Buying my First Home
Congratulations – you’ve decided to buy your first home! Buying your first home is a big decision and a major financial commitment. The Biggar Team is here to help you every step of the way! We specialize in assisting first-time homebuyers – like you. Our team will guide you through the process step-by-step and make buying your first home a great experience. We will offer you a wide range of mortgage options to choose from and find a mortgage that best meets your needs and fits your goals. Start your home buying journey with a mortgage pre-approval first. Start your mortgage pre-approval online today.
Here are some mortgage terms first-time homebuyers will find useful:
Understanding mortgage amortization
The amortization period is the length of time it will take you to pay off your entire mortgage. The traditional amortization period is 25 years, and in cases where you have less than a 20% down payment, this is the maximum amortization period allowed. You may choose a shorter amortization period or, if you have at least a 20% down payment, you can even choose greater up to 30 years. The longer the amortization, the lower your monthly mortgage payments, but the more you will pay in interest over the life of the mortgage.
Understanding mortgage term
The mortgage term is the amount of time your mortgage contract is in effect. At the end of each term, you need to renew your mortgage for another term. This is an opportunity to consider whether you’d like to make any changes to your mortgage. Most mortgage terms for first time home buyers are five years, though shorter or longer terms may be offered. The agreed-upon interest rate is in effect for the term. At the end of the term, you can renegotiate the rate and other details of the mortgage contract for the next term.
Understanding open or closed mortgage
An open mortgage provides the flexibility of being able to repay all or part of your mortgage at any time without a prepayment charge. A closed mortgage limits your prepayment options, but usually offers a lower interest rate than an open mortgage. We recommend first time home buyers take a closed mortgage to take advantage of a lower interest rate, unless you plan to repay all or a large portion of your mortgage fast. The Biggar Team will discuss the best option for you based on your mortgage goals.
Understanding fixed rate mortgage
With a fixed rate mortgage, you get the security of knowing that the interest rate on your mortgage won’t rise during the term, even if interest rates increase. Because the principal and interest payments are predictable, you’ll know exactly how much you will owe at the end of your term. This is a great option for a first time home buyer for this reason.
Understanding qualifying rate
The bank of Canda requires mortgages to be “stress tested”. This is a rule the Bank of Canada implemented to ensure that you can manage a higher mortgage payment if interest rates were to rise. Borrowers who apply for an insured mortgage use a qualifying payment based on the five-year benchmark rate published by the Bank of Canada. Borrowers who apply for an uninsured mortgage have to qualify at the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate plus 2 percent. Note that your mortgage payment is still based on the interest rate you are offered in your mortgage contract.
Understanding variable rate mortgage
With a variable rate mortgage, the interest rate changes with the banks’ prime rate. Because your monthly payments remain the same throughout the term, the amount applied to the principal versus interest may change with fluctuations in the banks’ prime rate. Your amortization period (number of years to repay the mortgage) may fluctuate and be longer if rates have risen or be shorter if rates have fallen since the start of the term. You should review your mortgage semi-annually to make sure it is on track to meet your mortgage goals. You can switch to a fixed rate mortgage any time and at no cost, provided the new term is the same or longer than the remaining length of your current closed variable rate term. Typically first-timer buyers stay away from variable rate mortgages because their finances don’t allow for much interest risk. We will discuss what mortgage option will work best for you.
Understanding payment schedule
Traditionally, mortgage payments are made every month. By paying more frequently, you’ll pay your mortgage down faster and pay less interest over the long term. You will see the biggest savings if you choose accelerated mortgage payments. An accelerated bi-weekly payment, for example, means that you pay one-half of your monthly payment at a time, but pay every two weeks rather than two times a month. This means you make 26 payments a year instead of 24 – and those two extra payments make a significant difference. It is recommended as a first time home buyer that you match your mortgage payment schedule to your works’ pay schedule. This will ensure you will always have money in your bank account to cover your mortgage payment.
Understanding down payment
The mortgage down payment is the initial amount of money you pay to the lawyer when purchasing a home. When purchasing a home in Canada, a minimum 5% down payment is required for a purchase price of $500,000 or less. For a purchase price between $500,000 and $1 million, the minimum down payment is 5% on the first $500,000 and 10% on the balance. For purchase prices over $1 million a down payment of 20% or larger is required.
A down payment is typically expressed as a percentage. It can be calculated by dividing the amount of money you have to put down on a home by the home value (ex. $15,000 down payment / $300,000 purchase price x 100 = 5% down payment.)
A down payment can be saved up over time. This may take a while for a first time home buyer. Other down payment options include withdrawing up to $25,000 from your RSP’s under the Government of Canada’s First Time Home Buyers Plan or having it gifted to you from an immediate family member. We can strategize a plan to help you save for a down payment.
Understanding mortgage default insurance
When you buy a home with less than a 20% down payment, the Government of Canada requires the mortgage to be insured against default. This type of insurance protects the lender if you were to stop making your mortgage payments or breach your mortgage contract in any way. It is important to understand that it provides protection to the mortgage lending institution only and not to the homeowner. Mortgage default insurance is not available for homes with a purchase price of a million dollars or more and/or an amortization of greater than 25 years.
Mortgage default insurance is offered by a number of different insurers. As a customer of BMO® Bank of Montreal, mortgage default insurance would be provided through Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada (GE), or Canada Guaranty Mortgage Insurance Company.
If you require mortgage default insurance, BMO® Bank of Montreal (“the Bank”) will arrange for you to purchase it at the time you take out your mortgage. The cost is a one-time charge and may be paid at that time or added to your mortgage balance. The cost of mortgage default insurance is calculated by multiplying the amount of funds that are being borrowed by the mortgage default insurance premium, which typically varies between 0.5% and 6.5%. Premiums vary depending on your mortgage amount and the size of your down payment. Mortgage default insurance can be complicated for first time home buyers. We will explain to you in detail how it works and why it is required.
Understanding closing costs
Closing costs are the extra expenses you occur when you purchase a home. Legal fees, home inspection, moving expenses and property tax adjustments can make up a large portion of your closing costs. Banks want to ensure that you factor these costs into your budget and they will ask to confirm that you have the greater of 0.5% of the purchase price or $2000 available when purchasing a home in Alberta. If you are purchasing a home in another province, you will need to budget 1.5% or greater of the purchase price because there are additional fees to consider.