If you are thinking of purchasing your very first home, you are not alone. Every year, thousands of Canadians take the leap and invest hundreds of thousands of dollars towards their first home. Doing so can be an intimidating task, as applying for a mortgage can be stressful, especially if it is your first. Here, we will discuss some of the top concerns that many first-time home buyers should address as soon as possible before they invest in a new home.
The Down Payment
It is important to note that putting down a higher down payment may actually have long term benefits, as doing so will also lower your monthly payments. That is, the higher the down payment, the lower your mortgage amount will be because you will end up borrowing less money from your bank or another such lender.
If you put down a down payment that is below 20% of the purchase price then you will be obligated by law to obtain mortgage insurance. Hence, putting down a small down payment will mean that you will have to deal with elevated carrying costs, which may also reduce the likelihood that you will be approved when you apply.
Mortgage Stress Test
The mortgage stress test can be applied towards uninsured and insured mortgages in Canada, and you will be required to qualify at a rate that is roughly 2% higher than your contracted rate. Passing the stress test essentially proves that you can afford to pay the mortgage amount even if interest rates rise.
In fact, the Market Year in Review and Outlook Report published by the Toronto Real Estate Board found that people who applied for a mortgage in Toronto needed to qualify at a median amount of $700 per month more than what was actually required of them in terms of their monthly payment.
If you are already struggling to make payments and you are spending over a third of your pre-tax income on shelter alone, then your mortgage stress test results may cause you to reach critical mass, which will subsequently prevent you from qualifying for your mortgage.
When to Apply for a Mortgage
If you have just bought a new condominium then you may be able to move in before the property registers. You will also be required to pay interim occupancy fees to the developer at this time, which essentially serves as rent because you cannot actually apply for a mortgage until the condominium complex is registered with your municipality. Interestingly, it can take anywhere from 3 to 6 months, or even longer in some instances, for a condominium to be registered.
Most developers will notify you when your final closing date is approaching, and to better prepare yourself for the impending day, we would suggest that you get your affairs in order right after you move into your new condo. You should also compare and contrast multiple different lenders and their advertised rates, so that, when the time comes, you will be able to make a sound and conscientious decision.