What first-time homebuyers need to know before getting a mortgage

By Alyssa Furtado
February 12, 2015
Continuing low interest rates present a window of opportunity for first-time homebuyers, but before you begin touring homes and hiring a real estate lawyer, you need to get pre-approved for a mortgage.Once you’ve been pre-approved, remember that this is the absolute maximum amount a bank or mortgage broker would be willing to give you – and the mortgage payment at that top price is often outside of people’s comfort zones, when it comes to their personal budgets. To ensure you’re not strapped for cash and become house poor, try to buy something at a lower price point. Your budget will especially thank you when – not if, when – interest rates go up.Finance officials and economists have said for years that an interest rate hike was on the horizon, but all signs point to it finally happening later in 2015. Since our economy follows the U.S.’s, the Bank of Canada will watch what the Federal Reserve does then go from there. It’s predicted that our prime rate could go up by as much as 1.25 to 1.50 per cent, though, which would affect anyone who had a loan attached to prime (variable mortgage, bank loan or line of credit). First-time homebuyers thinking of taking advantage of a low variable mortgage rate this year, should first run the numbers to see if you could afford this potential increase.According to the Canadian Real Estate Association, the average home price in Canada is slightly more than $413,000. If we plug that number into a mortgage calculator, put down 20 per cent and choose a five-year variable rate (2.09 per cent, for example), your monthly mortgage payment would be $1,413. Now, if prime went up by 1.50 per cent, so would your mortgage rate. If yours went up from 2.09 per cent to 3.59 per cent, your monthly mortgage payment would go up to $1,665 – that’s $252 per month or $3,024 per year extra that you’d need to find in your budget.Imagine how difficult that would be to come up with, if you’d already purchased something at the top of your max budget. And fixed rate mortgage holders won’t be immune to the interest rate increase, either – those will likely go up, too, but you’d be protected from that until your mortgage came up for renewal. Still, I wouldn’t be surprised if we saw more people go fixed this year, in light of this potential interest rate increase. Even if it weren’t on the horizon, it’s always best to stress test a mortgage before you buy. A good rule of thumb: if you can’t afford a two-per-cent interest rate hike, you may want to look at a home within a more appropriate price range.Related reading:What the bank of Canada's rate cut means for homebuyers 

About Alyssa Furtado

Alyssa Richard is Founder and CEO of RateHub.ca – a website that compares mortgage rates, credit cards, high-interest savings accounts, chequing accounts and insurance with the goal to empower Canadians to search smarter and save money.

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