It's important to know big mistakes to avoid when borrowing for your first home. If you're not in full control of the process, you can get into trouble fast. Some lenders may try to take control of your finances for you, which could mean increased profits for them and increased costs for you. So don’t take your hands off the wheel of your financial future, because if you do and you end up in a financial ditch, you’ll have no one to blame but yourself.
As you sit with your mortgage broker, you need to ask yourself, “Who is driving this car?” As Canadians, we tend to be too passive. We also tend to feel a sense of duty or loyalty that is sometimes completely misguided. In all too many mortgage negotiations, you end up agreeing to terms that don't necessarily benefit you financially in the long-run. Although we rely on the opinion of experts, such as mortgage brokers and lenders, you need to be in charge of the process, because no one can protect your finances better than you.
Here are five pitfalls to avoid when borrowing for your first home:
1. Taking a payment holiday when paying back your mortgage
Beware of payment holidays. These provisions allow you to stop paying your principal (the part of your payment that is actually paying off your debt) due to a personal crisis. But your mortgage lender continues to charge you interest on the full amount of your mortgage, even though you have taken a pause on the payments, so you're not completely off the hook. You must account for these costs to avoid surprises down the road.
2. Signing the mortgage forms too fast before fully understanding them
We've all been there. There's a special rate available for a limited time only. Do you take the time to think the offer through? Better not...you might miss the deal. When you buy your first home chances are you’re excited and you want to close the deal fast. But remember: You are entering into an agreement that will take a large part of your salary from you for the next 25 years. Do yourself a favour and take the time to make sure you fully understand the terms of your mortgage and that you’re 100% okay with them.
3. Taking on a massive mortgage load
Both mortgage lenders and realtors often look at the highest possible mortgage for you based on your current income and debt level, but that doesn't mean you have to take it. 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. Not comparing different mortgage lenders and rates
Do your due diligence. How else will you know if you are getting the best deal unless you do some shopping around? Just because a bank carries your bank accounts doesn’t mean you owe them your mortgage business too. Comparison shop for the best mortgage rates, your future self will thank you.
5. Consolidating your consumer loans into your mortgage
Be careful if you're offered debt consolidation or the chance to consolidate your other debts under the mortgage. While this may lower your interest rate by consolidating your consumer debt, you’ll be paying interest on those debts for many, many years.
Speak to a non-profit Credit Counsellor to know how much mortgage you can safely afford
If you're not exactly sure how much you should be paying every month towards your mortgage or how much mortgage your budget can safely afford, it's a good idea to speak to a certified Credit Counsellor. They will be able to look at your monthly income and expenses, plus any debt you have, and build out a budget for you so you'll know how much your mortgage payments should be in order to maintain your current lifestyle. They will also be able to suggest how to decrease your monthly expenses in other areas and adjust your budget to accommodate your mortgage payments. Just give us a call at 1.800.267.2272 to book a free counselling session with one of our counsellors. All of our counselling is 100% free and confidential.