First-time buyers need to consider many factors
For first-time homeowners making their maiden voyage into the universe of mortgages, there are many weighty decisions to navigate. The swirling questions are enough to cause a serious case of vertigo: What broker to choose? How long of an amortization period? What about interest rates?
Homebuyers tend to get especially sidetracked by that last issue, which is probably getting even more attention lately thanks to the recent Bank of Canada rate hike. “Why do people fixate on rates? Because they don’t know the other questions to ask,” says Gary Siegle, Alberta regional manager for Invis, a Canadian brokerage firm. “People shop for their mortgages based on rates but there are also other variables to consider.”
As far as the central bank hike is concerned, would-be homeowners need not be overly worried. Most Albertans have fixed-rate mortgages anyway, says Siegle, which unlike variable-rate mortgages, aren’t significantly impacted by the central bank’s rate. Instead, a more important factor for potential buyers to consider right now, he argues, is price.
Although Alberta’s sizzling housing market is finally starting to simmer down, this past year still saw significant growth, with housing prices increasing 22 per cent in Calgary and 37 per cent in Edmonton.
Income increases, on the other hand, haven’t been able to keep pace, even as qualifying incomes for mortgages continue ratcheting up. Using the example of a five-year fixed-rate mortgage amortized over 25 years, Siegle calculates that the average Alberta mortgage of $300,000 would require an income of $76,200 — that’s a whopping $16,800 more than last year’s qualifying income.
These are intimidating numbers indeed. Nonetheless, Siegle says the average Albertan can still gain access to the housing market. One way of diving into the real estate melee, he explains, is to take out a longer mortgage. As of fall last year, forty-year amortization periods became available, requiring lower qualifying incomes than the 25-year mortgage. “It’s what people are using regularly now,” says Siegle.
Forty years is an awfully long time however, and using the same example as above, Siegle calculates that this amortization period would mean paying an extra $200,000 in interest. “This is like a slap in the head,” he admits. “So we always tell people that this is just an entry strategy, not a long term one… it gets you qualified and then the first thing you look at is, ‘OK, how can I get rid of the 40-year amortization period?’”
The answer, he says, is to employ a little strategy. When you get that raise or that Christmas bonus, take advantage of your prepayment privileges and use it to pay down your principle. More frequent payments can also help ease the pain, Siegle explains, and choosing accelerated bi-weekly payments over monthly payments will get you out of your mortgage quicker.
“People just need to know that there are options out there,” says Siegle.