Best advice for starting your home buying journey
Buying a home is more than a financial transaction—it’s an investment in your future. The home buying journey can be challenging, especially for first-time homebuyers who may be unfamiliar with the ins and outs of mortgage, including whether it’s a right time to purchase, definitions of mortgage terms, tips for saving for a down payment, mortgage eligibility, and more. Meeting with a lending specialist can help you check off boxes and prepare for your mortgage journey.
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To rent or to buy
The ABCs of Mortgage terms
Saving for your down payment
Seven ways to improve your mortgage eligibility
To rent or to buy?
As a first-time potential home buyer, how do you know when the time is right to take the leap into the home market and get your first mortgage? Use the following list to check off as many boxes as possible to objectively evaluate your home buying potential.
You may be ready for home ownership if you:
- Have enough money saved for a down payment (at least 5%)
- Have job security and are past the probation period
- Have savings to cover closing costs
- Are looking for a sense of stability and responsibility that often comes with home ownership
- Have done the math and it makes more sense to purchase over renting after factoring in payments, maintenance, taxes, and the missed opportunity costs of not purchasing a home
- Want to build equity that can be used for future purchases or renovations
- Have a stable income and can cover additional house costs
- Like to choose the look and feel of your home, and want the flexibility to make improvements to suit your preferences
- Plan to live in the same area for at least the next few years
- Prefer to not follow the rules of a rental
Home ownership may not be the best option today if you:
- Are living on your own for the first time and want to experience the responsibility of paying monthly bills and utilities before buying a home
- Don’t have enough money saved for a down payment
- Are working to improve your credit score and pay down debt before buying a home
- Want less responsibility for home maintenance and outdoor upkeep
- Aren’t able to comfortably afford the additional costs that come with home ownership
- Don’t mind following your rental’s rules
- Want the flexibility to move without paying a penalty when your lease ends
The ABCs of Mortgage terms
Before diving into the ins and outs of home ownership, there are a few terms you need to know to help you make the most of your mortgage at SCU. Although some of these terms and conditions may vary depending on the financial institution, a firm understanding of these mortgage terms will go a long way in helping you make informed decisions when it comes to your mortgage.
- Mortgage: A mortgage is a type of loan that allows you to buy a home or borrow against the value of a home you already own.
- Amortization period: This is the length of time it will take for you to pay off your mortgage. At SCU, the maximum amortization period is 30 years for most mortgages.
- Mortgage interest rate: There are two primary types of mortgage rates:
- The first type is a fixed rate: A guaranteed rate of interest and set payment amounts for a specified period of time
- The second type is a variable rate: Changes your interest rate over the term, meaning the amount you pay for principal and interest fluctuates.
- Mortgage term: This is the length of time that you lock in your interest rate and mortgage type, and typically ranges from one to five years. You’ll likely have several terms over the course of your mortgage amortization period.
- Down payment: This is the amount of money you’re putting toward the purchase of your home.
- Mortgage default insurance: This is a type of insurance that protects the financial institution in case a borrower defaults.
- Mortgage principal: Refers to your outstanding mortgage balance.
- Rate guarantee: A guaranteed mortgage rate for a set period, giving you time to find the perfect home and protecting you if interest rates increase.
- Payment frequency: This is how often you’ll make your mortgage payments.
- Pre-payment privileges: Allows you to pay an additional amount up to 20% without incurring a penalty.
- Closing costs: The extra administrative and legal fees above your down payment that you’ll pay when buying a home. It’s a good idea to budget an extra 2-3% of your purchase price to account for these expenses.
- Home equity: The difference between what you owe on your mortgage, and the assessed value of your home. In a nutshell, it’s the percentage of your home you own.
- Mortgage appraisal: A professional assessment of a home’s value. Mortgage appraisals are often required when you buy, sell, or refinance your home.
- Stress test: A test banks are required under federal regulation to use to ensure you’re able to make mortgage payments should your mortgage rate increase. Credit unions are regulated provincially and therefore not subject to stress tests.
Saving for your down payment
Coming up with a down payment can seem like a daunting task but, with a good game plan, it doesn’t have to be. Every small amount you save now will move you toward your goal. And while options for a lesser down payment may seem tempting (and even make sense), the size of down payment you can afford now can have a long-term impact on your finances, determining your monthly mortgage payments and your initial home equity.
1. Test-drive your budget
The first step in saving is to determine how much you will need. Review your budget, evaluate your income and expenses, and determine how much house you can afford. Try to deposit an amount similar to your mortgage payment into a High Interest Savings Account (HISA) every month. Another idea is to deposit the cost of your property taxes, so you get comfortable adding that to your monthly costs.
2. Automate your savings
Commit to saving first by automating. It’s easy to set up a pre-authorized debit from your chequing to a HISA. Or consider moving money into a TFSA, which will give a higher rate of return on your investment, boost your savings, and shelter your savings from taxes.
3. Invest your extra income
As you work toward your saving goal, consider setting aside any “one-time” income that comes your way. Bonuses, tax refunds, gifts, and side-income earnings can substantially move you toward your goal.
4. Take advantage of first-time homebuyers’ programs
If you’re a first-time home buyer, two accounts can help make your home purchase more affordable. The first is your RRSP. Through the Home Buyers’ Plan (HBP), you can withdraw up to $35,000 to top off your savings and increase your down payment. This will reduce your monthly payment and give you room in your budget to pay back your RRSP over time. Keep in mind you will have to pay back the funds within 15 years.
Another option is the Government of Canada’s First Home Savings Account (FHSA)
An FHSA is a registered savings account that allows you to save up to $8,000 annually ($40,000 lifetime) to use toward the purchase of your first home. Contributions made to the FHSA are tax-deductible and withdrawals used to purchase your first home, including the investment income, are non-taxable. Unlike with the HBP, you do not have to pay back the funds.
5. Set goal milestones
Remember to celebrate! Saving toward a long-term goal like a house can be challenging. Finding important milestones to celebrate can keep you on track.
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Seven ways to improve your mortgage eligibility
Whether you’re a first-time buyer or looking to refinance, your mortgage eligibility plays a crucial role in determining your buying power, and in some cases the terms available. Fortunately, there are some proactive steps you can take to enhance your eligibility and improve your chances of approval.
1. Build good credit habits
Show you can be responsible with credit by keeping your credit card balance to a maximum of 60% of your approved limit, limiting your number of credit cards and credit applications, and paying off your debts on a consistent schedule.
2. Get pre-approved
Before you start house shopping, ask your lending specialist what they need to provide you with an approval. This will help you address any barriers to approval before you put in an offer.
3. Earn a stable income
Show you’re able to maintain a stable income by maintaining a steady source of employment. If you’re self-employed, lenders will look at a two-year average from your notice of assessment (with some exceptions, depending on your individual situation).
4. Work to pay down debt
Take inventory of all of your debts, including credit cards, loans, in-store financing, and CRA payments, then work to lower your debt ratio.
5. Have your paperwork ready
It might seem simple, but incorrect or missing information is a common reason why your application might not go through quickly. Review our pre-approval checklist for a list of all the necessary documents.
6. Do your homework
Research the housing market and have a good idea of how much you need to borrow to meet your housing needs, considering what you can afford while maintaining your current lifestyle.
7. Consult with a specialist
Understanding all of the options available to you, and deciding which choice is best for your unique situation can be challenging. A lending specialist can offer sound advice and guidance as they walk you through each step of the process.
Ready to discover what an SCU mortgage can do for you? Book an appointment with an SCU specialist.