The vast realm of mortgages in Canada has become increasingly confusing, as the rules and regulations—particularly amid fixed and variable options—have changed again. Of course, the process and paperwork for these financially complex agreements have always been challenging, which means more Evanston buyers are making costly errors. Here are the top 5 mortgage mistakes to be aware of before signing on the dotted line.
1. Not Considering a Fixed Rate Mortgage
Adjustable rate 25-year amortized mortgages with variable rates every 5 years have been the ‘norm' in Canada the past few decades. However, due to regulation and economic changes, recent legislation has changed the game to give buyers greater flexibility in terms and control over their financial future. Canadians can now enjoy lower interest rates on new mortgages with fixed rate mortgages, which are quickly exceeding owners opting for variable rates.
Choosing adjustable rate mortgages means that every five years or so, a new loan must be secured, which could be at a lower or higher rate. It's a gamble of sorts, that has left many homeowners underwater on their mortgages when market behaviours dictate higher interest rates. While they are tempting because they allow one to buy more home with low payments, those payments may be short lived.
2. Choosing a Longer Amortization Period
Those with a variable rate mortgage in Canada will need to choose a specific amortization period, which is typically somewhere between 25 and 40 years. A longer term is ideal for individuals who plan to be in the home for decades, as the interest rates will tend to be higher than with a shorter term. This means equity accrues more slowly, which a millennial buyer might not be interested in waiting for. Nor may younger buyers desire to stay in a home long term, and choosing longer amortization periods could make moving next to impossible.
3. Skipping Making a Down Payment
While Canadians can get a mortgage without a down payment, it's often a big mistake to take that route for a number of reasons. A down payment—even if it's not the recommended 20%—gives buyers advantages that include:
- Having immediate equity in their home
- Monthly mortgage payments will be lower, as will the payoff balance
- Taking on some risk is motivational for buyers to keep making those mortgage payments
- Creditworthiness will increase
Take a few years if necessary to avoid making the mistake of putting little or no money down on a new home.
Taking on a Reverse Mortgage Unnecessarily
In short, there's no need to even consider a reverse mortgage unless it is really needed. Reverse mortgages are only for senior citizens who have equity in a home and desire to use that equity to gain access to an income source. Payments are made to owners per the agreement, but this can eat up equity fast. While this is a good choice for some, a reverse mortgage should not be entered into lightly, as one could potentially lose their home to the lender.
5. Getting Involved in a ‘Liar Loan'
Canadians have a special term—liar loans—which are loans granted because borrowers inflate their income in effort to qualify for a larger mortgage that they really cannot afford. Liar loans do more harm to the buyers ultimately, as they may get into a home only to quickly fall behind on payments and fall into a state of foreclosure or bankruptcy. Keep in mind, being honest on mortgage applications is in your best interest.
The bottom line is, it is vital to get the assistance and guidance of a lender or home-buying advisor that is trustworthy and reputable to help navigate this process to ensure no mistakes are made.