How much mortgage should you carry?
There are several things to consider when deciding how much home to buy.
1. Draw up a budget including the new mortgage payments.
While the rules used by most lenders require that the mortgage payment along with property taxes and heating costs not exceed 32% of your household income, this is not suitable for every borrower. I have had some clients who do not have other loans or debts and so can afford a much higher payment while other clients, enjoy going out frequently and so this may be too high a payment for them to manage.
So even though your bank or mortgage broker may tell you based on the lender's or insurer's guidelines that you qualify for a certain sized mortgage based on your income, you need to look at your own budget needs. I good guideline is your current rent. How easy is it for you come up with the rent and still have money for other expenses?
The monthly, weekly or bi-weekly payments can also fluctuate if you are in a variable rate product as interest rates change, so be sure you have some extra money at the end of your month. With a fixed rate term you could also be looking at an increase in your payment when your mortgage comes due if rates have risen since you locked in. One way I protect my clients from this, is through an email system which alerts them when rates are going up and sets a plan to protect them from payment shock at maturity.
2. Reconsider the old idea of buying a starter home now and moving up down the road.
The larger home slightly outside of town although cheaper than the same sized house in town, may have all sorts of extra costs for many homebuyers. You need to look at the entire situation. For example, are the extra gas costs to commute into work really worth it? Yet buying a bigger home now could be a better decision if you know that you will be graduating to a larger home anyway. Everything from property tax and transportation costs should be at least considered. A $50,000 difference in selling price between two homes may not be that much if you are sure that you will most likely be spending more time in a larger home.
3. Don’t get carried away comparing mortgage rates.
I find that banks and brokers have done a poor job of educating consumers about what to ask as far as the mortgage is concerned, so we have made it all about price. The products vary so much from lender to lender that it is so important to understand what you are getting.
In particular most of my clients are not aware of collateral charges. Many banks such as RBC and TD Canada Trust register mortgages as collateral charges which the banks tell clients allows them more ease in taking out a line of credit from the house, yet this type of charge cannot easily be transferred to another lender at maturity without costs.
This also happens when you take out a line of credit with your bank. The balance of a line of credit is re-advancable unlike a regular mortgage and so cannot easily be moved from one lender to another if the rate offered at maturity is not competitive.
The lenders are finding these collateral charges are increasing their retention of business at maturity. But is it really in your best interest?
4. Prepayment options can save you thousands.
The ability to prepay extra on your mortgage. For example: 20% of your outstanding balance on any payment date and increase your payment by 20%, can save thousands of dollars over the life of the mortgage. Sometimes the lower advertised mortgage rates restrict these extra payments.
You are always best to deal with an Accredit Mortgage Professional (AMP) who has your best interests in mind. Please feel free to call 250 862 1806 or email mtggal@okanaganmortgages com.
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