Today I wanted to provide a list of common mistakes that home buyers make and more importantly – what do do about them to make your home purchase in Calgary or any area as smooth as possible.
1. Not getting pre-approved for a mortgage before you go shopping. This means that you might lose out on a deal because the bank tells you that you are approved for 50k LESS than you need to buy your dream home
2. Buying too much house and winding up “house poor” winding up with payments that could become unmanageable after “life happens” events such as work hours being reduced or slow times in business can really cause a family a lot of stress if things get tight.
3. Not structuring your mortgage for both short term AND long term goals, being trapped in a mortgage due to a huge payout penalty is no fun at all. In fact, recently I had a client that HAD to keep their rental policy because of this problem.
4. Failing to learn about pre-payment penalties and how they work. What is the penalty if I sell in year 1 of 5 year terms? What is the difference between fixed or variable? Can I port the mortgage? These are all questions that should be asked.
5. Not asking if the mortgage is portable/assumable – not portable you have a penalty for sure, how much is that going to be? Could be 10’s of thousands of dollars if you are not careful.
6. Not working with a mortgage broker and only their bank – the bank wants to make money for their share holders, that is their primary goal. Mortgages are set up to protect the bank’s bottom line not YOURS.
There is a lot that goes into designing a mortgage, it is kind of like building a house from the ground up – there are a lot of things that can go wrong without the proper design/guidance along the way.
Ok great, so now we know what to watch out for…what do do about it?
Here are some solutions and things to think about”
1. ALWAYS get pre-approved when going to shop for a home, investment or to live in. This process involves the bank verifying and checking all your documents (credit score, income, expenses, assets, liabilities just to name a few)
Then they will give you a commitment letter that is an full approval to lend you X dollars with having Y down payment available. This also locks in your interest rate in case rates go up you will get the agreed rate for up to 6 months depending on the bank.
BONUS: this helps you negotiate stronger knowing your max price. Not saying you need to use the whole approval, and generally you shouldn’t to avoid the house poor issue.
2. Biting off more than we can chew is a common trait for North American residents overall. We often feel the need to “keep up with the joneses” and live above our means, in terms of cars, clothes, houses. Real estate is generally the most expensive thing that families will ever buy, so any financial advisor will tell you not to buy more house than you need for your current family dynamic.
When investing in real estate we only think about the numbers: will it cash flow? What is the repairs needed? What is the common expense ratio for this area? (more on these in another article to come) Think of your house as an investment even if you live there, that thing should cash flow if you ever moved out and rented it.
3. Speak to a mortgage broker (or call our team for advice) on how to set up your mortgage for success both today and tomorrow. There are many features of a mortgage to consider past the interest rate – which is all that most buyers think about after watching ads/seeing posters for 0.99% interest rates (there are many strings attached to those!)
4. Dreaded penalties for breaking the mortgage early – which is generally 5 years, but it does not have to be there are 1,2,3,5 year and even 10 year mortgage terms that you can get to suit your goals over the long term. Also lines of credit or HELOC for short that have 0 penalties to pay them off early, and blended mortgages which are a combination of the 2 that are ideal for flipping houses. Also, how many payments you make per month is up to you bi-weekly can save you tones of interest over the life of the mortgage. Talk to the broker about these items
5. Many mortgages are no longer assumable after the regulators changed the rules many years ago, some still are which could be a great option for a home buyer both investors in real estate and retail home buyers alike – you need to ask and confirm. Always ask for a mortgage to be portable, this can save you lots of money in penalties – better to have the option when you need it because it cannot be added to a mortgage after the fact.
6. Bankers work with the tools that they have, and their list might not give you everything that you need to build the mortgage ideal for you. Get a second opinion at the very least – if you were told today you had cancer and only 6 months to live wouldn’t you get a second opinion from another doctor? OF COURSE YOU WOULD! Do the same with your mortgage your making a 5 year deal on terms and a 25-30 year commitment with that bank, for pete’s sake get it right from the start
If you have any questions about real estate financing, private money, how to invest your RRSP’s in mortgages and play the same game the banks do – contact our team to book a discovery call.
To you success,
Tim Reid
-respect the hustle