7 common mortgage mistakes and what to do instead
These common mortgage mistakes could cost you thousands and make it tough to meet your long-term financial goals. Here’s what to do instead.
When you’re looking for a mortgage, it’s easy to get caught up on a promotional interest rate or fixate on trying to get the biggest possible loan. However, this often means overlooking some key elements such as payments, prepayment options/penalties, and have your mortgage requirements prepared.
Understanding mortgage terminology, knowing what to watch for, and learning about the different types of mortgages can help you prepare for the application process.
Making an informed decision could even help you save thousands of dollars, choose a mortgage better aligned to your current needs, and even help you meet your long-term financial goals.
Learn to avoid seven common mortgage mistakes plus get actionable tips to help select the right mortgage.
Don’t prioritize rate over payments
We’ve all seen ads promoting time-limited low-interest mortgage rates, yet one thing these ads don’t show you is the cost of these mortgages in terms of flexibility in your financial life.
While a good interest rate is important when it comes to getting a mortgage, it shouldn’t come at the cost of flexibility. There’s simply more to a mortgage than a rate. Life happens, and you might find you need to make a change. So look for a mortgage solution that adapts to your changing life while also meeting all of your banking and borrowing needs.
Don’t just take our word for it: Rates.ca named Manulife One Canada’s most flexible 5-year readvanceable mortgage.
Get preapproved before putting in an offer
A mortgage preapproval helps ensure you have the right idea of what you could qualify for and gives you time to address any credit hiccups that could impact a mortgage approval. This saves time, stress, hassle, and heartache when it comes to looking at homes and putting in offers.
A mortgage pre-approval means you can feel confident when you make an offer on a home, instead of worrying that your mortgage financing could get turned down. Then you can calmly move on to what needs to happen after your offer is accepted.
Understand your down payment options and mortgage insurance
How much do you need from your savings to buy a home, and how much should you borrow?
Generally, if you borrow more than 80% of the purchase price, you’ll need to get mortgage default insurance, which is added to your mortgage balance and can add thousands of dollars of interest to the amount you must payback.
In some situations, (such as buying vacant land, or remote property that is off the electricity grid) a down payment of less than 20% isn’t even an option.
Since laws can (and do) change, it’s important to do some research (or talk to your lender) about the current rules around down payments to help avoid hefty mortgage insurance costs or disappointment when you can’t get financing on your dream home.
Understand your prepayment options and mortgage penalties
One of the most costly and common mortgage mistakes is not knowing the prepayment options and features of your mortgage.
Generally, mortgages have specific prepayment terms, allowing you to increase your regular payments by 15-25% once per year, and/or make a lump-sum payment of 15-25% of your original mortgage amount once per year. Making prepayments allows borrowers to pay down their mortgage faster, but the specific prepayment terms vary from lender to lender, so make sure you understand your options.
If you want to pay more than your prepayment limits, you’ll also have to pay a prepayment penalty or charge. The prepayment charge depends on your mortgage terms, the mortgage balance, how many months are left on the mortgage, and the interest rate.
Consider the impact of major life changes before applying for a mortgage
While it’s hard to know what tomorrow could bring, consider your life plans before choosing a mortgage so you don’t get locked into a loan that might not fit your future. Instead, select a mortgage customized to meet your needs.
For example, if you or your partner plan to take extended time off work to raise a family, a longer mortgage amortization and term could help lower payments better suited to one paycheck.
If you anticipate receiving a windfall or inheritance that could pay down (or pay off) your mortgage in the next couple of years, consider a short-term open mortgage or a mortgage without prepayment penalties.
Take advantage of government programs for homebuyers
Don’t miss out on government initiatives that could help. Did you know the federal government of Canada offers financial assistance for buying a home through several Canadian homebuyers programs? The Homebuyers’ Plan, First-Time Homebuyer Incentive, GST/HST New Housing Rebate, and the Home buyer’s amount could put thousands of dollars back in your pocket.
Budget for closing costs
When saving for a home, you’ll require more than just the down payment. Don’t make the mistake of overlooking closing costs.
Closing costs refer to the fees, charges, and taxes that accompany home purchases and mortgage transactions. These fees may include:
- Home appraisal
- Home inspection
- Land transfer tax (depends on the purchase price as well as your location)
- Legal fees
- GST/HST on new home purchases
When you’re familiar with the process of getting a mortgage and understanding the pros and cons of different mortgages and how they fit into your full financial plan, you’re better equipped to make the best choices for your financial future. The decisions you make today could help you save thousands and become mortgage-free years faster.