Recently I sat down with Paul Hollahan, mortgage specialist at RBC Royal Bank® and asked him about some important questions that all first time home buyers should know when starting their house hunt. Here is a summary of our conversation that we ended up calling the “Top 5 First-time Homebuyer Questions”.
There have been some rule changes announced by the federal government that affect homebuyers; these include down payments and amortizations periods. These rule changes affect how people have to save for a down payment. Do you have any advice for first-time homebuyers on how they can save for a new home and how much down payment will they have to pay? How soon can our clients expect to pay off their mortgage?
If the property is intended to be a primary residence the minimum down payment is 5%. Let’s say your first house is $200,000, your down payment would be $10,000. Mortgages with a 5% down payment require default mortgage insurance for which you will be charged a premium. This premium is normally added to your total mortgage amount. If you were buying an investment property like a non-owner occupied 2-unit rental, the current guidelines state that a minimum 20% down payment is required. Any mortgage with less than 20% down payment requires default mortgage insurance. Conventional (non-insured) mortgages are available if you have 20% or more to use as a down payment.
The types of down payment that are acceptable include savings or investment accounts where it’s possible to verify that the down payment has been on deposit for at least 90 days, money from the sale of an existing property, gifted down payment, or withdrawal from your RRSP through the home buyers plan. My advice regarding saving for a down payment is to have some sort of automatic savings plan such as TFSA, RRSP, or an online high interest savings account. You can contribute as little as $25 and make deposits weekly, monthly, etc. or whatever works best for you. The key is automatic savings, it will all add up to help with your down payment.
25 years is the current maximum amortization period for an insured mortgage and 30 years for a conventional mortgage. Most first-time homebuyers use a 5% down payment and 25 year amortization. This means that if you are paying your mortgage monthly it will take 25 years to pay your mortgage in full. Clients can pay down their mortgage years faster by choosing weekly and bi-weekly payment options over monthly. Accelerated payments, double-up payments and lump sum payments are also widely available to help you pay down your mortgage more quickly.
I always recommend that my buyer clients get pre-approved before we start looking for their next home. Can you explain why it is so important to get pre-approved for a mortgage and does this pre-approval guarantee that our clients will get the financing they need?
A pre-approved mortgage means that you have sat down with a mortgage specialist, reviewed your earnings, assets & liabilities and have determined the amount of money you should be able to borrow to buy a home. A pre-approval is based on the condition of fulfilling the required information: confirmation of income, confirmation of down payment, the value of the property you are purchasing, etc. Your mortgage specialist will provide a complete take-away list of requirements. A RBC Royal Bank® firm approval means that you have met all the requirements of the take-away list and thus financing is secure (unless fraudulent activity is discovered). Having a pre-approval gives my clients the confidence to approach REALTORS® and search for properties within their budget and comfort zone. A pre-approval also locks in your interest rate for a certain period of time, normally 120 days.
It is very important to have professional guidance when making one of the largest purchases of your life like buying your first home. Why do you recommend to your clients that they contact to REALTOR® to help them with the buying process?
A REALTOR® will offer guidance throughout the entire purchasing process and our clients can then go house shopping with confidence. It is important to choose a REALTOR® that is familiar with the local market and someone that will be easy to work with and easily reached by phone or email. Getting referrals from friends and family who have had a great experience with a local REALTOR® is a great first step in deciding who you should work with. Your REALTOR® will listen to what is important to you and then work hard to find the perfect home. This may mean viewing just a few homes or it may take many viewings to find the right house for your family. Your REALTOR® becomes very important during the negotiation process when preparing a purchase and sale agreement. They have the knowledge of what the house is worth to ensure you pay a fair price and they have experience with the many potential conditions of a purchase and sale agreement that will make sure you are protected. Once your REALTOR® has helped to negotiate you a great deal, they will work with home inspectors and lawyers to make sure the process to closing runs smoothly.
Many first-time homebuyers want their first house to be the one of their dreams. Sometimes they’ll get so caught up in a particular house that they forget about how much it will cost to own. How can our clients quickly determine how much of a home they can afford so they don’t waste too much time dreaming about a home that is not a reality for them?
It is important to always start with getting pre-approved for mortgage financing so you have a budget for your home purchase. To quickly get an idea of what you can afford there are online calculators that will give you an estimate of your home budget based on your current situation of savings, debt and income.
There are two important ratios that I use to determine the amount of home someone can afford. The first is the gross debt service ratio (GDS) and the second is total debt service ratio (TDS). GDS is your proposed monthly mortgage payment, property taxes and heating costs divided by your gross monthly income. Ideally, the GDS should not exceed 32%. The difference in TDS vs. GDS is that TDS is your entire monthly debt load (credit card payments, loan payments, home insurance, car payments and any other debts) divided by your gross monthly income and it should not exceed 40%. As a Mortgage Specialist, I always go beyond these numbers and get to know my clients as individuals. These are guidelines but everyone is different and part of my job is to provide customized advice and make sure clients are comfortable in their new homes.
Many of my home buying clients ask about mortgage interest rates, but in many cases there are scenarios where their financing can be structured to give them great flexibility depending on their situation and interest rate is only one of the important factors. Other than interest rate, what are some of the best mortgage options for clients?
As a mortgage specialist, interest rates are important, but the client’s situation definitely comes into play regarding their financing options. Every client is different so a fixed rate mortgage may benefit one client whereas a variable rate mortgage may be the better option for another client. With the RBC Homeline® plan (which requires 20% down payment), you can have the best of both worlds with both fixed and variable rates; this is called a split mortgage. We can also look at many pre-payment options that can increase the speed at which they will pay down their mortgage. These could include choosing accelerated bi-weekly payments rather than monthly, double up options which allow a client to pay up to double of their regular mortgage payment and annual lump sum payments where clients can pay a specified lump sum payment without penalty. Getting great advice from a professional is important and can often save you thousands over the life of your mortgage.
A big thank-you to Paul Hollahan of RBC Royal Bank® for his great advice!
Richard H. Butt is Broker/Owner & REALTOR® at Newfoundland Island Realty in Corner Brook. He has been in the real estate business for the last 8 years and helping his clients achieve their real estate dreams is his passion. Find Richard online at www.nlislandrealty.com or call 709.639.7368.