It can be hard to separate fact from fiction when it comes to home financing. If you’ve talked to friends or done some googling, you’ve likely been flooded by a deluge of information. Let’s talk about mortgage myths and clarify how things work, so you can choose a mortgage and finance your home with confidence.
What is a mortgage?
A mortgage is a home loan that you can use to buy your home. Mortgage interest rates and installments vary based on the specific terms of the mortgage you choose and your own financial standing. Payments are made regularly by homeowners in addition to the principal downpayment you make when you first purchase your home.
The truth about home financing
Myth 1: Pre-qualification and preapproval are the same thing
Pre-qualification and preapproval each serve a unique purpose. They both help you establish how much you can afford, inform your financial limits, and get a clearer picture of costs so you can look for homes in your price range. In general, a pre-qualification is more preliminary and can help you map out the road to buying a home even before you start looking. You might do a pre-qualification online to get a rough sense of your options, and choose to make a savings plan with a financial planner. Then, once you’ve paid off some debts or improved your credit score, you can check again to see how your pre-qualification has improved. This is a useful tool to get you closer to your end goal of buying a home without requiring a hard credit check. However, pre-qualification doesn’t give you a guaranteed rate like a preapproval does.
Preapproval uses your income, debt, credit score, and other financial factors to offer a guaranteed mortgage rate you can use to apply for a home. A preapproval in Canada generally has a guaranteed rate for 90 days, and it shows a seller that you have the financing to buy the home when you put in an offer. You’ll need this if you’re ready to buy a home.
Myth 2: All you need to pay up front is your down payment
It’s great to establish the right down payment, but closing on a home can involve additional costs that many first-time homebuyers don’t fully anticipate. You should plan to put aside 2-5% of your total home cost for closing costs. Ask your financial planner to help map out your big-picture to make sure you have the money you need.
Here are some extra costs you might need to pay around closing time:
- Land transfer tax
- Attorney and appraisal fees
- Building inspection fee
- Property taxes
- Renovations, updates, or repairs
- Pest inspection or fumigation
- Landscaping and remodeling
Myth 3: Your down payment is always 20%
In Canada, the minimum down payment varies based on the price of your home. Your down payment is the amount of money you’ll pay up front towards the total cost of your home. A mortgage lender covers the remaining amount of the payment. A home for $1 million will require a minimum 20% down payment, but a home that’s $500,00 or less requires a minimum 5% down payment. It’s important to rely on financial advisors and your real estate agent to help you establish how much of a down payment you’ll reasonably need. Your down payment impacts how much interest you’ll pay on your home, so sometimes it’s wise to pay a bigger down payment to make smaller monthly payments. Keep in mind that if you’re only able to pay less than 20% of your total home price, you’ll also need to purchase mortgage loan insurance in case the loan can’t be paid.
Myth 4: Always choose the lowest interest rate
The right mortgage plan for you depends on a broad array of factors, and the cheapest rate might not always be the best fit. The flexibility, terms, and length of your plan also impact how much money you’ll be spending over time. You’ll want to choose the mortgage type that best works for your big picture. When you’re establishing a rate, ask your mortgage professional to demonstrate how long it would take you to pay off your mortgage with different terms and loan periods. This will help you compare the benefits of different plans based on how long you plan to live in this house.
Once you’ve shopped around to compare lenders and committed to a mortgage, take note of interest rates for when it’s time to renew. If they’ve decreased, you might be able to put some more money towards your principal payment and keep payments the same.
Myth 5: You need a perfect credit score to buy a home
Your credit score will impact your preapproval, especially if it’s lower than 600. The higher your credit score, the lower your interest rate will likely be. But your income, debts, and other assets are all part of how a lender establishes your viability and loan options. You can monitor your credit score and work on improving it until it’s time to buy, and find out how much you may be able to afford based on income, savings, and debts. If it’s your first time buying a home, you may also be eligible for down payment assistance programs in Canada that help first-time buyers secure a home.
Here are a few to consider:
- The First-Time Home Buyer Incentive offers 5% or 10% of a home’s purchase price, which goes towards your down payment. If you have a yearly income of less than $120,000, you may be eligible.
- The Canadian Mortgage and Housing Corporation (CMHC) and Canadian Guaranty offer assistance for first-time homebuyers who require support in making a down payment.
- The Home Buyer’s Amount gives a $5,000 non-refundable income tax credit to eligible Canadians on a qualifying home.
- The Home Buyer’s Plan (HBP) lets eligible Canadians withdraw up to $35,000 per year from their registered savings plans (RRSPs) to buy or build a qualifying home for themselves or for a relative with a disability.
Are you purchasing, building, or renovating a new home? Some individuals may qualify for a rebate for part of the GST or HST you had to pay. Check out the GST/HST New Housing Rebate to learn more.
Let OJO help you navigate the homebuying process
We can help find a home that’s a great fit with a tailored search experience based on the features and details you care about most. Our comprehensive experience lets you search for a home that matches your vision.