Buying a home can be intimidating, especially if you’re a first-time buyer. You have to worry about mortgage approvals, contracts, closing procedures, fees, deposits and all the little things that can go wrong.
But with an ounce of preparation, there’s no reason why your first home purchase can’t be smooth sailing.
If you want to sidestep common homebuying pitfalls, consider this list of 5 mistakes homebuyers make, and how to avoid them.
1. Not knowing your credit before starting the process.
Lenders don’t lend without carefully examining your credit health.
Someone with sufficient provable income, a credit score of 720+ and a low debt ratio usually qualifies for the best market rates. (“Debt ratios” refer to your monthly obligations divided by your monthly gross income)
Someone with a credit score below 650, on the other hand, may have a more difficult time qualifying. And if they do, they’d likely be quoted a rate that’s higher.
A previous RATESDOTCA survey found that just 60% of Canadians are familiar with their credit score. But if you plan to apply for a mortgage, don’t be in that 40%. Know your credit strength.
Being aware of your credit lets you improve your score (if need be) before you apply. It also gives you a sense of the negotiating power you’ll have when it comes time to secure a mortgage rate.
Both of Canada’s main credit bureaus, Equifax Canada and TransUnion, offer credit-monitoring services. There are also free credit score providers, such as Borrowell, Credit Karma, Mopolo and Mogo. Make use of at least one of them.
2. Being short of funds to cover closing costs
Saving up enough for your down payment is hard enough. But your obligations don’t end there. You’ll also need enough for closing costs.
Mortgage closing costs can total thousands of dollars. That often places a significant financial burden on new homebuyers.
Closing costs include things like land transfer taxes, appraisals, legal fees, default insurance, title insurance, partial property taxes, utility hookups and more. If you don’t want to be unprepared for these costs, plan to have at least 1.5% to 3% of the purchase price saved up, in addition to your down payment. Those getting a default-insured mortgage must prove they have a minimum of 1.5%.
For a detailed list of closing costs, check out The Hidden Costs of Buying a Home.
3. Flouting your budget
Sticking to a conservative budget can be especially hard for those living in the country’s high-priced urban markets, particularly in and around the Greater Vancouver and Toronto area.
Competition from other buyers and fear of missing out lead many homebuyers to exceed their home-hunting budgets.
But just because you have the means to exceed your budget—i.e. just because you can pass the government’s mortgage stress test and qualify for a mortgage—doesn’t mean you should.
Historically low interest rates have boosted buying power, but mortgage rates will climb again someday. If you have to renew at materially higher rates, your payment could balloon.
And if you purchased a larger or pricier house than intended, remember that multiple expenses increase with property size and value, like property taxes, insurance and heating bills.
4. Not shopping interest rates online
Only half of Canadians are likely to comparison shop their mortgage, vs. a global average of 61%, according to this HSBC survey.
But in this day and age, with so many online tools available to mortgage shoppers—including RATESDOTCA—there’s really no excuse not to shop around for the best mortgage rate. Most people put more effort into shopping for a new car, which is just a fraction of the financial commitment.
Even if you’re inclined to get a mortgage from your primary financial institution, being well-informed about competing rates puts you in a far better negotiating position.
Compare Mortgage Rates
Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.
Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.
5. Placing too much emphasis on finding the lowest rate
Practically all homebuyers start their mortgage search looking for the lowest rate. What they should actually be looking for is the best rate. And yes, there’s a difference.
The problem with focusing on the lowest rate is that oftentimes those mortgage products come with limiting contract provisions. They’re often called “no frills” mortgages for a reason.
For some buyers who will never break their mortgage or refinance early, this isn’t an issue. But for those who may need to unexpectedly terminate a mortgage partway through the term, having a mortgage product with a “fair penalty,” for example, can save thousands in breakage costs.
Borrowers can expect to pay small rate premiums for additional flexibility, such as:
- more generous prepayment options (e.g. 20% annual lump sum payment and 20% annual payment increase privileges);
- an annual skip-a-payment option;
- a readvanceable home equity line of credit (HELOC);
- discounted penalties;
- generous portability, etc.
On the contrary, rates are often lower in exchange for more restrictions, like:
- limited closing dates (lenders often require that your mortgage closes in a specific date range to qualify for a deep discount rate)
- minimum mortgage amounts (sometimes the mortgage must be at least $300,000 to $400,000)
- bona fide sales clauses (meaning you can only break the mortgage if you sell the home)
- higher-than-normal prepayment penalties (e.g. 2.75% of the outstanding balance or six months’ interest instead of three months)
- and many more…
The moral is, the total borrowing cost is always more important than the lowest rate. Make sure your mortgage advisor cares enough to quantify all the potential hidden mortgage costs based on your 5-year plan.