Qualifying for a mortgage is a huge milestone for a first-time buyer on the quest to homeownership. In a time of restrictive mortgage rules, federal stress testing and climbing prices, scoring your first mortgage is a tough, but crucial component of the home buying journey.<\/p>\n
\u201cWe are finding, especially for first-time home buyers, unless they have a large gifted down payment from a family member, [the stress test] is making it very difficult to get into their first home,\u201d says Nicole Daoust, a RBC mortgage specialist based in Barrie, Ontario.<\/p>\n
Earning that first mortgage, however, is more than just keeping a healthy credit score and saving for a downpayment; choosing the right mortgage term and amortization, which will have a lasting impact on your mortgage payments and refinancing plans, is a vital ingredient for a mortgage best-suited to your financial needs. How much you should borrow from a lender, and when and how you pay off your mortgage, is at the discretion of the buyer.<\/p>\n
\u201cBorrowers should decide for themselves what they\u2019re comfortable spending and not use, \u2018What\u2019s the most a lender will lend me?\u2019 as a way to determine how much they should borrow,\u201d says David Larock, an independent mortgage broker.<\/p>\n
If you can\u2019t tell the difference between a mortgage term and a presidential term, never fear \u2014 the experts are here. We called on Daoust and Larock to explain mortgage terms and amortization, and how to select the best options for you.<\/p>\n
What is a mortgage amortization?<\/strong><\/p>\n Mortgages take years to pay off \u2014 we\u2019re talking decades.<\/p>\n During your mortgage-hunt, you will choose an amortization. This is the length of time it will take to pay off your entire mortgage. While amortizations range in length, the average mortgage amortization in Canada is 25 years, according to the Canada Mortgage and Housing Corporation. You could choose an amortization as high as 40 years with a private lender, but CMHC-insured mortgages are capped at 25 years. Under this regulation, if you don\u2019t have 20 percent down payment and your mortgage is insured, you can\u2019t extend your amortization beyond 25 years.<\/p>\n While the 25-year CMHC cap regulation had minimal impacts on cooling the housing market upon its implementation in 2012, Larock explains that, combined with the federal mortgage stress test, the effects are being felt hard now.<\/p>\n \u201cThe challenge now is with the mortgage rules changes and stress test doing exactly what it was intended to do, which is slowing down the market and making houses less affordable, it means people either have to wait until their incomes rise, they have a bigger down payment or they buy a less expensive property,\u201d says Larock.<\/p>\n Canadian home sales falling sharply this year as a result of the stress test prompted some real estate developers and lenders to lobby policymakers to extend the insured mortgage amortization to 30 years. A longer amortization allows a borrower, at the cost of paying more interest over time, to spread out costs and make smaller monthly mortgage payments. Some argue that this change would make it easier for first-time homebuyers with smaller down payments to qualify for mortgages. While the Liberal government chose to forgo this recommendation in its recently released federal budget for 2019, there is still growing pressure on policymakers to provide relief for first-time buyers.<\/p>\n Extending your mortgage amortization out to 30 years could be a benefit for those needing a little wiggle room in their monthly budget, but Daoust explains that this is dependant on the borrower\u2019s lifestyle. Financial restraints, such as a spouse on maternity leave, could be a good opportunity to opt for smaller mortgage payments, but poor budgeting habits or a spotty credit history might mean a 30-year mortgage isn\u2019t the best fit.<\/p>\n \u201cAnybody that has notoriously late payments on their credit and, or run their credit cards to the max \u2026 and they\u2019re coming in and wanting a 30-year amortization, it\u2019s not that I\u2019m not going to do it, because of course I will, but I\u2019m going to have a very serious conversation with them at that point,\u201d says Daoust.<\/p>\n What is a mortgage term?<\/strong><\/p>\n Within a mortgage amortization, there are mortgage terms. A mortgage term, which ranges from six months up to 10 years, is the amount of time you\u2019re locked into a lender, an interest rate and any mortgage conditions. When your mortgage term is up, you can choose to refinance and renegotiate the terms of your mortgage.<\/p>\n Your mortgage term can determine how quickly you\u2019ll pay off your mortgage, but also how much money you could save depending on how often you choose to refinance, at which interest rates and if you opt for a variable or fixed rate. Larock uses the yield-curve, a measure of how much interest is paid over time to borrow money, when examining terms for his clients. For instance, a two-year mortgage term with a fixed interest rate of two percent could save you more interest costs over a longer five-year term with a higher interest rate, but with an added risk of interest rates rising upon refinancing.<\/p>\n \u201cI would look at that and say, \u2018Well, if you take on a two-year fixed rate, you\u2019ve got to come back to the market in two years. So if rates go way up, there\u2019s a risk that you could get significantly higher payments in two years time, but you\u2019re saving a big whack of interest costs over the first two years because you\u2019re getting a big discount for going with only a two-year term,\u201d explains Larock.<\/p>\n If your plans change \u2014 you separate from your spouse or want to step out of the property market \u2014 you could break your mortgage term, but at a steep cost. Big-five banks will charge you thousands in penalties to break your term, though Larock explains private lenders will charge you significantly less, around $1,600 for a five-year fixed rate in some cases. With a private lender, Larock says the penalties could be worth it to break and refinance if needed.<\/p>\n Avoiding the need to break your term can be done with careful planning. Daoust, who works with a lot of military families who tend to move around a lot, says it could be possible to port your mortgage, where you can pay off the remainder of the term in your new home.<\/p>\n \u201cIf you\u2019re relocated within three years, anywhere in Canada, we\u2019re just going to take your mortgage from one house and transfer it to your next house penalty free,\u201d says Daoust.<\/p>\n What will the first mortgage term look like for me?<\/strong><\/p>\n If you\u2019ve established your mortgage amortization and term, you\u2019re halfway there, but you\u2019ll still need to determine how often you\u2019ll pay your mortgage.<\/p>\n A borrower has several choices with the frequency of their mortgage payments: monthly, bi-weekly, accelerated bi-weekly, weekly or accelerated weekly. Accelerated payments mean that you make an extra payment or two a year at a slightly higher monthly cost, but compared to regular payments, you\u2019ll save thousands in interest and pay off your mortgage more quickly. If you choose a 30-year amortization, Daoust recommends taking accelerated weekly or bi-weekly payments because it costs less than a 25-year amortization.<\/p>\n \u201cIf I\u2019ve got a family where maybe only one of the members is working full-time \u2026 then I will for sure do a weekly or bi-weekly payment because then, once again, that is even less than accelerated [payments], even on a 30-year amortization,\u201d she says.<\/p>\n Daoust and Larock both express the importance of properly researching the other expenses of homeownership when choosing how much mortgage to borrow \u2014 your utility bills, property taxes and maintenance costs are crucial to factor in. An amortization or mortgage term can\u2019t help you much if you borrow more than you can handle. Instead, Larock encourages homebuyers to frame their thinking in how much they are comfortable spending on their mortgage per month. This way, he says you can avoid house poorness and bidding more than you can pay for in a multiple-offer scenario.<\/p>\n \u201cBorrowers should keep in mind that the lender doesn\u2019t care if you ever save for retirement, go on vacation or take your significant other out for a nice dinner. All they want to know is, \u2018Will your income allow you to make our payments?\u2019 and to heck with anything else.\u201d<\/p>\n