THE DOWNPAYMENT

Most renters feel they can afford the mortgage payment. The main reason they feel they can’t afford to purchase a home is because they don’t have a down payment. But there are many solutions available today that can help first-time buyers with their down payments.

Many lenders will allow for a gifted or borrowed down payment. And of those lenders that will not provide this alternative, many offer cash-back options that can be used as a down payment.

Gifted down payments are allowed by most lenders, as long as the gift giver is an immediate family member and is willing to sign a form stating that the monies are gift and not repayable.

A borrowed down payment will be allowed, as long as it is disclosed on the application as borrowed, and has been included as part of the debt ratio calculations.

For borrowers with very little debt and not enough saved for a down payment, an RRSP loan can be a useful option. The money is borrowed for an RRSP contribution, the payments are included in the borrowers’ debt profile, and then the funds are withdrawn under the provincial First Time Buyer program that allows them to withdraw RRSPs without penalty for use towards the purchase of their first home. In 2009, a $5,000 increase was made to the RRSP Home Buyers’ Plan, meaning first-time homebuyers can now withdraw up to $25,000 from their RRSPs for a down payment – tax- and interest-free. And if you’re part of a couple making a home purchase together, you can each withdraw up to $25,000 from your RRSPs.

If, for instance, a renter is currently paying $800 per month, with that same payment (including taxes) they could afford to buy a $120,000 home. And assuming real estate values increase 2% per year over the next five years, the new homeowner would have accumulated $27,000 in equity in their home. If they continue renting, however, this $27,000 has generated equity in someone else’s home.

Most Canadians have likely asked themselves if it is better to buy or rent a home. Purchasing a home is one of the biggest decisions most people ever make.

Ultimately, the decision is a personal choice, but it helps to look at the pros and cons of buying vs renting to decide whether home ownership is the right choice for you.

Some advantages of buying vs. renting

Owning a home is generally considered to be a sound, long-term investment that can provide satisfaction and security for you and your family.

Every time you make your mortgage payment, you are growing equity in your home.
When you rent, you are building equity for your landlord.

At the start of a mortgage, most of the payments go toward paying off the interest and less goes toward paying off the principal. But the longer you stay in your home and the more mortgage payments you make, the more principal you pay off and the more equity you accumulate.

Most mortgages offer you the choice of making extra monthly or annual payments to reduce your principal faster. You can raise payments, double payments, make extra payments or put a lump sum directly against the principal. This will also help reduce the length of your amortization (the time it takes to pay off the mortgage principal), which in turn, saves you money.

From an investment perspective, there is also a tax advantage. If your home is your principal residence, any profit you make when you sell it is tax-free. A home can appreciate (or increase in value) as time passes, building up your equity. As your equity grows, it can be easier to upgrade to a more expensive home in the future due to the profit you’ll make when selling your current home.

As an owner, you are welcome to decorate and improve your home as you see fit. Ownership tends to provide a sense of pride and often strengthens ties to the community for you and your family.

If you decide that home ownership is the right choice for you, it is important to choose a home you can afford. If you can’t afford to buy your dream home, purchasing a more modest home can be a great stepping stone to start building equity that may eventually allow you to buy the home of your dreams.

Moreover, since we’re currently in a buyer’s real estate market and interest rates are at historical lows, now may be an ideal time to move from being a renter to an owner.

Some disadvantages of buying vs renting

While the benefits of buying a home are somewhat obvious, it’s also important to remember that home ownership brings some added responsibilities as well.

For starters, a home can be expensive. Your monthly payments will likely be more than what you are currently paying in rent, especially when you factor in such things as your mortgage, property taxes, insurance, condo fees if applicable, repairs and general maintenance.

The added financial responsibility ties up more of your cash flow. It is also likely to reduce your flexibility to move to a new location or change jobs without a lot of effort.

While your home might appreciate over time, don’t expect to get a huge profit quickly. There are no guarantees that your home will increase in value, particularly during the first few years. In the beginning, you could actually lose money if you had to sell because your home may not have appreciated enough to cover the real estate fees, and moving, renovation and other selling costs.

Real estate is, however, usually considered by most a good investment over the long term.

When making the decision about whether to buy or rent, it’s important to carefully choose a home you can afford, and then list out the pros and cons. Millions of people enjoy the rewards of home ownership but, ultimately, it’s a deeply personal decision based on your own individual priorities.

Talk to Greater Vancouver and Maple Ridge mortgage broker Rebecca Awram if you have any questions.

If you are shopping for a new home, be sure you have a mortgage pre-approval. Obtaining a mortgage pre-approval provides you with a guideline on how much mortgage you will qualify for, and also provides a rate hold.

The mortgage broker that you work with to get your mortgage pre-approved will let you know for sure what you can afford based on lender and insurer criteria, and also what your payments on a specific mortgage will be.

Licensed personal loan consultants can lock-in an interest rate for you for anywhere from 60 – 120 days while you shop for your perfect home. Some mortgage brokers can even lock in rates for longer on new construction/builder projects. By locking in an interest rate, you are guaranteed to get a mortgage for at least that rate or better. If interest rates should drop, your mortgage pre-approval rate will drop as well. On the other hand, you are protected if mortgage interest rates should go up, as your locked-in interest rate will not. The rate hold on a mortgage pre-approval is strong protection and hedge against a short-term rise in rates.

To get pre-approved for a mortgage, a mortgage broker requires some application information that will allow them to determine your buying power. They can then explain to you the benefits of shorter or longer mortgage terms, the latest programs available, which mortgage products they believe will most likely meet your needs the best, plus they will review all of the other closing costs involved with purchasing a home.

Getting pre-approved for a mortgage is something every potential home buyer should do before going shopping for a new home. A mortgage pre-approval will give you the confidence of knowing that financing is available, and it can put you in a very positive negotiation position against other home buyers who aren’t pre-approved. It gives you a significant advantage over other people bidding on the same home.

Selecting the length of your mortgage amortization period – the number of years it will take you to become mortgage free – is an important decision that will affect how much interest you pay over the life of your mortgage.

The lending industry’s benchmark amortization period is 25 years and this is the standard that is used by lenders when discussing most mortgage offers. In fact, this is the maximum available for all high ratio insured mortgages (equity of 20% or less). Shorter or longer timeframes are available – to a maximum of 35 years.

Advantages of Shorter Mortgage Amortizations

The most compelling reason to opt for a shorter amortization period is that you will become mortgage-free sooner and the total interest that you pay over the life of your mortgage is greatly reduced. This shorter amortization also affords you the benefit of building up equity in your home sooner.

While this is obviously attractive, other considerations must be made before selecting your amortization. Payments on shorter amortizations are higher than the payments on longer amortizations. So if your income is irregular because you’re paid commission or if you’re buying a home for the first time and will be carrying a large mortgage, a shorter amortization period that increases your regular payment amount and ties up your cash flow may not be the best option for you.

Your mortgage broker will be able to help you choose the right amortization and ensure you have adequate cash flow. If you can comfortably afford the higher payments, are looking to save money on your mortgage or maybe you just don’t like the idea of carrying debt over a long period of time, you can discuss opting for a shorter amortization period.

Advantages of Longer Mortgage Amortizations

Deciding on a longer amortization period also has some advantages. For example, it can get you into your dream home sooner than if you select a shorter period. When you apply for a mortgage, lenders calculate the maximum regular payment you can afford. They then use this figure to determine the maximum mortgage amount they are willing to lend to you. Being “maxed” out isn’t a comfortable feeling for anyone, but a little easier to swallow for those people knowing that their incomes will be increasing consistently and dependably as time goes by.

While a shorter amortization period results in higher regular payments, a longer amortization period reduces the amount of your regular principal and interest payment by spreading your payments out over a longer timeframe. As a result, you could qualify for a higher mortgage amount than you originally anticipated. Or you could qualify for your mortgage sooner than you had planned. Either way, you can end up in your dream home sooner than you thought possible.

Keep in mind, this option is not for everyone. While a longer amortization period has appeal because the regular mortgage payments can be comparable or even lower than paying rent, it does mean that you will definitely pay more interest over the life of the mortgage.

Regardless of which amortization period you select when you make your mortgage application, you do not have to commit to that period for the life of your mortgage. You can always choose to shorten your amortization and save on interest costs by increasing your payments, making extra payments when you can or even an annual lump-sum principal pre-payment. If making pre-payments (in the form of extra, larger or lump-sum payments) is an option you’d like to have, your mortgage broker can ensure the mortgage you select will not penalize you for making these types of extra payments.

It is also wise for you to re-evaluate your amortization strategy every time your mortgage comes up for renewal. That way, as you advance in your career and earn a larger salary and/or commission or bonus, you can choose an accelerated payment option (making larger or more frequent payments) or simply increase the frequency of your regular payments (ie, paying your mortgage every week or two weeks as opposed to once per month). These strategies will take years off of your amortization period and save you a considerable amount of money on interest throughout the life of your mortgage.