Making an Informed Investment
If you’re in the market for a new home, take a moment to ask yourself a few key questions about what you should be looking for, how much you can comfortably afford to spend, and whether homeownership is right for you.
How much home can you afford?
- Before you begin shopping for a home, prepare a simple budget, so you can figure out where most of your money is going on a monthly basis. If you aren’t sure how much you’re spending each month, use CMHC’s Household Budget Calculator to take a realistic look at your current expenses.
- When preparing your budget, don’t forget that there are many up-front costs that come with buying a home. This can include a deposit, appraisal fees, legal fees, home inspection fee, survey or certificate of location cost, title insurance, land registration fees, water or septic tests, Estoppel Certificate fees, condo or strata fees, property taxes, utility bills, property insurance, moving costs and other expenses. Use CMHC’s Home Purchase Cost Estimate Worksheet to calculate your up-front costs.
- Always keep in mind how much you can afford to spend. As a general rule, your total monthly housing costs (including mortgage payments, property taxes and heating expenses) should be no more than 32% of your gross household monthly income.
- In addition, your total monthly debt load (meaning your housing costs plus any car loans, credit card payments, personal loans, line of credit payments or other debts) shouldn’t exceed 40% of your monthly income.
- The amount of house you can afford will also depend on the size of your down payment. Once you’ve decided how large a down payment you’re prepared to make, use CMHC’s Mortgage Affordability Calculator to figure out the maximum home price you can afford, how large a mortgage you can borrow, and what your monthly payments will be.
- If your down payment is less than 20% of the value of the home you want to buy, you will also need to budget for Mortgage Loan Insurance. Mortgage loan insurance helps Canadians buy a home with a minimum of 5% down. Talk to your broker or lender to find out more.
- After all these calculations, if the numbers don’t look encouraging, you may want to pay off some other loans, save for a larger down payment, lower your target home price, or take a look at your budget to see where you can spend less.
Which mortgage is right for you?
- When choosing a mortgage, you will have to select between a wide variety of different options. This includes: the amortization period (the length of time to pay off your mortgage); the term (the length of time the interest rate and other options you negotiate will remain in effect); the payment schedule (monthly, bi-weekly, weekly, etc.); open or closed mortgages; and whether you want a fixed or variable rate of interest.
- Your lender or broker can help you decide which options are right for you. You can also use CMHC’s Mortgage Payment Calculator to compare a few options, and find out how much your payments would be.
- To give your family greater financial stability and peace of mind, you may want to consider getting a smaller mortgage than the maximum amount you can afford, or reducing your amortization period to pay off your mortgage sooner.
- When choosing a mortgage, always take into account the impact an increase in interest rates could have on your ability to make your monthly payments.
What is your credit score, and how can you improve it?
- Your credit score is a number that illustrates your financial health at a specific point in time. It is also an indicator of how consistently you pay off your bills and debts.
- Your credit score is one of the factors lenders consider when qualifying you for a mortgage. A good credit score, for example, can help improve your chances of being approved.
- To find out your credit score, contact Canada’s two credit-reporting agencies: Equifax Canada and TransUnion Canada. These agencies can provide you with an online copy of your credit score as well as a credit report — a detailed summary of your credit history, employment history and personal financial information.
- If you find any errors in your report, notify the credit-reporting agency and the organization responsible for the inaccuracy immediately.
- If you want to improve your credit score, always pay your bills in full and on time; pay off your debts as quickly as possible; never go over the limit on your credit cards; and try to reduce the number of credit card or loan applications you make.
- Once your credit score has improved, work with your mortgage professional to obtain a mortgage that works for you.
What is mortgage fraud, and how can you avoid becoming a victim?
- Mortgage fraud occurs when someone deliberately misrepresents information on a loan application, to obtain mortgage financing that likely would not have been approved if the truth had been known.
- To protect yourself from becoming the victim of, or an accomplice to, mortgage fraud, never accept money, guarantee a loan or add your name to a mortgage unless you fully intend to purchase the property.
- Never give out your personal information, banking information, credit card details, passwords, or other personal or sensitive information, unless you know who you are dealing with and how your information will be used.
- If you are buying or selling a home, use only licensed Real Estate Agents and other professionals.
- Determine the sales history of any property you are thinking about buying, and have it inspected and appraised.
- Find out if anyone other than the seller has a financial interest in the home.
- Get independent legal advice from your own lawyer or notary.
- Never sign anything until you know exactly what you are signing.
- Be wary of anyone who approaches you with an offer to make “easy money” in real estate. If a deal sounds too good to be true, it probably is.
* reprinted by CANADA MORTGAGE AND HOUSING CORPORATION