CHAPTER 7 – HOUSING First Time Buyers • Late 20’s • Calgary: $363,400 • Vancouver: $506,500 • Typical down payment is 10% The Rent versus Buy debate • Financial Considerations – Which alternative results in the better financial gain? • Emotional Considerations – To what extent are emotional considerations such as pride and selfconcept part of the decision? • Lifestyle – How does your lifestyle needs influence this decision? Qualifying for a Mortgage • Employment status • Credit History • Down Payment (%) • Financial Ratios – GDSR and TDSR Gross Debt Service Ratio (GDSR) • Monthly shelter costs as a percentage of your gross monthly income P = Principal I = Interest T = Taxes H = Heat P + I +T+ H Gross Monthly Income Housing 32% = Maximum Allowable Amount to Spend on Total Debt Service (TDSR) • Your monthly shelter costs plus any outstanding debt payments and obligations P = Principal I = Interest T = Taxes H = Heat D = Debt P + I +T+ H + Debt 40% = Maximum Allowable Gross Monthly Income on Housing Amount to Spend Mortgage Terminology • Amount Borrowed • Down payment • Interest Rate: Fixed or Variable • Term (length of the mortgage contract) • Amortization (length of time it would take to pay off the entire mortgage given the current interest rate) • Closed – borrower pays a penalty for pre-payment • Open – mortgage paid off at any time without penalty Canada Mortgage and Housing Corporation CHMC Insurance • The minimum down payment allowed is 5% • Any down payment that is less than 20% requires CHMC insurance • This insurance premium is multiplied by the loan and is added to the mortgage CHMC rates Source (CHMC, 2015) Loan to Value (up to and including) Premium up to 65% 0.60% up to 75% 0.75% up to 80% 1.25% up to 85% 1.80% up to 90% 2.40% up 95% 3.60% Fixed Rate Mortgages • The interest rate is locked in for the term • Typically a higher associated interest rate Variable Rate Mortgages • The interest rate floats or changes with changes in general interest rate levels • Payments remain the same but the proportion of interest and principal changes • Some offer Rate caps that place limits on increases and decreases Most Common Home Buying Mistakes • • • • • • • Don’t buy a house if you plan on moving again soon Not being aware of your budget – over spending – Get preapproved for your mortgage Ignoring additional costs of home ownership – Property taxes, utilities, maintenance A minimal down payment – CMHC insurance will be required, higher interest costs Making assumptions – Appliances are included – Neighbors are great – We wont mind the commute Skipping the home inspection New home means new everything (furniture, car, ect)