A host of variables will govern price you pay for cash to buy your home
Ian Harvey Special to the Star
Mortgage shopping for the first time can seem a daunting and intimidating task.
There are so many choices to make: Will you go long or short? Fixed or variable? Make monthly, bi-weekly or weekly payments? Deal with a bank or private lender? And what about a prepayment option? Will there be a penalty for early discharge?
Settling on the right mortgage is probably one of the most stressful components of the home-buying experience, says Tina Hoy, a real estate sales representative at Keller Williams.
"I tell new homebuyers that they should get the mortgage issues sorted out even before they start looking at houses," she says. "That way, they know what they can spend, what they can afford and they're ready to make an offer, if and when they do see something they like.
"It really helps first-time buyers set realistic expectations."
Mortgage shopping is pretty much like shopping for groceries or clothes - what you buy is a reflection of your needs and tastes.
In effect, you're buying the money to buy a house. The terms of that deal will govern your finances for much of your life.
Mortgages used to be simple documents. They set out the amount being loaned, the life of the contract, the interest rate, how interest was calculated and the monthly repayment rate.
The place to get that mortgage was your local bank; you made an appointment with the manager who looked at your employment history, credit rating and bank account and then told you how much you could borrow.
Today's mortgages come in a dizzying array of styles and flavours, says Joe Rosati, executive director of the Independent Mortgage Brokers Association.
Though he's clearly cheering for the home team, Rosati says an independent mortgage broker can help homebuyers tailor a mortgage to their needs.
"A broker deals with all the banks and knows their products, but they also deal with mortgage companies and private mortgage placements," he says. "It doesn't cost the consumer anything."
It's also a more efficient use of time for clients, he says, as they don't have to run from bank to bank, making applications.
Banks are eager to deal directly and will sometimes shave down a posted interest rate or offer an incentive to attract a new customer or retain an existing client.
It's good business practice; customers tend to take all their banking needs to the bank where they have a mortgage. The mortgage itself is a hugely profitable loan over its lifetime for the bank and is risk-free, as the lender is insured for losses if the client defaults. There's a lot of value in having the customer's chequing and savings accounts, RRSPs, business and car loans and personal lines of credit, as well.
The basics of a mortgage are simple, but the combinations are where it gets complex. The equation starts with the size of the down payment: you must have 5 per cent or sometimes 10 per cent or more of the purchase price, depending on whether you're self-employed or not.
The next factor is what you can afford monthly. That's based on your income, and what the mortgage and property taxes will take off that.
Related factors are the amortization period, usually 25 to 35 years; the term or time period the interest rate is set for, which can be six months, one year, two years, five years; the type of rate - fixed, locked in, or variable, which rises and falls in step with the prime rate; and the frequency of payments.
The Financial Consumer Agency of Canada (www.fcac-acfc.gc.ca) has good background information on mortgages and some of the most common questions, including an interactive mortgage-qualifier tool.
Both banks and brokers can help homebuyers get pre-qualified.
"It really does remove doubt for the buyers," says Hoy. "It's just a matter of filling out some forms, and there's no commitment or cost. Most agents have mortgage specialists they deal with and can make introductions and everything can be done online."
Rosati says mortgage brokers have an advantage over banks or institutions in that they have a wider range of products to select from and present to the client.
"They listen to what the client needs - whether they are willing to take a variable rate and go for the lower interest rate, or if they are willing to pay a higher interest rate and lock it in for five or seven years," he says. "They also know how the wording in contracts differs from bank to bank and lender to lender."
While it has been shown that short-term interest rates cost less in the long run, despite the odd spike in rates, many buyers want the assurance of a rate that's locked in for the long term, because they can sleep more soundly at night knowing what the rate will be.
In some cases, knowing how the interest is calculated can save the buyer thousands of dollars over the lifetime of the mortgage, Rosati says.
Some homebuyers want the flexibility to be able to pay down the mortgage in the event they get extra cash in the form of a bonus or inheritance. Ensuring there's a clause in the mortgage document that allows for a reasonable amount of prepayment without penalty is one of those fine details often overlooked.
Indeed, when it comes to mortgages, the devil is in the details. What's even more shocking to some folks is that for the first couple of years of a new mortgage, almost all the monthly payments go to interest. So, after paying $1,000 a month for 24 months, you might only see a few dollars shaved off the principal.
And there's one last piece of fundamental advice in mortgage shopping. Just as they should on a trip to the mall, consumers must balance needs against wants, says Mel Fruitman, vice-president of the Consumers Association of Canada.
"I look at some of the crazy prices people are paying for houses and wonder what they're going to do when mortgage rates start going up and their mortgages come up for renewal," says Fruitman, who notes that money is as cheap as it has ever been historically and it is tempting for homebuyers to take on high levels of debt.
"Consumers should stay within their budget and not load up on more debt than they can handle if things change."