Common Mortgage Misconceptions
With so much misinformation floating around, many common misconceptions surround the mortgage process. We have broken down a few of them below.
#1 - Pre-qualification guarantees a mortgage approval
No, they are not similar and have several differences. In the pre-approval process, the borrower doesn't need to submit documentation to prove their case. In the pre-qualification stage, they ask questions about their credit scores, debt status, and current income.
#2 - The bank is always your best option because they know you
No, it’s not.
Your local branch may offer you a mortgage substantially discounted below the posted rate, but you’ll be heavily penalized if you need to break that mortgage.
I had a recent client who was penalized five times the rate displayed on the bank’s online penalty calculator.
Banks are not sentimental or compassionate. They don’t reward loyalty. But they know people are loyal to banks, and they take advantage of that knowledge by sneaking in penalties and fees on unsuspecting customers.
Taking the time to weigh your options between lenders and their products could save you penalties and headaches in the long run.
#3 - You need more than 5% down if you’re not a first-time homebuyer*
This is a common belief. There’s an assumption that you need at least a ten or fifteen percent down payment if you're not a first-time home-buyer.
It’s simply not true.
Regardless of whether you’ve owned a home, anybody who qualifies can purchase a home with a five percent down payment. *You can do 5% down on the first $500,000 and 10% on the remainder up to $1,000,000.
#4 - Avoid default insurance
To avoid paying for CMHC default insurance, you need a minimum 20% down payment. But there’s no point if you’ll clear out your savings to reach 20% and leave you short on cash.
There are so many things you need to account for at closing time. Unfortunately, people get so focused on down payments and mortgages that they forget the other expenses of buying a new home. Instead of having cash on hand, they put these expenses on their credit cards.
It makes more sense to make a small default insurance premium payment, so you have cash available for movers, furniture, appliances, remodelling and repairs, and even a lawn mower and snowblower, rather than racking up credit card debt.
#5 - The lowest interest rate is always the best
The right mortgage plan depends on many factors, and the cheapest rate might not always be the best fit. Your plan's flexibility, terms, and length also impact how much money you’ll spend over time. You’ll want to choose the best mortgage type for your big picture. When establishing a rate, ask your mortgage professional to demonstrate how long it would take to pay off your mortgage with different terms and loan periods. This will help you compare the benefits of other plans based on how long you plan to live in this house.
Once you’ve shopped around to compare lenders and committed to a mortgage, take note of interest rates for when it’s time to renew. If they’ve decreased, you might be able to put some more money towards your principal payment and keep payments the same.