You shouldn’t always take the maximum mortgage that’s offered

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The first time can be scary, but it doesn't need to be if you take the right precautions.

While that's true for just about everything, it certainly applies to first-time homebuyers taking out a mortgage.

Even for experienced buyers, it takes careful thought and planning to choose where to go for a mortgage and how to choose the right terms. For first-timers there's the added edge of not always knowing what to expect.

"You should know what you're getting into and what you can realistically afford," says Trish Bongard Godfrey, a Toronto-based real estate agent at Chestnut Park Real Estate Ltd.

While acquiring a mortgage will usually be one of the biggest decisions in people's lives, first-time buyers can make it easier if they follow a few time-honoured steps.

"Don't overextend if you don't have to," Ms. Bongard Godfrey says.

"There's a school of thought that says, take the biggest mortgage and the biggest house as you can. But sometimes things go wrong in life. You don't always have the earnings you expect, or interest rates can go up. It's good to have a bit of cushion."

One of the biggest hurdles is determining how much of a down payment you can scrape together, says Wade Stayzer, vice-president of sales and service at Meridian Credit Union in St. Catharines, Ont.

"It's a key principle to be realistic about what you can afford, not just today but later," he says. "It's really a matter of looking at your personal circumstances, not just walking in and asking how much you qualify for. Otherwise you'll get an amount, but you might not be able to furnish your home or go out on weekends."

The higher the down payment, the easier it will be to handle the mortgage payments. Buyers in Canada should typically expect to put at least 5 per cent of the purchase price down; they'll probably also be looking to pay for mortgage loan insurance.

Canada Mortgage and Housing Corp. insurance is available for purchasers who buy properties costing less than $500,000 with a 5-per-cent down payment. For buyers of houses up to $1-million, purchasers have to put down 10 per cent of the amount above the first $500,000, and CMHC insurance is not available for properties costing more than $1-million.

First-time buyers should also understand that while mortgage insurance protects them against default, it's not the same as mortgage life insurance, which guarantees that if you die the mortgage won't be a burden to your estate.

Establishing a personal relationship with an expert, either a mortgage broker or a financial adviser, is especially important for first-timers, Mr. Stayzer says.

"Build a conversation. It's exactly the kind of conversation that you can't have over the Internet," he says.

"Whoever you're working with, whether it's a mortgage broker or a financial professional, it's important to listen to the advice. That's what you're engaging them for," he adds.

Ms. Bongard Godfrey and Mr. Stayzer agree that it's also essential for first-time buyers to get preapproved for a mortgage amount before they go house hunting. It's not only a necessary step before putting in an offer, it helps buyers remain realistic in hot and heavy housing markets such as those in Toronto and Vancouver, where the average price of a detached home is in the $1-million neighbourhood.

"You need to be prepared for extra costs beyond the mortgage. Sometimes a house looks expensive but it's not, and then it turns out to be expensive. People refer to HGTV syndrome," Ms. Bongard Godfrey says.

Extra costs can include unforeseen repairs and maintenance and, in some provinces and municipalities, land transfer taxes, which can't be included in the amount you borrow for a mortgage.

First-time buyers do get some benefits. The federal government offers a first-time home buyers' tax credit, and it allows first-timers to borrow up to $25,000 from their registered retirement savings plans for a home, though repayment to the plan must begin in the second year after the funds were withdrawn.

Mr. Stayer says first-time buyers should also contemplate what might happen to interest rates.

"Look at what happens if in five years your mortgage rate is 1 to 2 [percentage points] higher. Will you still be able to afford that?"

Mortgages from different lenders may come with great rates or sound exactly the same as competitors' offerings, but they can't always be compared like apples to apples, Mr. Stayer says.

"If you have options, check: Do both have the same prepayment privileges? What's it going to cost you to get out of your mortgage if you decide to move?"

Other details to look at are whether the mortgage you're being offered has hidden service charges or is completely closed, locking you into its terms until it matures.