Read now, or forever hold your lease

Nathan Lawrence

Mortgage Agent

Did you know that the single largest purchase the average Canadian will make in their lifetime is the purchase of a home? To many students, the prospect of owning a home is likely a distant dream – well beyond exams, assignments, regular class work and, eventually, graduation.

Chances are, however, you have probably thought about eventually owning a home, or you may even be in the process of purchasing your first home. Considering that purchasing a home will likely be your single largest investment, there should be some careful consideration and planning done prior to taking the plunge. Being an informed homebuyer definitely has its advantages.

There are so many different things to know and understand about homeownership that when the time comes to purchase your first home, you can often feel lost in the shuffle of all the paperwork. Add to this the confusion caused by the current “financial and housing crisis” we’ve all heard so much about, and the process can seem daunting. It can easily take its toll on those buying a home or investment property.

The economic crisis has impacted global markets in a variety of ways. Trying to weed through all of the available information and decipher what’s accurate can be intimidating. In Canada, it has affected how banks and other lenders assess an individual’s ability to borrow. For the average consumer, it’s no longer as easy as it used to be to obtain financing. The downturn has forced all lending institutions to reassess how they lend money and to whom. This has had a drastic impact on both existing and future mortgage consumers, which is why it’s important to take the time to get prepared and organized before you head out home shopping.

Getting Started

The planning stages of purchasing a home should start earlier than you may expect. There are a number of factors impacting your ability to purchase a home. The down payment, your income and type of employment, debt servicing, your credit rating and the property itself all come into play when a mortgage lending institution looks at your personal ability to borrow. Understanding how mortgage financing works is the first step in making the home-buying process that much easier and stress free.

Although the idea of reading about financing may seem dull, acquiring a basic understanding of the process can go a long way. Granted, not everyone’s personal situation is the same, so certain items discussed here can vary given your circumstances. That’s why early planning and working with professionals who understand their industry and local market is extremely important.

Given the complexities of a home purchase, it’s important to know and trust the professionals with whom you are working. These professionals should have an excellent grasp on their aspect of the home buying and financing process as well as a solid knowledge of the local market. This will enable them to act as your personal advisors and guide you through all of the processes, legalities and paperwork.

While partaking in the home-buying process, you should expect to deal with the following professionals: mortgage agent; real estate agent; home inspector; insurance agent; and lawyer.

Again, it’s always best to deal with a professional you feel comfortable working with. Take the time to ask family, friends, peers, or co-workers for recommendations regarding which professionals have worked hard for them in the past. The best place to start is with your mortgage agent, as this professional will help you determine what you can afford to spend on a home. You can’t buy a home without your financing in place, so let’s go through some of the financing basics.

Simply put, a mortgage is a loan granted you by a lender which allows you to buy a home. The home is then used as security or collateral for that loan – meaning that if you were to stop making your mortgage payments, the bank has the right to take possession of the property to recoup their losses. In the event of a default, the lender typically has two options: repossession, or forcing a power of sale.

The actual mortgage amount is based on the purchase price minus the down payment, plus any default mortgage insurance premium (which is required by the lender if you have less than a 20% down payment). In Canada, most mortgage lenders require the individual purchasing the home to invest some of their personal savings into the down payment, which starts at 5% and increases from there.

When it comes to making a down payment, there are a number of factors to consider. These include where the funds will come from, how much of your personal savings you’re prepared to spend, and whether you can (or wish to) avoid the mortgage default insurance premium. The funds for the down payment must come for your personal savings or a gift from a relative; most lenders will not allow borrowed down payments.

As a first-time homebuyer, you’re able to use up to $25,000 from your RRSP savings towards the purchase of your first property. In order to use the RRSP funds towards the purchase of the house, they must be repaid over a set period of time, as outlined by the Canadian Government. This benefit is one of several currently available to first-time buyers.

If you’re a student or a recent graduate, another challenge you will face concerns employment and income. When Mortgage Agents assess a purchaser’s ability to borrow, they look at your income, the stability of that income, and your current debt load. The income that you’re earning must support your monthly debt and the purchase of your new home based on guidelines from mortgage default insurers, such as crown corporation Canadian Mortgage and Housing Corporation (CMHC), and individual lenders.

The type of employment and the income you earn impact the strength of the application. Self-employed (also referred to as business-for-self individuals), commissioned, contracted, salaried and part-time employees are all assessed differently. As you may have guessed, commissioned earners don’t have a guaranteed income, whereas full-time salaried employees have a much more stable and provable income.

Understanding how your employment and income will affect your ability to purchase is important. The more permanent the employment and income are, the stronger the application will be. The reason lenders take the strength of a purchaser’s income so seriously is because the income is what supports the purchase of the property, in addition to any debt you may have.

Examining Your Debt Load

Next, an assessment of your ability to carry your debt is completed. In simple terms, debt servicing is the purchaser’s ability to carry the mortgage payment in addition to any other monthly debts that they currently have in their name. All lenders follow specific guidelines that clearly outline what percentage of a person’s monthly income can reasonably be spent on financing debt.

Lenders look at housing debt, credit card payments, line of credit payments, student loan payments, vehicle financing payments and so on. This is why managing credit cards, lines of credit and other loans is so important. The debt servicing guidelines are designed to prevent Canadians from overspending and purchasing a home out of their range of affordability. The guidelines help mortgage professionals assess what you can afford, while ensuring you don’t exceed a sustainable level of debt.

By managing your outstanding credit, you can minimize the impact the monthly payments will have on your affordability. Once a mortgage professional has reviewed the employment type, income level, and debt load, they will have a good indication of what you can afford. Armed with this information, a new homebuyer can start house hunting. But understanding what you can afford to spend on a home is only part of the process.

The current credit crisis has had many impacts on the Canadian mortgage and housing market. It has affected our interest rates and credit guidelines the most. So what does this mean to you? For starters, it means that mortgage financing is more affordable than it has been in the past. The lower interest rates have a direct impact on the overall cost of borrowing.

Current interest rates are at historic lows, as the Canadian government attempts to encourage consumers to spend. To encourage increased spending, the government has lowered its key interest rate, which directly impacts a purchaser’s cost of borrowing. The key interest rate and bond rates have the greatest impact on mortgage interest rates. The prime lending rate follows any adjustments made to the key interest rate, which directly impacts variable-rate mortgage products. Fixed-rate mortgage products, on the other hand, are impacted by fluctuations in bond rates.

Determining whether fixed-rate or variable-rate programs are better for you depends on a number of items such as the state of the market and your personal situation, as well as your goals and future plans. A good mortgage agent will take all of these factors into consideration when selecting the best mortgage rate and product catered to your needs.

It’s important to note that even though the interest rate is an important aspect of a mortgage, it’s not the only item you should be considering. Your mortgage agent will be able to explain this in detail. Interest rates make it favourable to invest in a new property, but the credit crisis has made it more difficult for many Canadians to obtain mortgage financing. This is primarily a result of tightening credit guidelines that home purchases must abide by.

Understanding how to manage your credit is becoming very important. As the financial markets start to stabilize, we will likely find that the importance placed on credit guidelines will become a major focus for all lenders looking to provide home loans.

Credit histories and credit scores are the main determining factors mortgage agents look at when assessing your ability to obtain financing. Your credit score is tracked and maintained by two main credit reporting agencies in Canada. The score itself is based on a number of key factors, including credit history, amount of active credit, outstanding balances, and late payments - to name a few.

Your personal credit score has a direct impact on your borrowing ability. Lenders and mortgage default insurers have guidelines for the minimum credit scores for the various available mortgage programs.

In Canada, credit scores range between 300 and 900. According to the Financial Consumer Agency of Canada, 27% of Canadians have a credit score between 750 and 799, 24% between 800 to 849, and 5% above 850. This means that the remaining 44% of Canadians have a credit score below 750. Tracking your credit score is essential to understanding your financial position, while at the same time reducing your chances of missing potential credit fraud.

We often forget that lenders also take time to review the property itself. When you get to the stage where you’re ready to purchase the home of your dreams, the lender must then evaluate the property. As a homebuyer, you need to keep in mind that the mortgage lender is not only investing in you – they’re also investing in the property you wish to purchase.

The lender will assess the value of the property to make sure the it is worth the dollar figure they’re willing to lend. In addition, they’re also looking at items such as the location, age of the building, living space and lot size. This information gives the lender insight into the property’s ability to maintain its value over the term of the mortgage.

Purchasing a home is a big step in anyone’s life. For first-time buyers, it can seem much more stressful, given that the process is often foreign. The most important thing a homebuyer can do is work with professionals and be as prepared as possible.

The challenges ahead for the Canadian housing and mortgage market are difficult to predict. In 2009, Thunder Bay had its own struggles. A lack of available listings in the market led to increased competition and purchase prices for many homebuyers. The low interest rates made it more affordable to purchase homes, but the lack of listings made it more difficult for buyers to find their ideal homes.

In its 2009 fourth quarter Ontario Housing Market Outlook Report, CMHC said that “Hamilton, Thunder Bay, Ottawa and Kitchener will see new home demand sustained through 2010 as these centres represent the tightest Ontario resale markets.”

With respect to interest rates, the same report stated that “the Bank [of Canada] has committed to keeping this rate at 0.25% through the middle of 2010 unless inflationary pressures warrant an increase.” In all likelihood, we will see the government hold the key interest rate where it currently stands until mid-2010. If we are, in fact, on the road to recovery, we will likely start to see interest rates increase as the market stabilizes in the latter half of 2010.

Regardless of the market conditions, you probably have plans to one day own a home of your own. You may even look to investment properties as another stream of personal revenue. When the time comes to make that first home purchase, do your homework. Know what your goals are and prepare for them well in advance – it’s never too early to start getting ready. The more prepared you are as a homebuyer, the greater your chances are of finding your ideal starter home.

Nathan Lawrence is a Mortgage Agent with Dominion Lending Centres Lakehead Financial based in Thunder Bay. He can be reached at: 807-620-2655; NLawrence@dominionlending.ca

Photo by flickr user woodlywonderworks.