Canadian mortgage rates are low and housing prices are softening from province to province. But before running off to see the mortgage broker, Canadians entering the housing market for the first time should ask themselves whether they can afford a new home.
There are a number of steps prospective first-time buyers should take to assess their financial readiness before committing to home ownership, and being aware of the different aspects involved in qualifying for a loan and financing mortgage payments can start consumers off on the right track, according to M&I, part of BMO Financial Group, parent company of the Bank of Montreal.
The first thing potential homeowners should consider is how much of their income will be spent on housing. Between mortgage payments – which include interest and insurance – and property taxes, the costs can add up. One good rule of thumb is to keep the ratio of mortgage debt to income under one-third.
With a wide variety of home financing products available to consumers, using a mortgage calculator can help first-time buyers determine the monthly payments for each mortgage type and see what percentage of their income will be spent on home payments.
But homeowners will also have personal debts in the form of credit card payments, auto loans or utility payments, M&I points out. All together, housing payments and other debt should take up no more than 40 percent of household income.
First-time buyers will be able to choose between mortgages that have different interest rates, different amortization periods and different lengths. Each type of mortgage has its benefits, but consumers may find the process confusing.
The amortization period is the length of time in which one can pay off the principal balance of the mortgage. A shorter period can save tens of thousands of dollars in interest payments over the life of the mortgage, but may carry higher monthly payments.
The choice between fixed-rate mortgages and variable-rate mortgages can be a tough one. With a fixed-rate mortgage, homeowners will be certain that their monthly payments will remain consistent, which can help them better plan their finances. A variable-rate mortgage may offer some cost-savings benefits, but market fluctuations could bring monthly payments up unexpectedly, M&I warns.
The more money a homeowner can throw at a mortgage early in its life, the more he or she will save over the long-term, so the size of the initial down payment is key. Opening a savings account dedicated to a down payment can help potential homebuyers prepare for that first big leap into homeownership, M&I suggests.