What Young Professionals Should Know About Mortgages

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If you’re a new or soon-to-be graduate, you’re probably thinking about all the things you want to accomplish after you write your last exam.

You’ll send out hundreds of resumes, hopefully land a job in your field, and then get the one thing you’ve been working so hard for: a job offer (and your very first salary). Once you start making some money and learn how to budget with it, don’t be surprised when you find yourself dreaming up new financial goals. As soon as you reach one milestone in life, it’s natural to want to work towards the next one. After you start your career, that could include, moving to a big city, getting married or starting a family – and you might even be thinking about buying a home.

Of course, homeownership is a goal that takes some time, money and a little patience. But if that’s one of your next goals in life, here are 3 things you need to know about getting a mortgage so you can buy a home.

1. You Probably Won’t Get Pre-approved Right Away

Before you even consider buying a home, one of the first things you should do (besides save up for a down payment) is get pre-approved for a mortgage. That means sitting down with a mortgage broker and asking them to crunch some numbers, so they can tell you exactly how much you can spend on a home.

To get that magic number, your mortgage broker will look at a few different things: your salary, your other debts (such as student loans), and estimates for your potential property taxes and utilities. They’ll also take your down payment into consideration, but they really want to make sure you can afford all your monthly payments.

Unfortunately, even if you have a good down payment and your new job comes with a great salary, you may not be able to get pre-approved for a mortgage too early in your career. A bank may want you to have a couple years of employment history (or at least a letter from your employer stating that you work there, what your salary is, etc.) before they will lend you money.

The lesson: Work hard, save as much as you can and be realistic about what (and when) you can afford to buy. When you have some work experience under your belt, sit down with your broker and see how much you can get pre-approved for. Don’t like the answer? Then don’t buy yet. You shouldn’t jump into homeownership, just for the sake of it. Keep working and saving, until you can buy the home you want.

2. Your Down Payment Will Save You Money

That doesn’t sound right, does it? But it’s true. What we mean here is that the larger the down payment you can save up and put down on a home, the less money you’ll need to borrow and the more you’ll save on interest costs. Let’s look at an example.

Let’s say the first home you decide to buy is listed at $250,000. If you put down $12,500, which is 5% (the minimum amount allowed in Canada), your mortgage payment would be $1,088/month (with a 5-year fixed rate of 2.38%). If you paid off your loan over 25 years, you’d pay $80,221 of interest. However, if you could put down $25,000 (10%), your mortgage payment would drop by $70 to $1,018/month. Over 25 years, you’d pay $75,199 of interest – $5,102 less than if you’d only put down 5%.

The numbers change significantly when you can put down 20% or more. In Canada, if you can’t put down 20% or more of the purchase price on a home, you need to get something called mortgage default insurance (more commonly known as CMHC insurance, because they are the #1 provider of it). CMHC insurance is added onto your mortgage, which means you borrow it upfront and pay it off over the 25 years (or less) it takes you to pay off your mortgage.

Going back to the original example, if you could put down $50,000 (20%), you wouldn’t need to get CMHC insurance at all and your mortgage payment would drop down to $884/month (with a 5-year fixed rate of 2.38%). Over the course of 25 years, you’d pay just $65,207 of interest – $15,014 less than if you’d put down just 5% of the purchase price.

The lesson: For now, just focus on saving your money. Make it automatic, so the money is taken out of your account on payday and you don’t even miss it. And if you don’t think you can save a 20% down payment, at least try to put 10% down. Because CMHC insurance costs are so high, a 5% down payment turns into nearly $0, when it comes time to take out a mortgage. Always strive for at least 10%.

3. Your Credit Score is What Determines Your Interest Rate

Finally, while you’re busy gaining work experience and saving money for your down payment, make sure you’re also building up your credit score. At this stage in your life, using a credit card the right way may be one of the most important things you can do for your financial future. When it comes time to take out more credit (i.e. when you want to borrow money for a home), your credit score is what banks use to decide how good of an interest rate you can get.

In Canada, credit scores range from 300-900 (900 being perfect) and anything over 700 shows that you’ve used your credit wisely. If your score is below 600, you won’t qualify to get a mortgage from any of the major banks; instead, you’d have to look at bad credit lenders (also known as ‘B’ lenders). If you have a credit score of 700 or more, you should have no problem getting one of the best mortgage rates in Canada.

The lesson: Get a credit card when you’re young and use it responsibly; that means using it to do some of your regular spending, paying off the balance in full each month and not racking up debt you can’t afford to repay. Just remember that credit card limits shouldn’t be considered free money; use them wisely and the rewards (including your great credit score) will pay off.

Figuring out your finances? RateHub.ca has top resources for young professionals!

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