Envision Financial - Buying Your First Home
Buying your first home can be exciting and scary all at once. There's so much to know, so much to decide. At Envision, we take the worry out of home financing and give you the information you need to get on with living.
The mortgage process
Saving for your home
Mortgage Basics - What do you need to know?
Open or closed mortgage
Effects of amortization
Fixed or variable rate
How much can you afford?
What other costs do you need to consider?
Can you be pre-approved for a mortgage?
Finalizing your mortgage
Saving for your home
The first step is to save money for the down payment (the initial upfront portion of the total sales price) and figure out how much you can afford. The larger the down payment you make, the smaller your mortgage will be and the less interest you’ll pay over the life of your mortgage. A typical down payment is 20% of the purchase price of the home. Save up this amount and you’ll be eligible for a conventional mortgage.
You can, however, buy a home with less than 20% down or no money down. This type of financing, called a high-ratio mortgage, requires you to purchase insurance from Canada Mortgage and Housing Corporation (CMHC) or Genworth. You can pay the associated application fee and premium upfront or add it in to your overall mortgage. Premium varies depending on Loan-to-Value (LTV) ratio and amortization.
Down Payment Calculation
20% -> $300,000 - $60,000 = $240,000 mortgage, 5% -> $300,000 - $15,000 = $285,000 mortgage
Interest Rate 6%*
Amortization 30 years
Monthly Payment $1,427.58, $1,745.26
Total Paid $513,926.16, $628,293.28
*Assumes an average rate of 6% over entire amortization for illustrative purposes only. Actual rates would vary depending on term selected.
Need advice on how to save? We can help. Our member service representatives can set up a strategy that will help you put away a little each month. First-time home buyers can also withdraw up to $20,000 from their RSPs (without immediate taxation) to use for their down payment. Remember though, whatever amount you withdraw will need to be repaid to your RSP within 15 years. Please visit the Government of Canada website for further details. Some conditions apply.
Mortgage basics
A “closed” mortgage has a longer, set term (usually six months to 10 years) and limited prepayment options. If you decide to refinance, renegotiate or pay out the mortgage before your term ends, a penalty applies. However, what you sacrifice in flexibility, you usually make up for on rate. A closed mortgage is a great choice for buyers who suspect that interest rates are on the rise and aren’t planning to move in the short term.
An “open” mortgage can be repaid at any time during the term of the mortgage without a penalty and usually has a shorter term (from six months to one year). While open mortgages can allow you to pay your mortgage off faster, they often come with a slightly higher interest rate. But, if rates appear to be going down or you’re thinking you may be moving again in the next few years, an open mortgage may be exactly what you need.
Reducing the amortization period can help you save a great deal of interest over the long term. On a $200,000 mortgage, for example, increasing your monthly payment by $144.77 saves you $42,035.67 in interest and your mortgage is paid off five years sooner!
Effect of Amortization
Mortgage $200,000
Interest Rate 6%*
Amortization Terms 35, 25, or 20 years
No. of Payments 420, 300, or 240 payments
Total Payments (per month) $1,130.50, $1,279.61, $1,424.38
Total Amount Paid $474,815.44, $383,882.31, $341,849.64
*Assumes an average rate of 6% over entire amortization for illustrative purposes only. Actual rates would vary depending on term selected.
What about interest rates?
Again you have choice. With a fixed-rate mortgage, payments are set in advance for the term, providing you with the security of knowing exactly how much interest and principal you’ll be paying throughout the term. Another option is a variable-rate mortgage. As the interest rate fluctuates with the market, the portion of your payment that goes toward reducing your principal changes. If rates go down, more of your payment is applied to reduce the principal. If rates go up, more of your payment goes toward paying the interest. Research has shown that over the long term, most consumers come out ahead with this type of financing.
How much can you afford?
When it comes to buying a home, the last thing you want to do is get in over your head. At Envision, we can help you think through the real costs of home ownership-everything from redecorating, repairs and insurance, to suddenly needing a lawnmower.
When approving your mortgage, we'll consider your income as it relates to not only your home, but your other debts as well. Generally, we'll use two calculations to determine the maximum amount of financing you can afford.
Gross Debt Service (GDS) ratio
Your monthly housing costs should not exceed 30% of your gross monthly income. Included in housing costs are: monthly mortgage principal and interest payments, property taxes, hydro and heating, condominium or strata fees, or your annual site lease for leasehold property.
Total Debt Service (TDS) ratio
Your overall debt load (including housing costs and payments on car loans, credit cards, personal loans and lines of credit) shouldn't be more than 40% of your gross monthly income.
Mortgage Calculators
To help you calculate how much you can afford Envision has created tools to show you what you can afford. Compare mortgage terms, review refinance options, see the impact of interest rates and more! Click here to link to Envisions tools and calculators.
What other costs do you need to consider?
When assessing how much you can spend for your home, don’t forget about the many one-time expenses that you’ll face. Expect related fees to cost about 1.5 to 3 per cent of the purchase price of your new home. Here’s a brief list of items to consider:
GST and sales taxes-apply to certain properties, including new or recently constructed homes.
Property transfer tax-applies to most home purchases in B.C. The tax is 1% of the first $200,00 of the market value and 2% of the balance.
Inspection fees-to check your home for structural soundness, confirm mechanical condition and identify any problems.
Appraisal fee-to ensure the property is acceptable security for the mortgage.
High-ratio fees-to cover the premium and application cost for default mortgage insurance on high-ratio mortgages.
Legal fees-to register the mortgage and transfer the property to you as the new owner.
Tax/utility/interest adjustments-to compensate the vendor for any pre-paid property taxes, utility fees or interest payments.
Home insurance-to protect your home in case of fire or other damage. Did you know that Envision can help you get home insurance that’s right for you? Click here for an insurance office near you.
Mortgage insurance-is always a smart choice because it enables your family to keep your home in the event of your death. It can also protect you in the event of prolonged illness, injury or loss of employment.
Moving costs-to settle into your new home no matter where you move.
Utility costs-to establish new utility hook-ups.
Renovation and repair costs-to cover any immediate repairs, renovations or decorating costs.
Can you be pre-approved for a mortgage?
Pre-approval makes shopping for a home easier. That's because you'll know exactly what your price range is before you go out looking. You'll know how much you can borrow, the interest rate, and your payments. You won't be obligated to make a purchase, but if you see something you like, you can quickly make a realistic offer. That can be a big advantage in a hot housing market.
Plus, your interest rate can be guaranteed for up to 90 days, protecting you against rising rates.
Documents required for pre-approval
Income confirmation-this can include a letter from your employer, T4 slips, financial statements, and Revenue Canada assessments.
Down payment confirmation-your down payment can include saved funds on deposit with your financial institution, RSPs, a gift from an immediate family member, and/or equity from the sale of another property.
Credit application-this will provide us in assessing your mortgage request and your net worth. It also authorizes us to do a credit bureau check.
Credit confirmation-we'll need to do a credit investigation and confirm that your credit rating is satisfactory for lending purposes.
Finalizing your mortgage
When you sign your mortgage agreement, you’ll need to provide some essential paperwork:
Income confirmation-this may include a letter from your employer, T4 slips or financial statements.
Down payment confirmation-this can include statements that verify deposits, RSPs, equity from another property or a gift from a family member.
Credit application and confirmation-this will give Envision the information we need to review your credit rating and assess your mortgage request.
Purchase agreement-this is the legal document between you and the seller.
Real estate listing-this verifies the property.
Contact information of your notary or lawyer.
Contract and building plans, if your home is being built.
