Moving out of your parents house is an exciting milestone, but one that can come with questions and uncertainty. If you are a first-time homebuyer, you may be wondering how to apply for your first mortgage, how to receive the best rates, or how to consolidate your existing debts through a new mortgage loan. Luckily, Clover Mortgage is here to help!
Canada’s Residential Market: An Overview of 2022
Canadian housing prices hit an all time high in February of this year. The average cost of a Canadian property was $816,720 during this time, but that figure has since come down to approximately $640,480. As an aspiring homebuyer, you may be wondering why this happened and what that means for you.
Earlier this year, the Canadian government began raising the overnight lending rate, with the most recent hike occurring just last month. The benchmark rate is now 3.25%, the highest it has been since 2008. While these new conditions may make it more difficult to qualify for a mortgage loan, the goal of this new policy was to curb inflation, which has indeed begun dropping in the last few months.
Despite the recent inflation cooldown, it is uncertain whether or not the Bank of Canada will continue to raise rates in the coming months, which makes the residential housing space especially difficult to navigate.
Canadian housing sales are down 31% since last year, indicating a hesitancy to take on new loans given market conditions. If you are thinking of moving out of your parents’ home, you may want to consider the repercussions of investing under the current rate policies. For more information about the pros and cons of property ownership, check out our guide on buying vs. renting.
How to Start Planning for Your Own House
Moving out of your parents’ house comes with a number of logistical considerations. Before diving into a property search, you first need to determine a time-frame for your move, consider which region you are looking to move into, and decide on a property type to browse. You will also want to begin looking for a good realtor that can help you navigate the housing process.
In addition to these plans, however, you will also need to begin planning financially. The following are a few best practices to help you prepare for this major step:
Get Your Credit in Good Shape
One of the easiest ways to improve your odds of mortgage approval while also upgrading the rates and terms you qualify for is by getting your credit score sorted ahead of time.
If you have never taken on a major loan before, the easiest way to improve your credit score is by taking out a credit card, making small purchases (around 10% of your limit) and paying them off immediately. If you repeat those steps over the course of a few months, your credit score will start to slowly increase.
It is also a good idea to avoid taking out any other loans or major debts while you are planning for your first home, this will help keep your credit score as high as possible. However, if you already have debt— such as student loans or car payments— making regular, timely payments can actually help increase your score over time.
Start Saving Up for a Down Payment
A down payment is the amount of the purchase price of your home that you are paying up front, typically with your own money or money that was given to you as a gift. It is one of the biggest upfront expenses you will have to deal with when purchasing a property. The more you save up for your down payment, the lower your overall mortgage costs will be.
To prepare for this expense, it is a good idea to come up with a savings plan. Over the course of a few months or years, try to put aside a large percentage of your disposable income into a savings account. You may also want to create a monthly budget and cut costs wherever you can in preparation for this payment. For more information on how to save for a down payment, check out our comprehensive guide.
Create a Monthly Budget
Once you move into your new home, you will need to account for independent living expenses as well as monthly mortgage payments. Before making the move, you may want to create a monthly budget outlining your mortgage, utility, and expected tax expenses, while also accounting for food, recreation, and miscellaneous costs.
If you already have a budget, remember that you might need to change some figures when moving into a new home. Your new location may come with increased parking costs or a higher average cost of groceries. It is a good idea to research these factors ahead of the move.
The better you manage your budget, the more likely you are to make your monthly mortgage payments. Missing your mortgage payments can lead to increased costs over the lifetime of your loan and negatively impact your credit score.
Applying For Your First Mortgage Loan
When you apply for a mortgage, your lender will evaluate your income, credit score, debt history, and debt ratios to determine whether or not they want to approve you for a loan. The better your finances, the less risk you pose to your lender. The less risk you pose to your lender, the higher the chance they will approve your mortgage application.
The size of your mortgage loan can vary based on your qualifications and your personal preferences. You do not need to take out the largest loan you can qualify for. In fact, choosing a home that falls comfortably within your price range allows you to make your monthly payments with ease, and will likely qualify you for lower interest rates.
Here are a few elements of the mortgage application process to consider:
- Down Payment: Your down payment can be as low as 5% of your home’s purchase price, depending on the price of your property. However, it is important to note that all properties with a value greater than $1 million have a mandatory minimum 20% down payment. The average price of a home in Toronto is $1,086,760 as of September 2022, requiring an average down payment of $217,352.
- Mortgage Default Insurance: If your down payment makes up less than 20% of your overall purchase price, you will need to purchase mortgage default insurance. This policy protects your lender against the added risk you pose, but will increase your costs in the long run.
- First-Time Home Buyers Incentive: The first-time homebuyer incentive programme offered by the Canadian government is a great option for buyers who are having trouble saving for their down payment. The Canadian government can provide first-time purchasers with 5% of the cost of an existing home or between 5% and 10% of the cost of a newly constructed home under this programme. The "incentive" must be paid back either 25 years from the purchase date or when the property is sold.
- Mortgage Rates: When negotiating the terms of your mortgage, you may be given the choice between fixed and variable rates. These will determine the percentage of your loan you will have to pay in interest on top of your regular payments. Fixed rates remain stable throughout the entire duration of your mortgage term while variable rates fluctuate based on the current benchmark rate. When rates are low, fixed rates are more favourable. When rates are high, variable rates may be a better option in the long run.
- Closing Costs: On top of your loan costs, you will also need to budget for closing costs when preparing to buy a home. These costs can include new home buyer fees, insurance, new home prepayments, property taxes, and more.
- Pre-Approval: If you want to go into the house hunting process knowing exactly what your budget is and how large your loan can be, you may want to consider getting a pre-approval. A Clover Mortgage broker can help you look over your finances and determine which lenders and products you would qualify for, and help you get pre-approved for the best option.
Applying for your first mortgage can be tough, but Clover Mortgage is here to help. Once we have a full picture of your income, credit, and debt information, we can start looking into finding the mortgage that would be best for you. Based on an evaluation of our 50+ working lenders, different mortgage products, their structure, features, and risks, we can present you with the best options for you.
Contact Clover Mortgage to book your free consultation today! Email us at email@example.com or call us at 416-674-6222 anytime!