Few things are as special or exciting as buying your first home. However, the process also involves risks and challenges, especially for first-timers. Aside from budget planning, house hunting and hiring a real estate agent, you’ll also need to arrange your mortgage.
Mortgage law in Canada is becoming increasingly confusing as rules and regulations, particularly fixed and variable options, have changed over time. This means that the paperwork and other formalities for these complex financial agreements have become more challenging, causing homebuyers to make costly mistakes.
Here are the top six blunders to take note of before signing your mortgage agreement.
Top 6 Most Common Mortgage Mistakes Made By Homebuyers
Buying a home is one of the biggest financial investments most of us make. That’s why it’s important to give it the attention it deserves, including the mortgage. From skipping your preapproval to neglecting down payments and penalties, there are many common mortgage mistakes first-time homebuyers make.
Skipping Your Mortgage Preapproval
It’s difficult to buy a home without knowing how much you can afford to spend on it. So, before you go house hunting, do the legwork to see what you can actually afford. A mortgage preapproval helps you look for homes within your price range and paints you as a serious property buyer.
A mortgage pre-approval also helps you determine how much money you can borrow to buy a property. For this, you need to provide your lender with some basic personal and financial information, such as your income, employment history and how much you’ve saved towards your down payment. They’ll analyze these details and inform you about the maximum amount you can spend.
Choosing Adjustable Mortgage Rates
Although adjustable mortgage rates may appear low and affordable at first, they can increase after a few years and become unaffordable. This is because if the Bank of Canada increases their overnight rate, the major banks will also change their prime lending rate, usually by the same amount. If this happens, your monthly payment will increase drastically, sometimes even causing you to default on the debt.
Adjustable mortgage rates create a false sense of stability and lure you into huge mortgage repayments. In short, a loan that was affordable two to three years ago suddenly becomes too much to handle. Under such circumstances, homeowners often have to take the equity out of their homes and refinance at a lower rate.
Neglecting Mortgage Penalties
When you first sign your mortgage, breaking it is the last thing on your mind. Yet, 60% of Canadians with a fixed-rate mortgage default at approximately 38 months in.
The penalty for breaking your existing mortgage is equal to three months of interest, with a chance of additional administrative costs. If you sign up for a 5-year fixed-rate mortgage, the penalties could be even costlier. The big banks and credit unions tend to have the heftiest mortgage penalties: depending on your loan amount, you could end up spending $20,000 or more as a mortgage penalty. That’s why it’s advisable to ask about penalties before signing a mortgage. You don’t want to pay a hefty penalty, or worse, surrender your home to your lender.
Choosing Longer Amortization
People who choose a variable rate mortgage in Canada need to select a specific amortization period. This usually ranges between 25 and 40 years. A longer amortization period (30 years or more) is ideal for those who plan to be in the home for an extended period, as interest rates are higher than with a shorter term. Borrowers would also have less equity in their homes, which they may not find viable enough for their investment. Longer amortization periods can also make relocation difficult.
Avoiding the Down Payment
While it’s possible to secure a ‘no down payment mortgage’ in Canada, it is actually an important and useful financial tool when purchasing a property. There are three main benefits of making a larger down payment:
- It increases the equity in your home, right from the beginning. Your net mortgage amount will thus be lowered, as will your monthly mortgage payment.
- A lower mortgage amount has a better chance of a quick approval than a hefty loan amount.
- Down payments lead to savings, as processing fees and loan insurance premiums depend on the total loan amount.
While it may seem simpler to be able to buy a home with no deposit, it’s a better idea to save as much as you can to make a reasonably-sized down payment.
Not Hiring a Mortgage Lawyer
A lot of people avoid hiring a lawyer for the mortgage, refinancing and foreclosure issues, thinking they can save money by doing it on their own. In reality, there is much confusing paperwork, laws and regulations involved that require expert assistance. Your mortgage lawyer can help you handle these legal matters and make sure the deal is closed. They can also assist you in successfully applying for a mortgage at the lowest reasonable monthly payments.
|Speak to an Expert Mortgage Lawyer
If you’re in Brampton and looking for an experienced mortgage lawyer, Brar Tamber should be your destination. Whether you need a lawyer for a new home purchase or to negotiate your mortgage, you can depend on our expertise. Book a free consultation to discuss your mortgage requirements.
The bottom line is that not all mortgages are the same. There are many terms, conditions, issues and circumstances that should be considered before signing any mortgage contract. Hence, it’s advisable to seek the assistance of a reputable mortgage lawyer to help navigate this complex loan approval process quickly and successfully.