Considerations for your first mortgage
by Alyssa Richard
We all have financial goals. You may want to get out of debt, save more money or even buy your first home. If you’re thinking about the latter, a plethora of new financial tasks awaits you. You’ll need to get your down payment ready, hire a home inspector and a real estate lawyer, and, of course, find the home you want to buy. But before you can do any of that, you need to get pre-approved for a mortgage.
Once you’ve been pre-approved, remember that this is the absolute maximum amount a bank or mortgage broker would be willing to give you – and the mortgage payment at that top price is often outside of people’s comfort zones, when it comes to their personal budgets. To ensure you’re not strapped for cash and become house poor, try to buy something at a lower price point. Your budget will especially thank you when – not if, when – interest rates go up.
Economists have said an interest rate hike was on the horizon for years, but indications are that it could happen in 2015 (despite the recent drop). Since our economy follows the U.S.’s, the Bank of Canada will watch what the Federal Reserve does and go from there. It’s predicted that our prime rate could go up by as much as 1.25 to 1.50 per cent, though, which would affect anyone who had a loan attached to prime (variable mortgage, bank loan or line of credit). If you’re thinking of taking advantage of a low variable mortgage rate this year, you should first run the numbers to see if you could afford this potential increase.
According to the Canadian Real Estate Association, the average home price in Canada is slightly more than $413,000. If we plug that number into a mortgage calculator, put down 20 per cent and choose the current best five-year variable rate in Toronto (2.09 per cent), your monthly mortgage payment would be $1,413. Now, if prime went up by 1.50 per cent, so would your mortgage rate. If yours went up from 2.09 per cent to 3.59 per cent, your monthly mortgage payment would go up to $1,665 – that’s $252 per month or $3,024 per year extra that you’d need to find in your budget.
Imagine how difficult that would be to come up with, if you’d already purchased something at the top of your max budget. And fixed rate mortgage holders won’t be immune to the interest rate increase, either – those will likely go up, too, but you’d be protected from that until your mortgage came up for renewal. Still, I wouldn’t be surprised if we saw more people go fixed this year, in light of this potential interest rate increase. Even if it weren’t on the horizon, it’s always best to stress test a mortgage before you buy. A good rule of thumb: if you can’t afford a two-per-cent interest rate hike, you may want to look at a home within a more appropriate price range.
Alyssa Richard is the founder and CEO of ratehub.ca, a mortgage rate comparison site that aims to empower Canadians to make smart financial decisions.