First Time Home Loans
As a first-time purchaser, you will have the chance to require a loan (also known as a mortgage) from a lender whether that be from a financial institution or an alternative option such as a private lender. The best first time Home loans are structured to tight budgets with no compromising or hidden costs.
Usually private lenders handle more complex situations such as applicants with a poor credit history. They can adjust the regular rules of borrowing but they do so knowing the risk they are taking putting their neck out for that applicant.
Since it is your first Home, you will have to decide what kind of rate you want to base your mortgage on.
A fixed-rate mortgage is concrete throughout the whole term. By taking on a fixed rate, you are committing to same payment each time without worrying about market changes.
For a first time Home buyer, the best Home loan to get is the fixed rate mortgage. This option is appealing for a first time Home buyer because the interest rate cannot change.
Since your rate or your payments are not increasing or decreasing, it's easier to manage your monthly payments into a budget.
A 5-year fixed term is most common in Canada. It is right in the middle of the term which shows a neutral choice with little to no risk involved.
- Purchase Price: $450,000
- Down Payment: 10%
- Borrowing = $417,555
- Amortization Schedule = 25 years
- Mortgage Interest Rate = 2.37%
- Default Insurance Cost = $12,555
- Mortgage Amount = $405,000
Even though you have the consistency with a fixed-rate, you will most likely be exposed to higher interest rates in comparison to a variable-rate.
Variable rates are quite different compared to fixed because they rely on the fluctuations of the bank's prime rate. If the prime rate lowers, so will your mortgage rate. If the prime rate rises, your mortgage rate will do the same.
The prime rate is stated as plus or minus a percentage amount. For example, a variable rate could be quoted as prime - 0.8%. So, when the prime rate is, say, 5%, you would pay 4.2% (5% - 0.8%) interest.
- prime -1.32%
- prime rate = 4%
- paying = 2.68%
- (4-1.32) interest
If you decide to go with a variable rate, you have two options on how you would like to set up your monthly payments.
- A predetermined payment with the interest fluctuating;
- A fixed sum applied to the principal with the fluctuating interest portion changing the overall mortgage payment.
The amortization period is the amount of years it takes to pay off your entire mortgage. In this country, the maximum amortization period is 35 years with the exception of default insured mortgages that have a maximum of 25 years.
A portion of each payment will be put towards the principal balance as well as the interest. The longer you set your amortization schedule, the more interest you will have to pay
CMHC Default Insurance
By putting less than 20% down on your down payment, you are required to purchase default insurance known as CMHC insurance. You are buying this extra protection for your lender. It's set in place if you, as the Homeowner, were to stop paying your mortgage payments. It gives the lender some breathing room to adjust the situation.
A down payment between 10%-14.99% has to purchase CMHC insurance which is 3.10% of the mortgage amount. This is the same for a range between 15%-19.99%, the CMHC insurance is 2.80% of the mortgage amount.
Default insurance is not necessary if the down payment is more than 20% or if the cost of the property is more than $1 million before tax.
Once the details on your mortgage are set, choosing a lender is the next step. First time home buyers tend to lean more towards a safe choice that they are aware of such as their own financial institution. Since they are already a trusted client, it's an easy route to take.
However, applicants with a complicated background may not have the option of going to their bank for financing because banks do not tend to advertise their business on risky applicants.
At-risk applicants are people are usually:
- Self-employed (series of inconsistent income)
- Have a poor credit history
- Previously declared bankruptcy
Unconventional lenders are more likely to take on the business of these applicants for a fee. The interest rates are usually quite high because of the possibility it might not work out.
Mortgage Broker vs. Big Bank Rates
More often than not, a bank will present higher rates than a brokerage online or at a branch. Brokers seem to have better choices for their clients because of their exclusivity into lower rates. Working closely with lenders gives brokers the advantage over the banks.
Lenders such as credit unions, trust companies, private and monolines are willing to give discounts to brokerages as a return for consistent business coming their way. Since a broker has their ways of bending the borrowing rules, this is a huge benefit for their clientele.
If you have your heart set on working with your bank, you could attempt to show your them the lowest interest rate offered to you from another lender with the hope that they will fight for your business and attempt to match it however, it's very unlikely they would do that.
It is best to go with the lender you feel most comfortable with while also avoiding a handful of lenders battling for your business.
How do I get the best loan?
There are plenty of websites that solely market comparable mortgage rates in your location. Whether it's from a national bank or mortgage brokerage, there are fixed rates and variable rates available in your city.
Currently in the province of Alberta, mortgage rates are averaging less than 2.5%, while the same bank posted rates are averaging well over 4%.
To find the best mortgage rate for you, rely on your broker. Using their professional networks, they can search for and find low rates that aren't shown on the comparison websites.
To have the best chances of getting your mortgage needs, contact HomeHow Mortgage for referrals and opportunities to land the best loan available.