For most new home buyers that don’t have the capital to fully pay for their property, the pleasure of purchase can be oft overshadowed by the dreaded ‘M’ word.
“A lot of people have the idea that a mortgage is actually the biggest debt of their life,” said Bruna Anacleto, Toronto mortgage specialist for Royal Bank of Canada. “It’s really not. It’s an investment.”
It’s also the only property loan homebuyers can acquire, outside of one from family and friends. And the first step Anacleto recommends toward acquiring a mortgage is obtaining a pre-approval, which she said both qualifies you for the loan and gives you a sense of how much you’re financially qualified to purchase.
So before setting your heart on that $500,000 dream home, a pre-approval will assess if you can really afford it. “You may think, with your salary, you can, but you’re not taking into consideration your debt load,” she said.
And what qualifies as debt isn’t always so apparent. Anacleto said most people don’t know that a line of credit, for example, counts as debt, in full. “You may have a zero balance on that line of credit, but we assume that you’ve withdrawn the whole thing,” she said. “The reason for that is because that’s credit you can obtain at any point in time, so we want to ensure you can pay that back if that happens.”
Paying back a mortgage over tens of years may seem like a daunting task. But there are strategic ways to do it. Barry Rathburn is a mobile mortgage specialist for TD Canada Trust on Vancouver Island. He recommends accelerating your payment by paying an amount higher than the minimum required, that you feel comfortable with, to make repaying more flexible down the road.
“One of your benefits is that you can up to double your payments,” said Rathburn. “Having the privilege to increase and decrease your payment at will is a great financial planning tool to manage your cash flow.”
TD specialist Barry Rathburn offers the following advice:
• You can pre-pay 15 per cent of your original mortgage balance each year. If completed yearly, your mortgage would be paid off in about seven years.
• Obtain mortgage insurance, to cover the amount of mortgage debt if you or your spouse falls ill or dies.
• Get approved for the longest possible repayment period to decrease the amount paid in the long run.