TD Canada Trust breaks down the financial commitment for first-time
buyers
TORONTO, Sept. 10, 2013 /CNW/ - Buying a home is the biggest purchase
most Canadians will ever make, and with the high cost of real estate
today, understanding the full financial commitment is critical. TD
Canada Trust breaks down three key home financing decisions for
first-time homebuyers to consider: down payments (20% is the goal),
mortgage options (it's not just about the lowest interest rate
possible) and accelerated payments (pay down more than you need to).
"Home ownership is a major goal for many Canadians, and in today's
market it is especially important that prospective buyers understand
home financing options in order to manage their overall monthly costs,
assess the flexibility they will need, and help plan for the future,"
said Farhaneh Haque, director of mortgage advice at TD Canada Trust.
The following tips can help first-time homebuyers structure their
mortgage so that it works best for them before signing on the dotted
line:
1. Down Payment: how much and how to finance?
There are many benefits to a larger down payment. For example,
homebuyers with a down payment of greater than 20% do not have to
obtain mortgage default insurance, the premium for which is calculated
as a percentage of the mortgage and is paid up front or by adding it to
the principal portion of the mortgage. So, the larger the mortgage
balance, the higher the monthly mortgage payments. Eliminating or
decreasing this premium can result in significant savings.
Haque suggested that first time buyers can take advantage of the
government's Home Buyers' Plan and use savings in their RSP to bolster the down payment.
"Homebuyers can also consider withdrawing up to $25,000 from an RRSP to
put towards the down payment on a first home," said Haque. "While this
can be a huge help upfront, among other conditions it must be repaid
within 15 years, so make sure to factor in the repayment schedule into
the monthly budget."
2. Mortgage Options: fixed or variable interest rate, open or closed
term, flexible payment features?
A low interest rate isn't the only factor to consider when choosing a
mortgage. A mortgage specialist can help you navigate options like
flexible payment features, and discuss monthly payment amounts in the
context of your overall cash flow and future home-buying plans.
"Buyers choose a home because it fits their lifestyle needs," said
Haque. "A mortgage should pass the same test, and that means weighing
the current term options against an overall long-term plan to pay that
mortgage down. Once you find the best option for you, look for
opportunities to realistically accelerate repayments."
Fixed vs. variable interest rate
With a fixed interest rate mortgage, the interest rate and monthly
payments do not change throughout the term of the mortgage and it's
clear upfront how much will be paid off at the end of the term. With a
variable interest rate mortgage, the interest rate may fluctuate during
the term. If interest rates go down, more of the monthly payment is
applied to the principal, helping to pay off a mortgage faster. If
interest rates rise, more of the monthly payment is applied toward
interest. In addition, with a variable interest rate mortgage, you may
be required to revise your payment arrangements at certain times.
"This choice usually comes down to whether homeowners are comfortable
with the possibility of paying more money toward interest and less to
principal some months as a trade-off for potential interest savings
other months, or if they prefer the stability of a fixed interest rate
mortgage," said Haque.
Open vs. closed mortgage
With a closed mortgage, a homeowner agrees to a term anywhere from six
months to 10 years. There are conditions that limit when a closed
mortgage can be renegotiated or refinanced and there may be a
prepayment charge for renegotiating early or paying off the mortgage
prior to the end of the term. Often negotiated for a shorter term, an
open mortgage can be paid off at any time without prepayment charges.
While it offers greater flexibility in terms of repayment, the interest
rate for an open mortgage may be higher than for a closed mortgage.
Flexible payment features
Some mortgages offer features that give homeowners added flexibility to
react to changes in their financial situation. For instance, flexible
mortgage options may allow homeowners to make prepayments on their
mortgage when they can and then reduce their monthly mortgage payment
or take a payment vacation for a short period of time when they need
to.
"Until it's paid off, a mortgage will become a part of a homeowner's
life. Homebuyers need to ensure the terms of their mortgage match their
plans, now and for the future," said Haque.
3. Accelerated payments: how can a mortgage get paid down faster?
Homebuyers can pay off their mortgage faster and save money on interest
by choosing a shorter amortization period or setting up an accelerated
weekly or biweekly payment schedule instead of a monthly payment
schedule. Prepayments are another way for homebuyers to pay their
mortgage faster without locking into a payment schedule that could make
it a challenge to manage their monthly cash flow. Many lenders allow
mortgage holders to make prepayments up to a percentage of the original
mortgage amount each year.
"It's wise for homeowners to strive to be mortgage-free quickly; however
it's important they don't stretch themselves too thin with the amount
of their payments," said Haque. "Beyond their mortgage, there are
ongoing expenses that come with homeownership such as property taxes,
utility bills and maintenance. It's important that home buyers budget
for these expenses when deciding on the mortgage payment schedule they
can afford. They need to be realistic and not put themselves in a
position where they're struggling to keep up with payments."
Canadians can ask questions related to broad range of financial advice,
including buying a new home, at the TD Helps community: www.tdcanadatrust.com/homeownership.
About TD Canada Trust
TD Canada Trust offers personal and business banking to more than 11.5
million customers. We provide a wide range of products and services
from chequing and savings accounts, to credit cards, mortgages and
business banking, to credit protection and travel medical insurance, as
well as advice on managing everyday finances. TD Canada Trust makes
banking comfortable with award-winning service and convenience through
24/7 mobile, internet, telephone and ATM banking, as well as in over
1,100 branches, with convenient hours to serve customers better. For
more information, please visit: www.tdcanadatrust.com. TD Canada Trust is the Canadian retail bank of TD Bank Group, the
sixth largest bank in North America.
SOURCE TD Canada Trust
Image with caption: "Found your dream home? Now find the mortgage to match. (CNW Group/TD Canada Trust)". Image available at: http://photos.newswire.ca/images/download/20130910_C5639_PHOTO_EN_30551.jpg
