Buying a home is likely the biggest purchase an individual will make in their lifetime and for most Canadians that means borrowing to finance the purchase. Mortgage loans exist as an important way for people to purchase property. So, whether you have picked out your dream home, deciding to get pre-approved, or are re-financing or renewing your mortgage, it’s important to fully understand the process and all the choices you must make along the way.
The first thing to understand is just how much money you can borrow, that amount is based not only on your credit worthiness and financial situation, but also on the interest rate environment. Before Rapport grants a mortgage, a stress test is to analyze the affordability of the mortgage assuming an increase in rate to match the Bank of Canada’s benchmark rate. This is done to ensure, that you will still be able to afford your payments, if rates increase. It’s often a great strategy to check with your financial institution first to understand how much you can afford to borrow before you start looking for your home. That way you can stay within your budget as you shop instead of getting your heart set on a property outside of your price range.
Since Rapport wants members to be mortgage free as quickly as possible, making the right choices are essential. To pay less interest, the total period you will be paying your mortgage (amortization period) should be as short as possible, and you should choose higher frequency payments. The other factors to consider are your term and type of interest rate. It also means thinking about the pros and cons of mortgages. Let’s start with mortgages and your financial wellness.
Financial wellness is made up of two parts: financial capability and financial health. Being financially capable means actively making good money management decisions. It is a combination of our knowledge, skills, attitudes towards money, and our sense of control. Financial health measures how we are doing in meeting our financial needs and obligations. Basically, it measures our financial state. It also means being able to meet longer-term goals.
Since owning a home means that you have a large asset, many people believe it is automatically good for their financial wellness. While mortgage loans that improve your financial situation may be positive financially, it is still possible that dependent on the amount of debt you are already carrying, your cash flow, and payment history there could be negative impacts on your financial health.
One way to improve your financial capability around mortgages is understanding some of the terms associated with mortgages and lending. That way, you will be better able to make the right choices to positively impact your financial health.
As our member’s financial advocate, we want to make sure that you are knowledgeable when making decisions to borrow for a home. The following section outlines some of the terms you may hear when talking to a financial advisor.
Roll over the items below to find an explanation for each term.
Application Process | Net Worth | Cash Flow | Debt Service Ratio and Affordability | Credit Score | Loan to Value | First Time Home Buyer Incentive | Down Payment Requirements and Mortgage Type | Home Buyers’ Plan | High Ratio Insurance | Cost of Borrowing | Term & Amortization Periods | Mortgage Payment Frequency | Fixed versus Variable Interest Rates | Open versus Closed Mortgages | Portable Mortgages | Mortgage Insurance | Appraisal | Security Registration | Closing Costs
Pros and Cons of Mortgages
Like every decision, there are pros and cons when it comes to borrowing to purchase a home. The table below summarizes some of these.
PRO
- Makes home ownership possible
- Lower interest rates than other loans so a cost-eective way to borrow money
- Flexible terms and repayment options to suit individual circumstances
- Many mortgages allow for additional payments reducing interest paid over the long term
- Acquire equity as principal is paid down improving net worth
CON
- As the loan is high, borrowers pay significantly more for their home over time because of the interest paid
- Potential negative impact on credit score and cash flow if not handled appropriately
- Not everyone qualifies for the lowest rate as it is dependent on credit worthiness
- Could lose home if payments not made as required
- Significant fees
There are a lot of decisions to make about borrowing for a home. So, if you find yourself with questions, or you simply just want to have a conversation about your plans, your financial advocate is always just a call, email, or visit away. After all, our mission is to be your financial advocate so that you can be financially well now and into the future.