There’s a lot to learn before you make a move. Here are some tips
Derek Sankey
Sun
RBC’s Don Peard says first-time buyers should see a mortgage specialist and get approved. Photograph by : Greg Fulmes, Canwest News Service
Sixty-four per cent of Canadian adults own their home, but that number could drop because significantly fewer people intend to buy a home in the next two years due to the lack of affordability, according to new research from RBC Financial Group.
Overall intentions to buy a home in the next two years have dropped by five per cent to 23 per cent of adult Canadians, says the report. Those who say they are “very likely” to buy have slipped from nine per cent in 2007 to seven per cent this year, the lowest level in 15 years.
“Considering the flurry of activity we’ve seen over the last few years, this year’s results definitely signal a change,” says Catherine Adams, vice-president of home equity financing for RBC.
For first-time home buyers, much of the hesitation is due to lack of knowledge about their options and a sense that it’s a confusing, daunting task. Mortgage experts say it also signals a need for young adult Canadians to get a lesson in Mortgage 101.
“A lot has changed in the boring world of mortgages in the last two years that has helped people deal with the affordability issue as prices have gone up,” says Adams.
Housing markets may rise and fall, but one thing has always been true: building home equity pays off in the long run. “If I’m renting an apartment, that’s just money going out the window every month and you have no equity at the end of the day,” says Adams.
It all starts with the basics. Don Peard, a vice-president of RBC’s mortgage specialists, says potential first-time buyers need to get their credit report from Equifax Canada or TransUnion so they know where they stand.
“Try and get realistic about how much you can afford to pay for that home,” says Peard. The rule of thumb is that your mortgage and utilities costs should amount to no more than 32 per cent of your income, known as gross debt service ratio.
The total debt ratio, which includes all outside debt, should be no more than 40 per cent.
“Once you get up into that 40 per cent range, you’re curtailing your ability to have other funds available,” he says.
Next, see a mortgage specialist and get approved for a mortgage so you know exactly how much money you have to work with before looking around.
“People might have the perception that they can’t qualify for a mortgage but it’s a conclusion they jump to too quickly,” Peard says.
Interest rates are important, but remember to include other factors in your considerations, including flexibility of the terms and the type of mortgage: variable rate, fixed rate or a combination of both.
Take advantage of the change in the past two years among major lenders to switch from a 25-year limit on the length of the mortgage, or amortization, up to 40 years.
If you select a longer term, it will allow you to have lower payments up front and then, ideally, increase those payments as you progress in your career. If you don’t, the costs can be staggering.
For example, on a $150,000 mortgage paid out over 25 years, you would pay $140,000 in interest alone, but that goes up to $249,000 for a 40-year amortization. However, the 40-year term will reduce monthly payments from $979 down to $839 minimum.
About 60 per cent of RBC customers currently opt for the 40-year mortgage, Adams adds, but the majority plan to increase payments when they are able.
“It’s more of a strategy,” she says. “They’re young in their careers [and] they’re really more concerned about managing the payment while they’re young in their careers.”
Don’t forget to include closing costs in your calculations, which include legal and real estate agent fees, home inspections, property taxes, moving costs, utilities and possibly condo fees.
Shop around and see who offers a solution that makes the most sense for you. While buying a first home may seem overwhelming at the outset, just remember to do your research and take advantage of the new options available on the market.
“The important thing is that there’s a lot more flexibility,” Adams says.
© The Vancouver Sun 2008
