Mortgage tips for buying a new home in Alberta

When building a new home, sometimes picking the right mortgage is easier than picking the backsplash for the kitchen. Not that less time or consideration is involved in the decision, but the process is much more straightforward.

Buying a first home is especially daunting, it’s likely the biggest purchase of your life, and the challenges in picking a mortgage that works for you is a crucial part of the process. The current turbulence in the economy brought about by inflation and rising interest rates does bring challenges, but once the decision is made to build a home here are some tips that might prove handy.

Calgary New Home + Condo Guide spoke with Clay Jarvis of NerdWallet Canada, a personal finance website that offers guidance to personal financial questions.

A reliable builder is crucial

Buying a new home in Alberta is a little more complicated today than it was just a decade ago, Jarvis says. “I’d say buying new is a little less ‘set-it-and-forget it’ today than it was 10 years ago. Material costs are higher, labour is more of a challenge to secure, and as we saw with the COVID pandemic, unforeseen events can lead to severe delays.”

Finding the right builder takes even more importance now. “It’s really important that when you decide to buy a pre-con or custom-built home that you learn all you can about the builder, their history and what their strategy is for keeping the project on time and on budget.”

He adds that when buying a pre-construction home, buyers must be confident in their builder’s ability to complete the project that was promised. “Do they have a reputation for delivering quality, or a track record of disappointing their customers?” he asks.

“Buyers should also be financially prepared for any worst-case scenarios. If a project is cancelled but you’re still interested in buying, you’ll have to do so at today’s prices, not those you paid five years ago. If financing falls through, you’ll probably be required to put down a larger down payment to complete your purchase. In either instance, you’ll need quick access to extra capital.”

Sound advice

The best tip he can give is to be aware of your own personal financial abilities first. “In general, all buyers should be wary of their own spending habits. What I mean by that is that they should be constantly re-evaluating their budgets to ensure their discretionary spending and other credit obligations aren’t increasing to a worrying degree.”

He also advises that when discussing your options with a lender or broker, it’s not a bad idea to borrow less than the maximum amount offered. “Not only will that allow you to pay less in interest, but you’ll have a little extra breathing room in case your life suddenly becomes more expensive.”

Consider short-term mortgages

He says homebuyers should look into short-term mortgages right now. “Short-term mortgages are especially attractive today because mortgage rates could be lower two to three years from now. Anyone getting a two-year fixed-rate mortgage today, for example, won’t have to commit to one of today’s elevated rates for the next five years.”

He does caution that the rates on short-term mortgages tend to be higher than those on five-year terms. “They might pay a higher rate than they would with a five-year, but for a shorter length of time. If they’re in need of financing in 2023, I think new homeowners should benefit by going the short-term route.”

The Alberta advantage

Jarvis has expressed confidence in the strength of the Alberta economy, where homes remain a lot more affordable than in other parts of the country.

“Alberta’s advantage right now is the relative affordability of its housing market. The average sale price in the province in January was $420,152, which was significantly lower than the national average of $612,204,” he says.

“Mortgage rates aren’t any lower in Alberta, and borrowers there still have to pass a stress test, but those lower home prices mean buyers can apply for smaller loans and put down smaller minimum down payments.”

Facing challenges

Jarvis cautions that elevated mortgage rates will continue to be a challenge for some buyers for much of this year. “One thing you can do to try and secure a more affordable mortgage is to put down a larger down payment. That’s a tough ask when inflation is as high as it is but making a larger down payment may encourage lenders to offer you a lower rate.”

He does recommend getting a mortgage broker. “I also recommend buyers reach out to a mortgage broker rather than just dealing with their banks by default. Having someone in your corner who can compare the details of different mortgage products and negotiate for better terms and rates on your behalf can be a game-changer,” Jarvis says.

“Above all else, mortgage brokers offer buyers choice. Because they’re not tied to a single financial institution, brokers can compare mortgage products from all their lender partners to find one that best fits a borrower’s needs,” he notes.

“And in cases where buyers are having trouble getting banks to play ball, brokers can play the role of advocate and make the case for why their clients can be trusted to pay back a major loan.”