By Mark Salerno
For the vast majority of Canadians, buying a home means taking out a mortgage. But with so many different options available, how can you be sure you are choosing a mortgage you can live with?
The first decision you need to make is how much money you can afford to borrow. This amount depends on a wide range of factors, including your income, the size of your down payment, current mortgage rates and the amortization period you choose.
Most lenders will provide you with a pre-approved mortgage that shows approximately what you can afford. As a general rule, however, your monthly housing costs shouldn't exceed 32 per cent of your gross monthly household income, and your total debt load shouldn't be any higher than 40 per cent of your gross monthly income.
The next decision is your down payment. If you're a first-time homebuyer, you may be eligible to withdraw up to $20,000 tax-free from an RRSP to use as a down payment, provided you repay the funds within 15 years. CMHC's Mortgage Loan Insurance, however, will allow you to purchase a home with a high ratio mortgage, meaning you can contribute as little as 5 per cent down.
Once you've decided on the amount you're prepared to borrow, there are a number of different options and features available in the marketplace to help you customize your mortgage to suit your needs, circumstances, and financial goals.
A prepayment option, for example, allows you to pay down your mortgage with a lump sum or extra payment, without having to pay a penalty. A portability feature allows you to transfer the terms and conditions of your mortgage to your next home, if you sell one house and buy another. An assumability feature lets you take over the existing mortgage on a property you're purchasing, or allows you to transfer your mortgage to the buyer of your home, making it a significant selling feature if you have a lower rate of interest than the prevailing market.
In addition, there are also a number of steps you can take to minimize the amount of interest you pay on your mortgage and achieve financial freedom that much sooner. Some of the most common of these include:
Making a larger downpayment;
Adopting a shorter amortization, or period over which the loan is repaid;
Increasing the frequency of your payments, such as making weekly or biweekly payments instead of once a month; and
Making additional lump sum payments throughout the life of your mortgage.
Finally, even once you've selected a mortgage; it may not be too late to make some modifications if your needs or goals change. For most mortgages, at the end of each term, you may be able to change the payment schedule, term and rate?or even who holds the mortgage.
Mark Salerno is district manager for the Greater Toronto Area at the Canada Mortgage and Housing Corporation. To order a free copy of CMHC's Homebuying Step By Step consumer guide and workbook, please call 1-800- 668-2642 or visit www.cmhc.ca.