As a mortgage shopper, you'll get different advice from every banker or broker you talk to. So it's useful to hear what a variety of experienced advisers recommend.
To provide a leg up on your mortgage research, I asked three top mortgage professionals for their best recommendations, irrespective of who they work for.
Since every borrower is different, we gave them specific scenarios to comment on. We're starting with the very foundation of Canada's housing market: the first-time home buyer.
If you're a young person who's about to meet a mortgage payment for the first time, this story is for you.
Meet the pros
I solicited the top picks from three seasoned advisers, chosen for their objectivity and experience:
Shelley Jobb, a mortgage adviser of 17 years with CIBC;
Sarah Taylor, a senior mortgage specialist at Meridian Credit Union;
Dustan Woodhouse of Dominion Lending Centres, one of Canada's top-20 brokers according to Canadian Mortgage Professional magazine.
The scenario: Ms. First-Time Buyer
Picture a single 30-year-old new home buyer with no kids, a salaried stable job for one year, not a lot of savings but great credit, and a total debt ratio at the limit of traditional guidelines (for example, 40 per cent of her gross income is eaten up by debt-servicing costs). Now presume she's putting down 10 per cent on a new 600-square-foot big city condo and needs a $375,000 mortgage.
What mortgage term would you recommend to this person?
SJ: "I'd ask them, 'What are your short-term and long-term goals?' Is this where you plan to live for a while? If they were [staying] short term, I wouldn't put them in a five-year fixed and expose them to an interest rate differential (IRD) penalty. I'd put them in a variable (which entails the lowest penalty for a closed mortgage). Otherwise, I would typically suggest a five-year fixed. It gives them good flexibility for making prepayments and increasing payments, and gives them the security of fixed payments with no surprises if prime rate changes."
ST: "Many times I see first-time homeowners overwhelmed with the hidden costs and expenses involved in buying and maintaining a home," she says. "My recommendation would be a fixed closed rate … knowing your fixed and controllable monthly payment is an important factor for a new home owner."
DW: "Everyone should be looking at the historical outperformance of a variable rate mortgage." At the same time, he says "first-time buyers want a payment that is fixed" so look more at variable-rate mortgages versus adjustable rate mortgages, which don't have fixed payments. Variable-rate mortgages usually have more favourable early-breakage penalties as well. At 30 years old and single, life is variable, and so your mortgage should be, too."
What amortization would you recommend?
SJ: "If they're putting less than 20 per cent down, I'd put them at the maximum, 25 years. It's not very often I'd suggest less than 25 years, even if they want to pay off in 10 to 15 years. It's better to increase your payments [than] to reduce your amortization," she says, since you can no longer refinance to increase your amortization if you have less than 20-per-cent equity. "Sometimes it's worth their while to put [only] 5 per cent down and pay off other things [like credit cards]," even though you'll be paying higher default insurance premiums, she adds. "Sometimes this makes sense to help them qualify as well, because it frees up cash flow which may put their total debt service ratios in line."
ST: "I would recommend going with the longest amortization available on a high-ratio mortgage, which would be 25 years. Once they are settled in their home and are comfortable with the financial obligations, it would be advisable to review [their mortgage] and see if they wish to reduce the amortization and pay down the principal quicker by increasing payments ... . Alternatively [the borrower may] determine to keep the payments the same over the term and start to build a retirement/savings portfolio."
DW: "Take the maximum amortization on paper. [You] can effectively shorten it using prepayment privileges ... . On paper we want to be able to create the lowest possible required payment ... . The low-payment option gives you comfort renting the property out and retaining it long term," in case you move far away or have some other life-changing event, he says.
What mortgage features should this borrower look for?
SJ: "Make sure the mortgage has flexible porting [moving your mortgage with you to your new home when you sell] with no penalty. Look at the length of time [the lender allows you to port – she recommends 120-plus days]. In this market, if you sold and couldn't find something for a few months, you'd want to make sure you have enough time so you can close on something else."
"A blend-and-increase [feature] is also important because you don't want to pay the penalty and go into a new mortgage" if all you need is a bit more money.
With a blend and increase, your "current money stays at the existing rate and the new money is at [a new] rate closest to your remaining term ... . And ensure that a penalty is not built into the new blended rate," she warns.
ST: Know your payment options, Ms. Taylor advises. "What are the payment frequencies available? Am I able to skip a payment if required? What are the maximum additional payments that can be done on the mortgage annually without penalty or hidden costs? How [easy is it to] process additional payments?"
DW: "We avoid credit unions, as at 30, single with no kids, we want a mortgage that can be ported from one end of the country to the other [which is not generally allowed at credit unions] ... . And ideally you are buying in a building without rental restrictions for rental flexibility and resale value. Ultimately the lender I [typically] suggest will allow recovery of the prepayment penalty for up to 12 months, so if you do move you have time to shop around the new market."
What's the No. 1 mistake first-timers make when getting a mortgage?
SJ: "They underestimate their closing costs, like land-transfer tax and credits, closing costs from builders and taxes on insurance premiums [which can't be added to the mortgage]. They also overestimate what they have for a down payment. If they buy for $400,000 and have 10 per cent down … that $40,000 is [sometimes] all they have, so they might have to pay more in insurance premiums."
ST: "Budgeting seems to be the biggest problem. Be realistic about what you can afford while maintaining your lifestyle. Too often people will purchase homes and within a year, they have accumulated high levels of credit-card debt due to overspending on items for the house or offsetting a lack of … cash flow [due to] new condo expenses."
DW: "The No. 1 mistake this buyer makes over and over is they lock into a five-year fixed mortgage with a major bank totally oblivious as to the better-than-50-per-cent chance they will trigger a not insignificant penalty when they break the mortgage early – or often be forced to refinance with that bank at inferior terms."