April 1, 2013

Ten common mortgage mistakes

Knowing about possible snags ahead of time will make it easier to apply for that mortgage.

Kevin Lutz, regional manager, mortgage specialists, Royal Bank of Canada

Becoming a homebuyer and applying for a mortgage may seem overwhelming, especially if it’s your first time. To help you feel more confident, I’ve put together a list of 10 of the most common pitfalls, with advice on how to avoid them.

1 Not knowing your credit rating. Lenders can use your credit rating to verify your repayment history. As part of your approval process, your lender will obtain and review your credit report. Should you want to review your own report ahead of time, you can easily request a copy from either www.equifax.ca or www.tuc.ca.

2 Being unrealistic about how much you can afford to pay. You may be under- or over-estimating how much you can afford to pay for a home. Start by checking your bank’s online mortgage calculators. You can input different down payment, income and credit information to give you an idea of the maximum mortgage payment you can afford each month.

3 Not considering a firm mortgage pre-approval. Knowing the mortgage amount you will be approved for gives you the confidence to begin looking at homes within your price range and make sure you are unconditionally and firmly approved.

4 Thinking you won’t qualify for a mortgage. Not sure if you qualify for a mortgage due to your credit history being less than perfect? You should still seek to get formally pre-approved, as many banks can help you find a solution.

5 Not knowing all the down payment choices. You’ll be glad to know that there are different options available depending on how much down payment you can afford. Low down payment mortgages (below 20 per cent down) require mortgage default insurance and the premium can be added to the amount you borrow. First-time homebuyers are eligible to use up to $25,000 in RRSP savings per person for a down payment.

6 Focusing too much on the interest rate, rather than the overall solution. All too often, first-time homebuyers give more thought to interest rates than the mortgage solution itself. While rates are a valid consideration, the type of mortgage, payment structures, terms and flexibility will have a greater impact on your overall cost of borrowing.

7 Understanding your interest rate risk tolerance. Choosing a fixed or variable rate term can be difficult. Get expert advice to help you decide which mortgage solution works for you based on your tolerance for interest rate increases. Most lenders now have a combination mortgage which means you can enjoy the advantages of both variable and fixed rates.

8 Not choosing your own mortgage payment schedule. Customize your amortization period depending on how much you can afford. If you decide to take a longer amortization, consider a strategy to reduce amortization of your mortgage by making extra payments along the way. Coordinate your mortgage payment with your pay day.

9 Forgetting about closing costs. It helps to know what closing costs are so you can minimize last-minute complications. When calculating costs, assume you will need approximately 1.5 per cent of the purchase price.

10 Not understanding the ongoing costs of home ownership. A suggestion is to budget at least one per cent of the home’s value for yearly maintenance expenses including heating, electricity, water, repairs and taxes. If you live in a condo, keep informed about future strata fee increases or assessments.

Follow Kevin Lutz on Twitter @RBCKevinLutz

 

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