Educated consumers make good homebuyers
By Peter Vukanovich
For most Canadians, homeownership is as much about financial well being as it is about comfort, security and a sense of pride.
That’s why Genworth Financial Canada believes that consumers need to be well informed before they make one of the most important financial decisions of their lives.
Building equity in your own home, while enjoying the experience of being a homeowner, is a priority for millions of Canadians. And now there are more options available to help you realize the dream of homeownership.
Best to start by understanding your current financial situation. Assess your own credit conditions and speak to a mortgage professional about obtaining a pre-approved mortgage.
Check your credit rating, available from such agencies as Equifax Canada Inc. and TransUnion Canada. Consider your total debt obligations and weigh your ability to manage mortgage payments. You should budget to spend no more than 32% of your pre-tax income on housing costs (mortgage payments, property tax & heating costs) and use no more than 40% of your income to service all debts including your mortgage.
New mortgage products, such as extended amortizations, can help you make the transition to homeownership. In addition to the traditional 25-year mortgage amortization (the time you’ll take to pay the loan back in full, with interest), there are now 30-, 35- and 40-year amortizations available.
Extended amortization products can help buyers with good credit become homeowners sooner. But they’re not without some drawbacks.
A home purchased with a 40-year amortization mortgage will carry significantly higher interest costs over the life of the mortgage than one purchased with a 25-year mortgage, assuming you use the entire amortization period to repay the loan. For example a $250,000 mortgage at 6.5% with monthly payments paid over 40-years will cost $445,177 in interest. If that amortization were 25-years, the consumer would pay $252,368 in interest, a savings of $192,809.
Extended amortization products should be viewed as a tool to help you become a homeowner sooner. However, there are options available for paying down mortgage debt more quickly than the original amortization period chosen. For example, mortgage loans in Canada generally end after five years, after which time you have the option of choosing a shorter amortization period. By doing so, you’d save interest charges and eliminate your mortgage sooner. Similarly, the average Canadian moves every seven years, which ends their mortgage and provides an opportunity to choose a shorter amortization period.
Also consider that mortgages in Canada offer pre-payment allowances of between 15-20% of the original mortgaged amount, usually on an annual basis. Some consumers use their income tax refund from RRSP contributions for this purpose.
Accelerated payment options are another great tool to reduce mortgage debt. For example, a 40-year amortization period can be cut to about 32 years by moving from a monthly to accelerated bi-weekly payment schedule. If you make additional payments or double-up your mortgage payment through-out the year, you can also significantly reduce the number of years to pay off your mortgage.
Most Canadians (78% according to a recent survey) are interested in paying their mortgage off as quickly as possible, and using the above strategies will allow you to do just that.
So, if a 40-year amortization is more expensive in the long-term, why choose it at all? Besides lower mortgage payments, there are other reasons why these products may make sense.
For example, you may purchase a ‘fixer upper’ and keep the extra cash flow available for renovation costs. Once the home is renovated, you can make accelerated payments or choose a 25-year amortization when renewing your mortgage term.
Similarly, for young professionals who still have student loans to consider, a 40-year amortization may make initial sense. It will allow them to pay down those loans and later pay their mortgage more aggressively after their income level rises and they’re free of that debt.
Extended amortization products will continue to offer informed consumers the flexibility they need to begin to realize their dream of homeownership. Genworth has launched a new website which provides consumers a wide range of information about the homebuying experience. Visit www.homeownership.ca to learn more.
Peter Vukanovich, CA, is President of Genworth Financial Canada and is Past President (2004-05) of the Canadian Association of Accredited Mortgage Professionals.
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Contact the Jeffrey Team for more information - 416-388-1960
