Important questions when financing your first home

Which is better, a fixed or variable mortgage?

Sarah Twomey | Desjardins Group

For the last ten years, John and Jill Doe and their kids have been living in a rented townhouse. Their dream has always been to save enough for a good down payment towards a detached house close to transit. Luckily they started saving before they got married and they've had some help from their parents. John thinks they're close to having 15% down, but Jill still has some concerns and suggested that they sit down with a mortgage expert for some advice:

Are we making the right decision? Can we even afford a house?

Although interest rates are low today, remember that they may increase in the future. Typically, mortgages are amortized over 25 years and are offered in six-month, five- or even ten-year terms. It's important to be honest with yourself about what you can afford because your financial priorities will change as your kids get older.

We saved close to 15%, is that enough?

It sounds like you both have been very disciplined. Most experts advise that prospective home owners should save up to 20% of the house's value for a down payment. If you two are looking at a place right now, you might want to consider borrowing against your RRSP. You could be eligible to withdraw $25,000 or $50,000 per couple. If you haven't enough in your account, it's possible to take a top-up RRSP loan to reach the right amount. Once you have bought your home, you'll have 15 years to repay the amount to your RRSP. Another option is to put down 10% and to accept a higher mortgage loan insurance amount. You could use the other 5% towards your closing fees.

We're not sure which is best: a fixed or variable rate

A fixed interest rate offers stability and predictability, but you lose out on lower interest rates should they become available. The payments with variable interest rates also remain constant but there is the risk that interest rates may go up. This means more goes to your interest payment and less to your principal. If you can't choose between the two options, a split mortgage offers you the best of both worlds. Another idea is to consider qualifying for a pre-authorized mortgage. This process evaluates your financial situation to determine the maximum financing amount for which you are eligible. That way when you start looking at houses you will know which ones fit your budget.

You mentioned closing fees. Can you give us an idea of what we could expect?

Yes, it's a good idea to avoid closing "sticker shock." Here's an idea of the kind of fees and taxes you'll need to pay:

·       Inspection fees: If you decide to purchase an existing home, this detailed report will focus attention on any hidden defects that will require repair in the short- and long-term.

·       Appraisal fees: Your financial institution will request that an appraiser evaluate and determine the true value of the property you wish to acquire.

·       Legal fees: You will be responsible for hiring a lawyer who will prepare, sign and register the various legal documents related to the purchase of the property.

·       Additional taxes and fees: Transfer tax, property tax, school taxes, electricity and natural gas bills are due at sale closing.

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