Your First Home. Kimberley Marr

term (or time frame for which you borrow the money at the interest rate you’ve agreed to) can be more difficult to decide upon. The shorter the time, the lower the interest rate and the greater the risk, as upon renewal, rates may have increased and it could cost you more to pay off your mortgage. With a low-interest rate environment, and the concern that rates may rise at some point in the future, many first-time buyers decide to lock in their interest rate for a longer term (often five, seven, or ten years), giving them the comfort and security that their mortgage payments will remain unchanged for a longer time frame. The attractive lower interest rate with shorter term mortgages comes with greater risk. You will need to determine your own risk tolerance and ability to carry and qualify for a higher rate mortgage upon renewal, if interest rates increase.

      Regardless of which term you choose, and especially if you want a shorter term, some lenders, especially with respect to high-ratio borrowers (and depending on your credit score) will mandate a pre-approval using a longer term interest rate. Some lenders use an average of the five major Canadian banks’ five-year posted interest rates to qualify a borrower. Other lenders use a five-year discounted variable rate. It depends on whether you are a conventional or high-ratio borrower, and what your credit score is. It varies and is up to the lender to decide. Of course, this plays a part in the underwriting criteria that a lender uses to determine the mortgage amount it will pre-approve. Your mortgage professional will discuss the criteria specific to your situation.

      4. Plan Your Budget

      Most first-time buyers have never experienced the costs associated with owning and maintaining a home and, for the most part, referring to mortgage amounts and numbers in the $300,000 to $400,000+ range can be a little intimidating and frightening. Of course, outside of your housing costs and potential other monthly liabilities (e.g., vehicle loan, student loan, credit cards), you also need to budget for day-to-day living expenses such as food, transportation, insurance, gas, clothing, entertainment, and savings.

      Set up a budget that includes all of your anticipated living expenses in advance. Factor in what you expect to pay each month for mortgage, taxes, utilities, monthly strata or condominium/maintenance fees where applicable, and all other anticipated living expenses. Try using your budget for a few months.

      You can use Worksheet 1 to help you create a monthly budget. This way you will be able to track your spending and determine, prior to committing to a certain mortgage amount, how comfortable you will be. It will also enable you to decide if there are expenses or items that can be eliminated to reduce your spending (e.g., entertainment or travel).

      It is not recommended that you become “house poor” and max out on credit cards or loans in order to make your monthly debt commitments — this is neither healthy nor fiscally responsible. Owning a home and building equity is a long-term plan that requires discipline and sacrifice. However, the long-term results are future security and building net worth. Many buyers decide to purchase for less than their maximum pre-qualification amount; they build in a “cushion” for unexpected expenses or life in general. This conservative approach is certainly something to consider. Remember: Short-term pain (and discipline) fosters long-term gain.

       Worksheet 1: Monthly Budget