When getting a mortgage, please, borrow responsibly
| November 15, 2016
We all know how we feel after a late night enjoying one too many cocktails. It can leave you over-tired, nauseous, and even a little anxious.
Now imagine feeling that way about one of the biggest financial decisions you’ll ever make: Buying a home. Over-extending yourself financially can leave you with those same feelings, and a financial hangover can last far longer than one caused by a night of overindulgence.
Acquiring a mortgage is a huge financial commitment. You should be sure that your mortgage is right for you before taking the plunge, because you and that mortgage are likely going to be together for a long time. Ask yourself a few simple questions to find out if you’re ready for this kind of commitment.
Can you be a responsible borrower?
Congrats, you’ve been saving your pennies like a squirrel hiding acorns for the winter and you have enough for a down payment. Now it’s time to figure out how much of a mortgage you can afford. In most cases it’s not a good idea to take on the largest mortgage the lender offers you since it can leave you with very little extra cash for fun things such as decorating your new place (Couches! Lamps!), and less fun things such as paying the utilities bill (Running water! Light!). Choosing a more conservative mortgage amount can protect you from becoming house poor.
Understanding which mortgage is right for you can also help you be a responsible borrower. Not all mortgages are the same, and their legal language can be complicated. Working with a mortgage broker who can help you understand what you’re committing to is a good idea. Consider your options in terms of payment schedule, interest rates, prepayment penalties, and amortization period.
How’s your credit history?
I once (unwittingly) carried a two-cent balance on a credit card that I had stopped using many months prior. You read that right, TWO CENTS. If you, like me, thought a measly two cents couldn’t mess up your credit, think again. This is important because your credit history affects your ability to get approved for a mortgage. Lenders check your credit history when evaluating your mortgage application, so before you apply, make sure you are familiar with your own credit history, and ensure it’s not going to stand in your way. The Government of Canada offers more information on your credit report, how to check it, and why it matters.
How’s your work situation?
Do you work seasonally or on contract? Maybe you’re self-employed. Cool! However, people in these situations may have a tougher time qualifying for a mortgage. Lenders want to see stable employment before approving you for a big loan, but all is not lost. There are mortgage products available for people who are self-employed or in other fluctuating work situations. Talk to a mortgage broker about your options, they can help you find the most appropriate mortgage for you.
Do you know how much owning a home really costs?
Your down payment and mortgage payments are just the beginning. There are closing costs, which include legal fees. Then, once the house is yours, we’re still not done. There are moving expenses, property taxes, home insurance, ongoing maintenance, possibly condo fees, and so on and so forth. It’s very important to consider all of these costs before signing on the dotted line for a new home.
What’s your five-year plan?
Do you think kids are in your future? Are you planning to lease or buy a car? Do you want to switch careers or become self-employed? Mortgage payments are a non-negotiable commitment, and they could limit your ability to manage other expenses. Once you factor mortgage payments into your life, then you can think about the money left over for other things life might throw at you. Don’t max out on your house budget without taking some time to think about what the future might hold for you, and if your finances are in order to make those things a reality.
Learn more about being a responsible borrower and check out other real estate and financial literacy resources available to consumers. Being a responsible borrower can help you avoid having a financial hangover.