Buying your own home is, for many, the ultimate investment. It’s the safest place in which to put your money, and it results in a home that is well and truly yours. You can decorate it however you like, you can make any renovations you see fit. And if you do something to increase the value of the property (like remodelling the kitchen or bathroom or converting the attic space), it’s you who benefits from the added value. No longer need you spend your years in a home that never quite feels like it’s yours, or fork out your hard earned monet to pay off someone else’s mortgage month after month.
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Still, buying your own home isn’t always smiles and rainbows. There are many liabilities from which renters are protected but which will be your responsibility when you own your own home. Furthermore, the mortgage product you choose will go a long way towards determining your experience as a home owner. It will affect everything from the down payment you part with to your monthly mortgage repayments and how long the loan takes to be repaid. For first time buyers, the world of mortgages may seem bamboozling with its mathematical gymnastics and endless jargon.
In this post we’ll look at some of the most common mistakes made in choosing a mortgage, and how to avoid them…
Assuming that all mortgages are the same
Many may assume that the difference between mortgage products is negligible. Furthermore, when you’ve fallen in love with a certain property you may jump on any mortgage that gets you closer to the dream of owning it. But this is exactly why you shouldn’t fall in love with properties!
There are many different kinds of mortgage in Canada, and each has slightly different terms and rates of interest which could result in you paying more of your hard-earned monthly income on interest and gaining less equity over the years.
Different kinds of product include;
- Conventional mortgages- where the downpayment is equivalent to roughly 20% of the property’s value.
- High ratio mortgages- This is where your downpayment is less than 20% and you will be expected to have mortgage default insurance to protect your investment.
- Open mortgage- This kind of product allows you to repay your mortgage in full without incurring penalties.
- Closed mortgage- This kind of mortgage usually cannot be prepaid,refinanced or renegotiated in any way.
- Variable rate mortgage- The interest rates may change depending on the market rates within the terms of the mortgage. So you may find yourself paying more (or less) interest than when you first took out the mortgage.
- Fixed rate mortgage- These mortgages have an interest rate that remains fixed. These mortgages usually have options to repay more of your mortgage in part or in full. You can see a comparison of fixed rate vs variable rate here.
- Home Equity Lines Of Credit- A Home Equity Line Of Credit (HELOC) allows you to borrow from the equity you’ve built up in your home, which may help you out in times of financial crisis and be more favourable in terms and rates than most credit cards or loans.
Assuming you can’t get a mortgage if you’re self-employed
When you’re a self employed small business owner, freelancer or contractor, you could be forgiven for assuming that your dreams of ever owning your own homes will never come true. But this is a fallacy which is so widely believed that it keeps many hard working freelancers from owning the homes of their dreams.
There are many self-employed people who go on to own their own homes. It is, however, slightly more complicated to apply for a mortgage when self-employed as your income may be more sporadic and you may represent greater risk to a lender. You will likely need to show at least 2 years worth of books, and provide evidence of incoming work for the coming years. Ratehub has some useful advice on self employed mortgages right here.
Just don’t make the mistake of giving up on your dream just because you work for yourself. A mortgage broker will be able to give you specific advice on how to meet the requirements for a mortgage given your current circumstances and income. Speaking of whom…
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Failing to ask a broker the right questions
There are so many mortgage products out there that you could spend days researching them and come out the other side with nothing but a headache. For many, it’s best to go through a mortgage broker like Altrua Financial who can guide you through your options. They’ll take the time to get to know your circumstances and help you to find a product with the best rates.
However, it’s important to make sure you ask them all the right questions, as well as answering the questions they ask you. We recommend making a list of questions that your own online research can’t answer and any questions that may cause you anxiety or unsurety. A mortgage broker is usually well placed to help you better understand the mortgage process in ways that are easier to understand than doing your own reading online.
Choosing longer amortisation for lower monthly repayments
Like all financially responsible households, you believe in budgeting. And the less you’re forking out on your monthly mortgage repayments, the more disposable income you have to repay your other debts, put into your savings account and enjoy life’s little luxuries.
As such, you may be tempted to opt for a mortgage product with a longer amortisation period. Most mortgages have a maximum amortisation period of 30 years. However, in recent years we have seen an increase in 40 and even 50 year mortgages. While this may seem tempting due to the slightly lower repayments, longer amortization has its caveats. Especially if you’re over 30. It means that you’ll be paying much more in interest and gaining more equity on your home over the years. Moreover, it will definitely have far-reaching effects on your retirement. You could sill be paying off your mortgage well into your seventies and even in your eighties.
Take the time to learn the market, and get help identifying the best product for your needs and circumstances and you’ll avoid the mistakes that can cause a mortgage to become a debt trap!