Purchasing a home and committing to a mortgage is likely one of the most significant financial decisions you’ll ever make. It’s a major step, with a lot at stake, and it’s important to be well-informed, as your mortgage could shape your finances for many years to come.
Even the most confident buyers can find themselves uncertain during the home-buying process. However, by thoroughly researching and understanding your options before applying for a mortgage, you’ll be better equipped to make an informed decision. Here are some key considerations and strategies for paying off your mortgage sooner.
The BlueShore Financial Spa branch located at 1250 Lonsdale, North Vancouver.
Opportunities for first-time home buyers
If you’re a first-time home buyer, but don’t have enough for a 20% down payment, you may qualify for a high-ratio mortgage from Canada Mortgage and Housing Corporation (CMHC). With a high-ratio mortgage, mortgage loan insurance is required, and the premium is calculated as a percentage of the loan and is based on the amount of your down payment.
The federal government also offers incentives and savings plans for first-time homebuyers:
- The First-Time Home Buyers’ (FTHB) Tax Credit is a non-refundable tax credit based on $10,000 of the home purchase amount. It provides up to $1,500 in federal tax relief to help offset costs associated with purchasing a home, such as legal fees, inspections, and land transfer taxes.
- The Home Buyers’ Plan (HBP) allows buyers who haven’t owned a home in five years to use RRSP funds to buy a home. The HBP withdrawal limit is $60,000.
- The First Home Savings Account (FHSA) allows Canadians to save for their first home through a registered plan, similar to an RRSP or TFSA. This plan permits tax-deductible annual contributions of up to $8,000 for up to 15 years, with a lifetime contribution limit of $40,000.
Understand how interest is compounded
Compound interest on a mortgage refers to the interest you pay on the interest that is owing on your mortgage. The more frequently the interest is compounded, the more you will pay. Generally a fixed rate mortgage is compounded semi-annually and a variable rate mortgage is compounded monthly. When discussing your mortgage with your lender, be sure to ask how frequently the compounding occurs. If the mortgage you are considering compounds more often than what is commonly available you will end up paying more than you need to.
Choose your rate of comfort – variable or fixed
In most cases, a variable-rate mortgage offers a lower interest rate compared to a fixed-rate mortgage. If you’re someone who feels comfortable monitoring interest rates and accepting the potential fluctuations, a variable-rate mortgage could be a good option for you. Since the payments are typically fixed, the amount applied to your principal varies with the interest rate. If you’re open to some risk, you might save money with a variable rate.
On the other hand, if you’d prefer not to track interest rates and value the certainty of a consistent payment, regardless of rate changes, a fixed-rate mortgage might be a better fit. While you may forgo the potential savings, you’ll gain the stability and peace of mind that comes with a fixed rate. It is best to speak with a Financial Advisor to determine which option makes the most sense for you.
Financial Advisor Shervin Morasaneshan shares expert advice during a financial planning session with a client at a BlueShore Financial location in North Vancouver.
Check your prepayment options
Whether you opt for a ten, five or one year mortgage term, find out what the prepayment options are. Why? You may want to adjust the terms of the loan during the contracted period, especially if rates change, you have excess cash flow or you sell your home. Prepayment options include annual lump sum payments or accelerated bi-weekly or weekly payments to pay off the principal faster.
Get pre-approved before you start house hunting
You can hold the current rate for up to 120 days while looking a suitable property. Whether you are in the market for a new home or are looking to upgrade, talk to a financial advisor at BlueShore Financial today about all your mortgage options.
Selecting the right mortgage is essential for setting up your financial future for success. By understanding key factors like interest rates, compounding, and prepayment options, you can make an informed choice that aligns with your goals. Whether you’re a first-time buyer or refinancing, consulting a financial advisor will help you navigate your options and choose the best mortgage for your needs.
