This is a guest post by Ratehub.ca
A smart would-be homebuyer knows that you should get a mortgage pre-approval before you start shopping around for a new home. A really smart buyer knows that you shouldn’t necessarily plan on using the full amount you qualify for. Here are a few reasons why.
To calculate a mortgage pre-approval, your mortgage broker or financial institution will factor in a few different variables including your income, existing debt, employment history, credit score, and the amount you have available for a down payment to calculate the mortgage amount you would qualify for.
If you haven’t met with a mortgage broker yet, you can still find out what sort of price range you should be looking at by using a mortgage approval calculator.
Overvalued and Under Qualified
While Toronto’s housing market has certainly slowed in recent months, multiple-offer bidding wars are still relatively common. One of the dangers for buyers caught up in bidding wars is that emotions can take over and the “winning” bidder drastically overpays for a house.
Before issuing a mortgage, the lender may call in an appraiser to determine the true value of the house. If you’ve offered $600,000 for a home, but the bank’s appraiser decides it’s only worth $500,000 they’ll only issue a mortgage for $500,000, minus the deposit. That means you’ll have to come up with an additional $100,000 on top of your deposit to seal the deal.
Some lenders may also decline to extend mortgages to homes with knob-and-tube wiring or asbestos until it is safely removed. (Insurers may also require remediation work before providing home insurance coverage.) If the purchase price is at the high-end of your personal affordability index, you may not have the funds available to undertake this work.
Condo Fee Conundrum
With detached homes in Toronto selling for an average of about $1.3 million and semi-detached homes just below the million-dollar mark, many first-time buyers have been forced to focus on the relatively more affordable condo market.
If you’re in the market for a condo, you need to also factor in condo fees. The fees are based on the square footage of each individual unit and can range from about $0.50 to more than $1 per square foot. A mortgage affordability calculator does enable you to include condo fees as one of the variables to help you have a better sense of what you can really afford.
Congratulations, you’re a homeowner! For many, the next step is to start a family. A couple years ago, MoneySense magazine calculated that the cost of raising a child (food, clothing, activities, etc.) worked out to about $14,000 per child a year. Raise two kids at home into their early 20s and you’ll have invested more than half-a-million dollars on your offspring.
If having a family is part of your plans, focus on finding a place with enough space for a growing family, but one that won’t stretch your budget so thin you can’t afford to feed and clothe your kids.
Many buyers are enticed by the savings a variable-rate offers. In early November 2017, for example, Equitable Bank was offering a five-year variable rate of 1.85%. Compared to a five-year fixed rate of 2.84% that some mortgage brokers were offering at the same time, the monthly payments on a $500,000 home (with 10% down and a 25-year amortization period) will be about $225 cheaper with the variable rate. But if rates go up, that rate difference shrinks until, conceivably, the variable rate at the end of your term could be higher than the fixed rate offered at the beginning.
Even if you do lock into a fixed rate, you’ll be at the mercy of market conditions when your mortgage term ends, typically after five years. If your monthly expenses are stretched to the max at current interest rates, the almost inevitable rise from current historic lows could jeopardize your near-future finances.
In short, when shopping for a home, find out how much you qualify to afford. Then make your offers based on what you’re truly comfortable paying.
Ratehub.ca is a website that compares mortgage rates, credit cards, high-interest savings accounts, chequing accounts, and insurance with the goal to empower Canadians to search smarter and save money.