It’s been a lot of hard work, but you are finally ready to join the ranks of the home-owning class.
You’ve paid off your debts, socked away enough money for a decent down payment, trolled through open houses and found the perfect place. Your offer has been accepted and you have two months to close the deal.
This is when many first-time home buyers finally get around to arranging their mortgage, according to Larry White, a 20-year veteran mortgage broker.
“A lot of people spend more time researching a television purchase than their mortgage,” says Mr. White, a broker with Invis.“I have had a lot of people call me when they’re closing in two or three weeks and they haven’t done any of the background work.”
The good news is that mortgage competition is so fierce right now that you can negotiate better terms on rates, fees and restrictions - provided you go in armed with some knowledge. Mortgage rates are not quite at an all-time low, but they are very attractive in the historical sense and easy to compare online.
One thing to keep in mind is that the rates posted at your bank or blinking at you in online ads are just a starting point. These rates are not only high, they are also likely to come loaded with caveats, including tight restrictions on making lump-sum payments and high fees when leaving the mortgage prior to renewal. (There is a reason why they’re called "sucker rates.")
Here’s our list of five things to remember as you prepare to wheel and deal:
Start early and be prepared
The bank where you have your chequing account will be more than happy to do a basic mortgage pre-approval document for you, but that won’t be enough to close the deal. You will need an up-to-date personal credit score, tax assessments from the last two years, and a thorough accounting of your income, including non-salaried contracts and debt.
Along with your down payment, you’ll need enough cash on hand to cover pay closing costs - roughly 2 per cent of the purchase price - for legal fees, mortgage insurance, title insurance and land transfer taxes. You should also be prepared to pay utility deposits in your new home. If you’re moving into a condo, don’t forget to budget for maintenance fees.
Have a strategy in place and a product in mind to achieve it
This is where a mortgage broker can really help you. Keep in mind, however, that they are paid by the financial institution to whom they bring your business - not you. Familiarize yourself with the mortgage basics - read up on how a fixed–rate mortgage compares to a variable-rate and the difference between a closed and open mortgage. Don’t automatically take a five-year-fixed mortgage, but research the various terms that are available.
This is where you should consider how important features like pre-payment options and break fees are to you. If you come into large sums of cash, you should consider a flexible mortgage that does not restrict you from making lump-sum payments. If you are due for a raise, hone in on pre-payment features that allow you to increase your payments without penalty.
Think about what will work best for you
If you’re starting a family or are in line for promotion that involves moving to another city, you could be upgrading sooner than you think. Unexpected life events, like an illness or divorce, can also lead to you paying a hefty break fee, which is basically a penalty for leaving your mortgage early.
Most lenders calculate penalties based on the amount left owing in your mortgage term and the rate differential between your interest rate and the current posted rate or the lender's discounted rate. In other words, they usually do not make it easy. As a general rule, expect to pay at least three months of interest multiplied by the rate differential to break your mortgage. Definitely probe the lender on their break fees. Hidden or vague break fee policies are the most common consumer complaint regarding mortgage products.
If your property is going to need renovations, make sure you have access to a home-equity line of credit. Remember: The mortgage that is right for your neighbour might not be the right one for you. Don’t be intimidated as a first-time buyer or feel pressured to accept a one-size-fits-all mortgage that might look cheap but comes loaded with expensive restrictions.
Approach it like you’re searching for a financial planner
First-time buyers looking for a mortgage will probably automatically go to where they do their daily banking. And the person they speak to could very well be the same person that sells them investment products like GICs.
“Experience counts,” says Mr. White. “Some institutions are more experienced than others. Some are order-takers. Some will help shape a product based on the information you share.”
That information should include your future financial goals and craft a payment schedule to achieve that. Your financial plan needs to reflect many things - like how much you are putting away for retirement, saving for a child’s education, or investing in home improvements.
Remember you have more leverage than you think
The bottom line is that the mortgage lending market is extremely competitive, and that makes first-time buyers highly prized clients.
Furthermore, the recent decline in the volume of home sales has put pressure on lenders to reach their goals of signing new business. The Financial Consumer Agency of Canada has produced this slick video of how to negotiate a mortgage with several lenders.
“Lenders are trying to maintain numbers from a year ago,” Mr. White said. “They are all jockeying for position to keep volume.”
Your first mortgage is not just a big loan. It will be a crucial element in determining your net worth, lending risk and ability to plan your financial future. There’s a lot at stake. You can save yourself thousands of dollars in interest alone.
And if interest rates rise, your negotiating prowess could make the difference between being able to make or miss your mortgage payment.