7 Pragmatic Steps to Buying Your First Home
Since last year’s federal changes to mortgage lending, most first-time buyers now are in the same situation as buyers of 30 years ago, before high-ratio mortgage insurance and long amortizations. If you have a down payment of under 20 per cent, you’ll require government backed mortgage insurance (CMHC or Genworth). And that means you’ll have to take pragmatic steps toward a home purchase.
- Make sure you qualify for the higher payments of a 25-year amortization. The amortization period has been reduced to a maximum of 25 years from 30 years. The result is slightly higher payments, because they’re not spread out as long. There is a payoff, though: you will pay thousands of dollars less in interest payments over the (shorter) life of your mortgage.
- Reduce your other debts. Before you apply for a mortgage, make sure that your other debt obligations (like student loans, credit cards or car loan payments) will not skew your debt-service ratio above the maximum threshold. The maximum gross debt service ratio to qualify for an insured mortgage is now 39 per cent, down from 41 per cent, and the maximum total debt service ratio is 44 per cent.
- Avoid the bare minimum down payment. The 5 per cent down payment is still available, but it is wise to save longer and put down more. This is because you will not only save on the mortgage insurance premium but you will also spend less in interest payments over the life of the mortgage.
- Check your credit score. A credit score of at least 600 is often required now to qualify for insured mortgages.
- Buy a property for under $1 million. This may sound obvious, but $1 million is the typical house price in some Metro neighbourhoods. Under the mortgage rules, such purchases require a minimum 20 per cent down payment, or $200,000. If you buy a $900,000 home, though, the minimum down payment required for mortgage insurance is $45,000. (But don’t ignore Step 3 above.)
- Take advantage of the current buyer’s market in the Lower Mainland. Sales through MLS® are down about 25 per cent from a year ago, prices have basically flatlined and mortgage rates are about as low as they can go. Realtors tell us that buyers are negotiating aggressively and getting price reductions. Developers are also starting to offer special deals and extras to help reduce their inventory.
Get pre-approved for a mortgage and contact a local Realtor. You can still buy under the stricter mortgage rules by applying pragmatic, old-school principles.
- If possible, put down 20 per cent or more. With a down payment of over 20 per cent you won’t need a government-backed insured mortgage and you will save the thousands of dollars those insurance payments would have added to your mortgage. You won’t be constrained by their rules, either, so you can amortize over a longer period.
Remember, your first home won’t be your dream home. It’s just your first step. So save as much as you can and buy only what you can afford. A Realtor and an independent mortgage broker will help you discover what’s feasible within your budget.