t’s hard out there for first-time home buyers in Ontario right now. I should know! I bought my first place (a stacked townhouse) in Toronto over 5 years ago. And over the past few months, I sold it and bought my very first house! It was an exciting, terrifying, and stressful journey…with an emphasis on the last two.
You may be wondering, why was I scared since this wasn’t my first rodeo. Well, with home prices in Ontario seeing a 25% increase in just the past year and bidding wars being par for the course, there was a lot to be concerned about.
For example, in a recent survey by credit union Alterna Savings, they found that more than half of respondents felt that a lack of affordable options was their single biggest hurdle as a first-time homebuyer. I can attest that this was still a hurdle as a second-time homebuyer considering the average house price in Toronto is now $1.2 million.
I will admit that having the experience of buying a home once before did make the mortgage process less scary than the first time though. The same survey also found that 22% of respondents felt that selecting the right mortgage terms was one of the scariest aspects of getting a mortgage. For this recent home purchase, it was actually one of the things I worried about the least. And I owe this in big part to working with the right mortgage professional to give me tailored advice.
So, with that said, in this blog post I want to share some key things you should know about mortgages if you’re a first-time homebuyer (or even a second-time homebuyer like me). Getting the right mortgage doesn’t need to be scary or intimidating and these tips can definitely help.
1. Get Pre-Approved for a Mortgage Before You Start House Hunting
If you’re like one of the Ontarians in Alterna Savings’ poll who said that affordability is a primary concern when buying a home, one of the best things you can do before you ever even start looking at neighbourhoods and properties is to get pre-approved for a mortgage.
Why? A pre-approval is a calculation that takes into account your entire financial picture – your debts, your assets, your income, and other factors – and spits out a maximum home price that you are reasonably able to afford and that the lender will likely grant you a mortgage for. I emphasize ‘likely’ because a pre-approval is not actually the same thing as applying for a mortgage on a specific property; once you find a home and make an offer, your lender still has to do an even bigger calculation based on your financial stats and the home’s appraised value in order to give you the official rubber stamp of approval.
That said, starting off your home search with a clear understanding of your budget range and what’s an affordable price for you is a smart way to avoid falling in love with a property that you can’t get a mortgage for. Plus, if you find yourself in a multiple-offer scenario for the home you want to buy, having a pre-approval can give you the confidence to make a condition-free offer.
And condition-free offers sure are the norm now in Ontario’s seller’s market. In a balanced or buyer’s market, it would be acceptable for you as a prospective buyer to put a financing condition on your offer, giving you extra time to have the home’s value appraised and confirm you are officially approved for a mortgage to purchase the property. With rampant bidding wars throughout the province, I can say confidently that your chances of ever having your offer accepted with a financing condition on it are slim to none.
For a personal example, the only reason our offer was accepted on our first place was because we had no conditions, whereas the other bidder lost out because they put conditions on…even though their bid was higher than ours. And when bidding on our second home, there were 7 offers and no one did conditions.
There are of course inherent risks when submitting a condition-free offer (the home’s value could get appraised for lower than your purchase price, meaning your lender might not give you a mortgage to cover the full amount), but you really won’t have to worry about these if you make an offer within your mortgage pre-approval budget. Long story short, working with a trusted mortgage professional to get a pre-approval is a critical first step to set you up for home buying success.
2. Find a Mortgage Professional You Trust
Just like you should interview prospective real estate agents to work with to ensure you hire the best person for the job, you should do the same when selecting a mortgage professional.
In that survey by credit union Alterna Savings, they found that 13% of Ontarians polled were scared of working with a mortgage advisor who wouldn’t have their best interests in mind. And fair enough! The people you’ll end up working with (i.e. real estate agent, mortgage professional, lawyer) all have a financial interest in seeing you buy a home. But that doesn’t mean you can’t find a mortgage professional who will take the time to understand your particular financial situation, lifestyle, values, and goals.
The ideal mortgage professional should be transparent, caring, and committed to helping you make an informed decision when it comes to selecting a mortgage. And this may mean looking outside of traditional lenders to find the right professional to help you.
3. Consider Alternative Lenders
When most people think about getting a mortgage, they often think about the big traditional financial institutions. But those places aren’t your only options. Another option that may be a better fit for you may actually be a credit union.
You see, what most Ontarians don’t know is that credit unions only answer to their customers, whereas the big financial institutions answer to their shareholders. Not only that, customers are considered credit union members. That’s why when you open an account with a credit union, you are required to pay a small membership share (i.e. $15). This one-time investment gives you voting rights for the Board of Directors and changes to the by-laws of the credit union too. This means that they are more inclined to offer their members more personalized service, especially when it comes to navigating the often complex world of mortgages.
Moreover, credit unions still offer competitive rates, and transparent mortgage advice, while offering the same products and services as any other financial institution. That could be why 42% of survey respondents said if they were first-time homebuyers today, they’d likely consult a credit union for their mortgage.
4. Determine What Your Goal for Your Mortgage Is
When selecting a mortgage there are three very important things to decide on: term, amortization period, and payment schedule. All three will have a big impact on your financial future but also your day-to-day finances.
Since these are big decisions, what’s key is determining what your main goal is for your mortgage. Is your goal to pay off your mortgage as soon as possible? Or is it to maintain a healthy monthly cash flow so you don’t feel chained to your mortgage? This is something a mortgage professional can help you decide on before you start looking at potential properties.
For example, when making these decisions for my first home, my goal was to pay off as much of my mortgage as possible. That’s why I chose a 5-year fixed term to lock in a low rate (interest rates started to rise after I locked in). I also chose a 25-year amortization period instead of a 30-year to cut 5 years off my mortgage, and I selected accelerated bi-weekly payments to pay off my mortgage even quicker. After my mortgage term was up, I discovered that because of all of those decisions and increasing my payments slightly in the final year of my term, I was able to cut my 25-year mortgage down to 14 years!
But, it was a different scenario for my second home. When discussing my goals with my mortgage professional, I realized my goal wasn’t to pay off my mortgage quickly this time around. Instead, maintaining a comfortable monthly cash flow was. This next home is a big investment, and since my mortgage payments will be increasing significantly, I wanted to ensure that I didn’t feel trapped by those payments. I wanted to give myself some breathing room in case any unexpected expenses popped. I also wanted to make sure that not all of my monthly income was going toward my house. I want to still have enough money to invest for my retirement, go on a much-needed vacation after this pandemic is over, and do some small renovations down the road.
5. Take Your Time (Yes, Seriously)
My last piece of advice that I’d like to leave you with is to be patient and take your time. I know, that may sound almost irrational considering how home prices continue to skyrocket and the fear of missing out is on everyone’s mind. But still, this is the biggest financial decision of your life. This isn’t something you should jump into blindly and have regrets about later. Being well informed and prepared before planning to buy a new home is the best way to ensure you make this big decision with confidence and certainty. This means getting a mortgage pre-approval ahead of time and speaking with a mortgage professional to get to know your options.
Remember, buying a home is a big part of your overall financial picture. So take some time to understand the process, learn the terminology and best practices, and find the right professionals for your team. If you need a few places to start, I’d suggest listening to this in-depth podcast interview I did with Michael Borrelli, Branch Manager at credit union Alterna Savings.
And to dip your toes in a bit more, play around with Alterna Savings’ free mortgage calculator, to give you a better idea of your affordability and monthly costs.
Lastly, check out some of the free guides and resources that Alterna Savings offers, or get in touch with one of their mortgage agents to learn more about your options and next steps.