#MakeItMakeSense is a weekly series from the Star that breaks down personal finance questions to help young Canadians gain more confidence and understanding around financial literacy.
Is buying a property feasible for younger Canadians? As real estate prices skyrocket, finding affordable housing and understanding mortgages can be a looming stressor on young Canadians when there are so many factors to consider and weigh.
A recent report by Re/Max Canada found since 1996, residential unit sales have doubled and the average price has increased by 453 per cent. With figures like these, it’s difficult to know where to start when planning or preparing to apply for a mortgage.
This week, our question comes in from 22-year-old Jessica. She asks, “I want to understand how to prepare for a mortgage. How do mortgages work?”
To #MakeItMakeSense, we brought in money expert Jessica Moorhouse to explain how mortgages work and tips on how we can best prepare for them.
What is a mortgage and how can I prepare for one?
Simply put, mortgages are a specific type of loan that you get from a lender in order to purchase a property, whether it be your primary residence or a second property you want to rent out, Moorhouse explains.
“It’s similar to lots of other types of debt products, but there’s probably a lot more paperwork because it’s a really big loan (and) it’s probably the biggest amount of debt that you’ll ever take on as an individual,” she said.
With that in mind, there are a number of things to organize in order for the lender to see if they are qualified and how much they can lend you, Moorhouse advises. A checklist to have on hand before speaking to a lender include: your net worth, what your debts, your income and assets as well as where your credit scores are at.
“Take a look at both your credit reports from TransUnion and Equifax as there’s two credit bureaus in Canada … make sure that all the information that’s currently on your report is accurate because a lot of the time there may be a mistake,” she said. “You want to have ample time to see if there’s any errors and if there’s errors, fix them before you go to a lender because you want all your ducks in a row.”
Moorhouse adds if you are planning to talk to a mortgage broker or specialist, that should be your priority rather than applying for a line of credit or a car loan. That’s because when a lender is taking a look at your mortgage and credit products and see you have too much available credit, it could negatively impact you.
“This isn’t the time to do anything with your credit, you want to kind of make sure you look really stable and everything’s organized. And then after you get fully approved for your mortgage and then you can kind of look at any of those things,” she said.
What are some tips on choosing a mortgage that is best for me?
A mortgage specialist or advisor should be able to get a good sense of your needs and requirements in order to advise you on what amortization is best for your situation, as well as if you should go for a fixed or variable rate mortgage.
“There’s so many different kinds of variables and it really comes down to what are your priorities and goals,” Moorhouse said.
There are also variations of payment schedules, for example, biweekly, semi-monthly, accelerated weekly, accelerated biweekly and so on.
“Do you want to set up a payment schedule where it’s just divvied up into a certain payment schedule or choose an accelerated one where you are basically putting down a little bit more money that can accelerate paying down your mortgage,” said Moorhouse.
She adds when looking at different mortgage options, there are some that allow for prepayments and some that don’t.
How is the mortgage calculated?
There are multiple steps in calculating a mortgage. For some, the first step may start with an online mortgage pre-qualification calculator where one can enter basic information to get an initial idea of what they could be potentially approved for.
For others, like Moorhouse, the first step was going directly to a mortgage broker or professional to get a pre-approval amount.
“A pre-approval is the first real step of actually going to get a mortgage. It takes a look at more of your specific information like your assets, income, debts and credit report. Then, (the specialist) can find a lender,” she explained.
At the pre-approval stage, you won’t be approved yet but you will be able to find a lender who is willing to commit to providing you with a loan, with the amount based on your personal information. They will also look at how much of a down payment you can afford and what interest rate you can be approved for.
In order to get approved, you have to find a home and put an offer on it, Moorhouse explains. The lender will then take a look at the property and appraise it in order to get it approved.
“There’s a lot of moving parts but I think a lot of people get caught up in worrying, ‘How am I supposed to know that?’ and that is why you can just find a mortgage professional to work with and they do all the heavy lifting for you,” she said, re-emphasizing the importance of having your personal information prepared for them as they walk you through the steps.
Additional tips on mortgages
Two things Moorhouse has learned from her personal experiences when approaching a mortgage is to manage your expectations and do it in your own time.
“It’s really about you taking the time. Yes, everything’s going up, interest rates are going up. So that feels like FOMO and you better get in now … but you never want to base a decision off of panic or FOMO or pressure,” she said. “It’s going to be the most expensive thing that you ever buy in your lifetime so you want to make sure you’re doing it on your own time and you feel good about it because you don’t want to regret buying a place that is going to have severe financial and psychological consequences.”
Moorhouse adds that investing in a starter home — like a condo — can be a good idea and starting point to later reassess a future upgrade.
“Maybe living in the city isn’t necessary anymore for your job, maybe you can move outside of the city and get a place that’s a bit bigger,” she said, emphasizing that a lot has changed due to the pandemic. “People have more options.”
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