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The-Mortgage-Gal

Have a plan

Setting Yourself up for mortgage success

I had an interesting conversation with clients about my last article Are you mortgage ready? We chatted about living within our means as opposed to living paycheque to paycheque.

We were signing final paperwork and going over a recap of their mortgage application. They looked at the list of their debts and basically said, “How did we get here?”

Both the husband and wife work full-time, and have one child who is very athletic and competes at the national level in his sport.

These parents cover all of his travel costs to get him to competitions. They have a nice home and dependable vehicles; nothing fancy or high-end on either front.  

The travel expenses for their son’s sport have added up over the years to the point they realized they had to make some difficult decisions. We talked about how extraordinary expenses like sports and the related travel can derail a sound financial plan.

Years ago, I worked with a couple who bought their first home based on the husband’s income only. They told me at our initial appointment they planned to have their home paid off in five years so that she could stay home when they decided to start a family.

I remember thinking that the odds of them sticking to this plan were very unlikely.

They made double-up payments every month, and made lump sum payments every year. Sure enough, when the mortgage came up for renewal, they had enough money in their savings account to pay it off in full. They are still in the same home and have raised two lovely daughters there.

I know another couple who bought their first home based on the husband’s entry-level salary. Over the years, he worked his way up to senior management. 

They took the unusual step of continuing to live as if he were only making the salary from his early days. Everything else they banked. They had their house paid off within 10 years, and were able to retire early and now travel extensively.

Both of these are situations where the couples were very committed to their plans. House prices were considerably lower at the time. The cost of living was lower. So were their incomes.

The point is that they made lifestyle choices strategically and in both cases this dedication meant they are able to live debt-free at relatively young ages.

I am currently working with clients who shared an idea with me. They decided to start saving for a home, and found it challenging to tuck away as much as they thought they could. For a month they tracked every penny of their spending, and realized how much they were spending on treats like fancy coffees.

They implemented an “Impulse Fund” program. Every time they talked about heading to their local barista, they instead transferred the equivalent money to their down payment fund. This simple change meant an additional $300 in their account at the end of each month.

My last article talked about taking some time to figure out if you are ready to buy a home; not only pre-approved with down-payment in hand, but prepared for the ongoing expenses.  

Are you ready to adjust your budget and current lifestyle to own a home?

The next step is to think about what type of home is going to best suit both your current and future lifestyles. For instance, will a slightly older or smaller home near great schools be a better long term fit than a condo downtown?

Will looking for a home with a suite mean you can get in to a slightly newer or larger home? Do you spend a lot of time away hiking/biking/camping so a smaller home might be a better option?

When you crunch the numbers and price ranges with your mortgage specialist, think about buying a home that is not at the top of your price range. Allow yourself a buffer so, if your income changes, you will still be able to make your mortgage payments.

Take some time to think about your wish list. Be very clear about your “must have” and “nice to have” features. Revisit your budget. Think about your lifestyle, and what type of home will work best. Do your research upfront.

Develop a plan and stick to it. Small changes can make a huge difference.

Being strategic about your home purchase will help set you up for long-term financial success. 





Are you mortgage ready?

By Tracy Head

Just because the numbers say you qualify to carry a mortgage, it doesn’t mean you're ready.

If you are thinking about getting in to the housing market or upsizing, it’s a great idea to meet with your mortgage specialist or bank well ahead of time.

Learn about the process and find out what you are looking at in terms of upfront costs and ongoing expenses. Research the payments you will be responsible for above and beyond your mortgage.  

As a homeowner, some of the ongoing expenses you will be responsible for include:

  • your mortgage payment
  • property taxes (can be collected with your mortgage payment)
  • quarterly public utilities (city services like garbage pick-up and water)
  • monthly strata fees (if applicable to your new home)
  • property maintenance and repairs
  • utilities – internet / gas / hydro
  • home insurance
  • life and/or disability insurance to cover your mortgage (optional)
  • alarm system (optional)

In addition to the ongoing expenses, you will also be responsible for repairing or replacing appliances when they pack it in; there will be initial expenses for items like lawn mowers; and you will need to plan for annual maintenance activities (gutters, furnace, spring yard clean up, etc).

As a tenant, your rent likely includes most of these expenses and it can be an eye-opener to realize what the true cost of owning your own home will be.

If you are trying to decide if you are truly ready, create a budget based on the list above. From there, practise covering those expenses for a few months.

Take the difference between your current rent payment and the budget you just created and put that amount into a savings account.

Be disciplined and committed – this budget represents your new reality as a homeowner. Stick with it for a period of at least six months to a year. This will give you a taste of how owning a home will impact your current lifestyle.

Let’s say that you total up the expenses on the list and that total is $2,850. Assume you are currently paying $1,700 in rent plus utilities (gas, hydro, internet/tv) for a total of about $2,100 monthly.

For the next six months, put the $750 difference into your savings account or TFSA. Better yet, round it up to $1,000 to represent unexpected maintenance and repair costs.

At the end of the six months (or whatever period you choose), you will have a substantial chunk saved for your down payment, and will have a pretty solid idea of whether you are ready to take the plunge and buy a home.

Tracy Head is a mortgage consultant with Verico Complete Mortgage Services. She can be reached at 250-826-5857.



Down-payment options

By Tracy Head

If you are paying rent in the Okanagan (often higher than a mortgage payment), it is almost impossible to save for a home. 

So how do you come up with the money you need?

To buy a home, you need to have a minimum of five per cent down payment. You will actually be required to show that you have 6.5 per cent (five per cent for down payment plus 1.5 per cent for closing costs) on hand.

At one time, this option was only available to first-time home buyers; the program has since been expanded so that most people are able to take advantage of it. Houses priced over $500,000 require a little more — five per cent of the first $500,000 and 10 per cent of any balance over $500,000.

What if you are not able to save part or all of your down payment yourself? Here are three ways you can come up with the money you need:

  • Gifted down payment
  • Federal Home Buyers' Plan (RRSP withdrawal)
  • BC Home Owner Mortgage and Equity Partnership

GIFTED DOWN PAYMENT

All or part of your down payment can come from a gift, as long as all of the following conditions are met:

  • The person giving the money is an immediate relative (i.e.: a parent, grandparent, or sibling); 
  • Your lender has verified that the money is a genuine gift (not repayable);
  • The funds are in your account at least 15 days prior to the closing date of your mortgage.

Your lender will usually ask for a gift letter signed by the family member providing the money, as well as copies of bank statements showing that the money is available and has been transferred to your account.

FEDERAL HOME BUYERS' PLAN

The Home Buyers' Plan is a program that allows you to withdraw up to $25,000 per person (or $50,000 per couple) from your registered retirement savings plans (RRSPs) to buy or build a qualifying home.

Withdrawals that meet all conditions do not have to be included in income and there is no withholding tax. As part of the program, you are expected to pay 1/15 of the amount you use back to your RRSPs over each of the next 15 years.

BC HOME OWNER MORTGAGE AND EQUITY PARTNERSHIP

Under this relatively new program, the provincial government will match your funds up to a maximum of five per cent of the purchase price.

Your portion can come from your own resources (savings, RRSP, etc) or from gifted money. This means that you will be able to get in to a home with as little as 2.5 per cent of the purchase price – the program will potentially match that amount to add up to the five per cent minimum you need.

To take advantage of this program, you need to meet with your mortgage broker or bank and get a pre-approval in place. Once you have your pre-approval certificate, you apply on-line for the additional down payment funds from the provincial program.

You will need to provide confirmation that you are pre-approved for a mortgage, as well as information about your income and finances.

It’s a great idea to meet with your mortgage professional before you start shopping for a home to discuss how much you qualify to borrow, as well as how much you need to have on hand for your down payment and closing costs.

Your mortgage professional can review your finances and discuss options like the Home Buyer’s Plan and the BC Home Owner’s Mortgage and Equity Partnership to help get you into a home.

Tracy Head is a mortgage consultant with Verico Complete Mortgage Services. She can be reached at 250-826-5857.





Things to think about

What You Should Think About When Financing Your Home

If you’re like most Canadians, your home is probably the most important investment you’ll ever make.

Whether you’re buying a home or refinancing your existing home, making the right decision now can help save you money and provide greater financial stability for your family in the future.

To help you make an informed decision, Canada Mortgage and Housing Corporation (CMHC) offers the following tips on what you should think about when financing a home:

Calculate in advance how much home you can afford. 

Mortgage professionals use a few variables to determine the maximum mortgage you can afford:

  • your household income
  • your down payment
  • your debt payments including your new planned mortgage along with major related expenses such as property taxes and heating.


Consider getting a smaller mortgage than the maximum amount you can afford. 

Your future financial picture may not be the same as it is today. By taking on a smaller mortgage than the maximum amount you can afford, you will gain the flexibility and peace of mind to manage your other obligations today and deal with any unforeseen events that might occur in the future.

Evaluate the impact rising interest rates could have on your monthly payment. 

For many homeowners, a rise in interest rates could have a significant impact on their housing costs. For example, if you are renewing a mortgage of $250,000, an increase of just two per cent in the interest rate could cost you around $265 extra each month.

Evaluating the impact of future interest rate increases today could help you avoid potential financial difficulties tomorrow.

Become mortgage free faster by reducing your amortization period. 

On a mortgage of $250,000, choosing a 15-year amortization instead of a 25-year amortization will increase your monthly payments by about $545, but will also save you around $48,000 in interest over the life of your mortgage, and make your family mortgage-free 10 years sooner.

Choosing an accelerated payment option (equivalent to one extra payment per year), making lump sum payments or increasing your regular payment amount all contribute to reducing your amortization period.

For example, making one extra payment per year on your 25-year mortgage will make you mortgage-free six years sooner.



More The Mortgage Gal articles

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About the Author

Laurie Baird and Tracy Head are mortgage brokers with Verico Complete Mortgage Services. Together they have over 45 years of experience in the mortgage industry.

As mortgage brokers, Laurie and Tracy spend time getting to know the people they work with and help them understand the mortgage process. They support their clients before, during, and after a home purchase.

Laurie and Tracy are able to offer their clients advice and options. With access to over 40 different lenders, Laurie and Tracy are able to match the needs of their clients with the right mortgage package. They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit:
http://www.okanaganmortgages.com

Visit Laurie's blog at: https://www.okanaganmortgages.com/blog



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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