker, a real estate agent, real estate lawyer, home inspector and home insurance agent.

- Mr. Mayer insists that buyers step up and take responsibility for the process early on. "Don't go into it blind assuming everyone else will do everything for you. People spend more time planning a wedding, which is $40,000, than on their house. The client needs to spend more time. It's a very big investment."

- Choose the right property. Many people fall in love with the look and feel of a home and realize too late that it needs a new roof and is too close to the railway tracks. Mr. Mayer provides his clients with a checklist covering the basics - such as square footage measurements and the age of the furnace - to help buyers stay objective when viewing a house. "Look at the location and educate yourself on the property. Make sure it's a property you can grow into and not grow out of."

- Come up with an offer strategy. In competitive real estate markets, it is common for vendors to put off accepting offers until a particular date. This means buyers may be bidding for a home along with several other parties. It's easy to get caught up in the emotion, so it is important to decide on a maximum price before bidding and to stick to it.

- Get ready to close. When buying a home, it pays to learn about closing costs, which can represent up to three per cent of the purchase price, including land transfer tax, lawyer's fees, appraisal fees, title insurance and home inspection fees. A mortgage professional can help estimate how much these will cost and offer ideas for how you can cover these costs.

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