With interest rates beginning to rise, consumers are scurrying to get into the real estate market.
The Canadian Real Estate Association (CREA) predicts home sales in the country will hit almost 450,000 in 2013, just a hair of a fraction below last year, and home sales in September posted a small increase of just under one per cent over August.
So much for the predicted meltdown of the housing market!
Buying a home is one of the largest investments that most people make in their lives. With the high cost of real estate today - the average cost of a home in Canada now is about $375,000 --- it's important for consumers to fully understand the financial commitment they 're making when they purchase a home.
"Home ownership is a major goal for many Canadians, and in today's market it is especially important that prospective buyers understand home financing options in order to manage their overall monthly costs, assess the flexibility they will need and help plan for the future,' says Farhaneh Hague, director of mortgage advice at TD Canada Trust.
Before signing on the dotted line, home buyers should consider how to structure their mortgage so it works best for them.
There are a number of benefits of putting a larger down payment on your home.
A down payment of more than 20 per cent of the purchase price means you don't have to obtain mortgage insurance, which includes paying a premium calculated as a percentage of the mortgage and is paid up front or by adding it to the mortgage's principal.
The larger the mortgage balance the higher the monthly payments, so eliminating or decreasing the insurance premium can result in significant savings.
First-time home buyers can take advantage of the federal government's Home Buyers' Plan (HBP), which allows you to withdraw up to $25,000 in a calendar year from your Registered Retirement Savings Plan (RRSP) to buy or build a qualifying home for yourself or for a related person with a disability.
Your RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them or they may not be deductible for any year. Generally, you have to repay all withdrawals to your RRSPs within a period of no more than 15 years. You will have to repay an amount to your RRSPs each year until your HBP balance is zero. If you do not repay the amount due for a year, it will have to be included in your income for that year.
Low interest rates aren't the only factor to consider when choosing a mortgage. There are many other options such as a fixed or variable interest rate, open or closed term, and other repayment features.
With a fixed rate mortgage the interest rate and monthly payments don't change during the term of the mortgage and you know how much will be paid off at the end.
With a variable mortgage, however, interest rates may fluctuate. If they go down more of the monthly payments are applied to the principal and the mortgage is paid off faster. If rates rise, more of the payments are applied to the interest.
With a closed mortgage you agree to a term of anywhere from six months to 10 years or more. A closed mortgage has conditions when it can be renegotiated or refinanced and there may charges for renegotiating or paying off the mortgage early.
Open mortgages often are for shorter terms and can be paid off at any time without prepayment charges. While it offers greater repayment terms the interest rate for an open mortgage may be higher than for a closed one.
Some mortgages offer other flexibility features such as making prepayments when they can and then reduce their monthly payments or take a payment vacation for a short period.
You can pay off you mortgage faster and save money on interest by choosing a shorter amortization period, making accelerated weekly and biweekly instead of monthly payments and making prepayments up to a percentage of the original mortgage each year.
"Buyers choose a home because it fits their lifestyle needs and a mortgage should pass the same test," says Haque. "Until it's paid off a mortgage will become a part of a homeowner's life and home buyers need to ensure the terms of their mortgage match their plans now and for the future."
