Fact or Fiction? Don’t let mortgage myths cost you

At one time or another, we’ve all fallen for an urban myth that turned out to be factually false. Think lightening never strikes twice, the Great Wall of China is visible from space, Sasquatch roams the forest and Nessie swims in the Loch.

Most myths are harmless, but when it comes to your finances, believing fiction instead of fact can cost you.

Join our experts as they separate fact from fiction and debunk some of the most common myths about mortgages, because when it comes to one of life’s biggest purchases, it pays to know the facts.
 

Fact or fiction: You need a 20% down payment to buy your first home

This isn’t true, especially if you’re an SCU client.

A high-ratio mortgage lets you buy a home with as little as five percent down. Of course, there’s a little more to it than showing up with a suitcase on possession day. You need to qualify, as does the home of your dreams.

Lenders look at something called the loan-to-value (LTV) ratio. It’s simply the amount you need to borrow divided by the purchase price. If the LTV ratio is more than 80 percent, your down payment is less than 20 percent and your mortgage is considered a high ratio one. 

Because you’re borrowing more of the home’s value, lenders view the loan as carrying a little more risk. That’s why you’ll need mortgage loan insurance through a provider such as CMHC or Sagen.

Before giving you the green light, both the lender and insurer will take a close look at your financial picture. They’ll verify your income, review your debt to credit utilization ratio and make sure the property meets their requirements. If everything checks out, you’re one (major) step closer to getting the keys.

While a smaller down payment does mean borrowing more money, and mortgage insurance can add to your overall costs, both items allow you to find your home-sweet-home all that much sooner.

And the good news? SCU offers eligible first-time homebuyers another option: putting 15 percent down instead of the traditional 20 percent. Offered at a lower interest rate, this option helps offset the cost of mortgage insurance—a win-win if you’re close to your down payment goal but not quite there yet.

Now that’s a fact worth its weight in gold.
 

Fact or Fiction: A mortgage pre-approval guarantees you’ll get the financing

It may be a popular belief, but a pre-approval isn’t quite the financial golden ticket it sounds like.

A mortgage pre-approval is based on your financial picture at the time you apply. Your lender looks at factors such as your income, debts, and credit history to determine how much you may be able to borrow. But the real test begins once you’ve found a place to call home and put in an offer.

Before all systems are go, your lender will take one more look at your finances. If you’ve changed jobs, taken on significant new debt or your financial situation has otherwise shifted since your pre-approval, the amount they’re willing to lend could change, too.
And it’s not just you who’s under the microscope. Your dream home must pass the test as well.

Your lender may require an appraisal to determine whether the property is worth what you’ve agreed to pay. If the numbers line up, you’re on your way to moving day. If the appraisal comes in lower than your purchase price, however, the lender may not be willing to finance as much as you expected, leaving you to make up the difference or reconsider your options.

Finally, if your mortgage requires mortgage insurance, the insurer will also do its due diligence before giving the deal its stamp of approval.

With all these potential plot twists, is a pre-approval still worth getting? Absolutely!

A pre-approval gives you a much clearer idea of what you can afford before you start house hunting. It can also show realtors and sellers that you’re a serious buyer and may allow your lender to hold an interest rate for a set period.

Think of a pre-approval as an especially useful head start rather than a guarantee. Keep your finances steady, avoid taking on major new debt while you’re house hunting and don’t start measuring for curtains until the financing is final.

Now that’s fact you can count on.
 

Fact or Fiction: All you need in your savings account is enough for a down payment

Wouldn’t it be nice if this were true?

Saving enough for a down payment is a major milestone—and certainly something worth celebrating—but don't empty the piggy bank just yet. There are still a few more expenses waiting between you and your new front door.

First up are closing costs. These can include land transfer taxes, legal fees, and title insurance. You may also need to budget for a home inspection or appraisal.

And then there are the expenses that come with actually moving into your new digs. Unless you have a group of very generous friends with strong backs and a truck, you’ll probably need to pay for movers. Add utility hookups, internet and all those little expenses that seem to magically appear once you get the keys, and those costs can quickly add up.

A good rule of thumb is to set aside approximately two to four percent of the home’s purchase price for closing and other upfront costs, in addition to your down payment.

Having that extra cushion means you’ll be better prepared for the expenses that come with buying a home, and less likely to find yourself house-rich and cash-poor before you’ve even unpacked the first box.

Now that’s a fact that will stick.
 

Fact or Fiction: It’s best to pay off your mortgage as quickly as possible

You’d think getting rid of your mortgage as fast as possible would always be the smartest financial move. But not so fast.

There’s certainly an upside to paying down your mortgage early: you’ll save on interest and own your home sooner. But funnelling every available dollar into your mortgage can come at a cost, too.

If most of your money is tied up in your house, you may be giving up some financial flexibility, potentially missing opportunities to put that money to work elsewhere.

Take retirement. Maybe your dream is to spend your golden years travelling the globe. Or perhaps happiness is simply sitting in your own backyard with a steak on the barbecue and nowhere you need to be. Either way, you’ll need money to enjoy it.

Investing some of your available cash instead of putting every extra dollar toward your mortgage could help build savings for retirement. After all, the equity in your home may look great on paper, but accessing that money generally means borrowing against your home or selling it, and what if moving isn’t part of your retirement plan just yet?

Then there’s life’s knack for throwing the occasional curveball. A job loss, unexpected expense or other financial setback is a lot easier to weather when you have accessible savings. You can’t exactly take a brick out of the living room wall and use it to pay the hydro bill.

The better approach may be about balance: paying down your mortgage while also building savings, investing for the future and keeping enough cash available for whatever life sends your way.

Being mortgage-free is a great goal. Just make sure getting there doesn’t come at the expense of your other financial goals.

Now that’s fact that really pays off.