According to the real-estate board of Greater Vancouver, Lower Mainland home sales are far above the 10 year average. And in a hot market like this it is easy to get overwhelmed with all of the information out there. Joining us now to debunk some of the most common home buying myths is Chris Maze of Coast Capital.
Let’s start with down payments.
Do you need to put 25% down in today’s market?
With a high ratio mortgage where the amount borrowed is greater than 80% of the property value, you actually only need a 5% down payment. However, these mortgages do require insurance–and that comes with a few unavoidable expenses. There are caviats on the percentage of down payment required based on the purchase price. The CMHC website is a great place to start your research , and of course talking to a lender or an advisor early in the process is also important so you can understand what down payment you’ll need. One other thing that I’ll say is along with a down payment, you’ll also need to have good credit. So as you’re saving for your down payment, if you have some spots on your credit history you’ll want to work on bumping up your credit score as well. Generally we advisor members that the need a year and a half sound credit in advance of being approved for financing.
Should paying down your mortgage be your primary goal?
This is a great [question] and can lead to a great conversation with your Financial Advisor. There are two basic options related to goals for your mortgage. Do you want to pay off your mortgage as fast as possible, or do you want to free up as much cash flow as possible? The choice can change based on the rate environment at the time of your purchase and your personal situation. Right now with rates being so low your money is going to work harder for you by using any additional cash flow to invest or pay off debt with a higher interest rate. It’s always a good idea to sit down and talk with an advisor to come up with the best strategy for your specific circumstances. Ultimately being free of a mortgage makes sense for everyone, but it really does depend on your individual circumstances and what part of your finances keep you up at night.
Do pre-payment charges apply to securing lower rates?
It is true. So the first part of the question, technically to take on a new rate you do have to pay a pre-payment charge. However, each situation is different based on the current interest rate, the amount of the pre-payment charge and the new rate available. In fact, some lenders allow a partial or full waiver of the pre-payment charge if you’re borrowing additional money at the time of the renewal. In many cases though it can still make sense to pay the pre-payment charge to get the lower rate and early renew your mortgage–but again each situation is different and anyone with questions should reach out to their lender to discuss. However that is only if the lower rate is at the same institution where you have your mortgage.
What if you find a lower rate at a different bank?
If you find a better rate elsewhere and you want to take advantage of those savings you don’t necessarily have to wait until your mortgage matures to do that. It’s all in the math. And often in the long run it’s actually going to be cheaper to pay the pre-payment charge and to take a new, lower rate because the money you’ll save by decreasing your mortgage rate is greater than the pre-payment charge to break your term. This isn’t the case for everyone, but it’s something to talk to your financial planner about to help do that math with you.