Banker or broker? How much house is too much house? Is the rate I'm getting really the best out there?
Buying a home comes with a lot of big questions. It’s also one of the biggest financial decisions you’ll make in your lifetime. That’s a little bit scary.
But it doesn’t have to be!
By taking control of the borrowing process, you can successfully navigate these muddy waters. To help, we’ve identified the top five pitfalls to avoid when borrowing to ensure that buying your home sweet home is a home run.
1) Taking a Payment Holiday
Oooh, a “payment holiday”—that sounds great! Not so fast. You’re not getting paid or getting a day off.
A payment holiday (sometimes referred to as a payment pause or a flexible mortgage, depending on the lender) allows you to temporarily stop paying your principal payment—the portion of your loan that is actually applied to your debt—due to a personal crisis.
But here’s the kicker: Even though you’ve put payments on hold, your mortgage lender continues to charge interest on the full amount of your mortgage. So, once you resume making payments, the payments will actually be higher than they were before the holiday to make up the difference.
One final thought: A payment holiday can also negatively impact your credit score. If you’re trying to build yours up, then you may want to reconsider taking this kind of holiday.
2) Not Reading the Fine Print
It’s one of the oldest marketing gimmicks around, yet we fall for it time and time again. Yes, I’m talking about that special, once-in-a-lifetime, limited-time-only offer.
It’s designed, of course, to make you act fast for fear of missing out on a great deal. In doing so, lenders know you’re more likely to skip the fine print and sign those forms—fast! Plus, it’s only natural that you’re excited about realizing your dream of being a homeowner and want to close the deal quickly.
But remember: You are entering into an agreement that will take a large part of your salary (generally about 30 percent) for the next 25 years. Even if it sounds doable at the moment, a lot can happen in 25 years, from the arrival of children to unforeseen health issues.
So, do yourself a favour and take the time to make sure you fully understand the terms of your mortgage and that you’re 100 percent okay with every single word.
3) Taking on a Massive Mortgage
Both mortgage lenders and realtors often look at the highest possible mortgage you can get based on your current income and debt level. Then they’ll give you the "good news" that you’re approved to spend, for example, up to $800,000. However, just because you can spend that much doesn’t mean you should.
“What people seem to forget is that a bigger home comes with higher carrying costs,” says Sean Cooper, author of Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. “You’ll shell out more for property tax, heating and electricity... and with your cash flow tied up, you’re not able to save for other long-term goals like retirement.”
Your best bet is to never go to a realtor or lender before you've decided on your upper loan limit. Do your homework first and set your budget on your own terms.
4) Failure to Shop Around
The Miracles once sang, “my mama told me, you better shop around.” They were talking about romance, of course, but this applies to borrowing, too. After all, how will you know if you’re getting the best rate possible unless you comparison shop?
The first stop for many would-be buyers looking for a mortgage is to go to the institution they do their personal banking with; however, unless you’re a long-standing customer with a great relationship, you may find better terms and better interest rates elsewhere, so do your due diligence.
You may also choose to go through a mortgage broker; they know the market, trends, and best rates out there, and can often expedite the process. That said, you should still be careful—brokers need to get paid, too. While most will receive a “finder’s fee” from the lender, others may attempt to charge the borrower, too. In addition, some brokers—having formed strong relationships with certain lenders—may work with the lender's best interest in mind over yours. If you choose a broker, try to get a referral from a friend or family member instead of choosing one at random.
5) Consolidating Consumer Loans into Your Mortgage
Even if what you hear sounds like an offer you can’t refuse, I highly suggest that you think twice if you're given the chance to consolidate debts, such as your credit cards, under the mortgage.
While this option may significantly lower your monthly expenses by lowering the interest rate on your debts, you’ll be paying that interest over the entire life of the home loan, which is likely to take longer than you think, draining more money in the long run.
Also, it’s important to remember that credit debt is unsecured debt. That means if creditors try to collect on any outstanding debt, they might be able to cramp your credit score style, but they can't seize your assets. On the other hand, a home loan is secured debt, which means failure to pay could result in the property being seized.
So why take unsecured debt and turn it into secured debt?
Well, as Canadians, we hold the unfortunate distinction of having the least affordable housing in North America. In fact, we spend over 50 percent more on housing than our neighbours south of the border! So, now is your chance to help reverse this troubling statistic!
Try to save as much as you can for your initial down payment. And when it comes to negotiation, don’t be passive—rather, control the process. For example, just say "no" to terms that may hurt you in the long run; and while it’s important to rely on expert opinion, it’s also important that you do your own research. After all, no one can protect your finances better than you.