Benefits of Home Ownership
Published by DLC Marketing Team

April 26, 2022

So, you have decided to utilize your buying power in the Canadian retail market and are looking to purchase a home – congratulations! This is a great step towards ensuring your future.

As a potential homeowner, there are some amazing benefits that we think you should be aware of right out of the gate:

Homeownership is the single largest source of savings for Canadian households.
Your payments build equity (as opposed to renting, where your money goes to the building owner).
Equity you build in your home can be used as security for other loans.
The return on investment is substantial – in fact, the average price of a house for sale on the Canadian real estate market has increased every year since 1998.
While other investments can prove volatile, investing in real estate is a solid use of your hard earned money.
Buying a home is not just about equity and investments, but it is about the future. While it is important to know what a mortgage is and how much you qualify for (and can afford), ensuring your new home is so much more than numbers. In these changing times with the cost of living constantly increasing, having home equity to fall back on can have a huge impact on your quality of life. Not only that, but owning your own home gives you a sense of pride, a feeling of security and the freedom to design the perfect living space for yourself – without having to ask permission from strata or a landlord! Moving into your first apartment or moving on up to your first house is an incredible step in the journey of life!

Now, as excited as you are to get started, you probably have some questions! Let us take you through some of the most important things to know when it comes to home ownership to ensure your experience is as smooth as possible – and provides the best possible outcome for you!

What Exactly is a Mortgage?

It is amazing how many people really don’t know what a mortgage is. Maybe you weren’t sure you would be in a position to have one or maybe you just never asked! Never fear – we have the answers.

To keep it simple, a mortgage is a loan that is specific to properties and homes. This type of loan uses the home or land you purchase as security in the event the loan cannot be paid. Mortgages are registered as legal documents and can be obtained through a variety of sources (or lenders) including banks, credit unions and alternative lenders or through the use of a mortgage broker!

Mortgage Terms to Know:

Principle The principal is the amount of the loan that is actually borrowed.
Interest Rates As with any loans (credit cards, lines of credit, etc) interest will be incurred. This is the amount that the lender charges for the privilege of funds borrowed. The amount of your interest payment will depend on the interest rates, which vary depending on terms and conditions of the mortgage and the borrower’s credit history.
Mortgage Payments These can occur monthly, semi-monthly (twice a month), bi-weekly (every other week), accelerated bi-weekly or weekly and are made to the lender. These payments encompass both payments to the principal amount borrowed, as well as interest charges.
Amortization Period This is the number of years it will take to repay the entire mortgage in full and is determined when you are approved. A longer amortization period will result in lower payments but more interest overall as it will take longer to pay off. The typical range is 15 to 30 years.
Term Term is the length of time that a mortgage agreement exists between you and the lender. Rates and payments vary with the length of the term. The most common term is a 5-year, but they can be anywhere from 1 to 10 years. Generally a longer term will come at a higher rate due to the added security. A “Fixed Mortgage” means you are locked in at the interest rate agreed for a longer length of time.A “Variable Mortgage” features an interest rate that is adjusted periodically to reflect market conditions.
Maturity Date The maturity date marks the end of the term. At this time, you can repay the balance of the principle or renegotiate the mortgage at the current rates. Note: If you choose to repay or renegotiate the mortgage before the term is up, penalties may be charged.
How Much do I Qualify For and What Can I Afford?

One of the biggest factors to purchasing a home is knowing how much you qualify for when it comes to a mortgage – and how much you can afford!

To determine the amount of the mortgage you qualify for, banks will utilize a set of ratios which determine the amount of your income that will be used to pay down the debt. These ratios are Gross Debt Servicing (GDS) and Total Debt Servicing (TDS).

It sounds confusing, but let us help break this down for you!

Gross Debt Servicing (GDS) Ratio

The first ratio, Gross Debt Servicing (GDS) is the percentage of gross income that is required to cover housing costs. If you are looking at getting an insured mortgage (less than 20 percent down payment on the purchase price) the limit is 32% GDS. For uninsured mortgages (20 per cent or more down payment) the limit is 39% GDS.

To calculate this, you would take any home-related expenses (mortgage payments, property taxes, utilities and strata fees when applicable) and divide them by gross monthly income to get your GDS percentage.

Gross Monthly Income $4,500.00
Mortgage Payment $1,000.00
Property Taxes $200.00
Heating Expenses $150.00
Total Expenses $1,350.00
Gross Debt Servicing (GDS) 30%
The rate of 30% GDS is well within the requirements and would be approved.

Total Debt Servicing (GDS) Ratio

The other ratio banks use is known as Total Debt Servicing (TDS). This is the percentage of your gross income required to cover housing costs (same as with the GDS) but also any other debts. The guidelines for an insured mortgage (less than 20 percent down) has a limit of 40% TDS while an uninsured mortgage (20 per cent or more down) is 44% TDS.

To calculate this, you would take all home-related expenses (mortgage payments, property taxes, utilities and strata fees when applicable) and other debts (credit cards, personal loans, student loans, car payment or a line of credit) and divide them by gross monthly income to get your TDS percentage.

Gross Monthly Income $4,500.00
Mortgage Payment $1,000.00
Property Taxes $200.00
Heating Expenses $150.00
Student Loan Payment $100.00
Car Payment $300.00
Total Expenses $1,750.00
Total Debt Servicing (TDS) 39%
The rate of 39% TDS is well within the requirements and would be approved.

Declaring Your Income

In order to get approved for the mortgage, you need to declare your income so the bank can compare it to your expenses and determine the ratios noted above.

If you are employed with a company, you would provide an employee statement declaring minimum guaranteed gross wage OR last two-year average if there were bonuses or commissions that put your income above your guaranteed wages. If the most recent year was lower, that year will be used instead of the average.

If you are self-employed, you would provide the average of your last two years of income based on line 150 of your tax returns. It is important to know that there are programs available for self-employed borrowers in cases where the two-year average does not qualify them for a mortgage. Just ask your mortgage broker!

Be Smart!

There are many cases where buyers will qualify for more than they intend on spending – but don’t get greedy! It is vastly more important, especially for your first home, to stay within a budget that you can afford each month instead of overextending yourself simply because it is available to you. The most important aspect is that your payments are reasonable and affordable. There are always options to move to a larger home in the future!

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Power Up Your Finances
Published by DLC Marketing Team

February 15, 2022

Let’s face it, mere mention of the word “money” can make people shift in discomfort. In an era in which the veils are being lifted off many societal taboos, a shroud of shame hangs stubbornly over money talk – we’re taught to fear it, we’re taught it’s too complicated, and those are all messages meant to disempower.

It’s time to push past the taboo, and normalize talking about money. Disrupt it by talking about it – openly and frankly – with your partner, your friends, your family, and your colleagues. Speaking of partners, it’s important both parties are open with one another about their fears, feelings, and goals in regards to money. This is particularly important in opposite-gender households, where research shows that the male partner takes the financial lead in most homes.

stnce Senior Program Specialist, Sarah Zandbergen, has this to say about the hesitation to discuss finances with partners: “It can be difficult to bring up, no question, but if you’re sharing your life with someone, finances are bound to come up. A staggering statistic we came across in our research is that 90% of women will be the sole financial decision-maker in their family at some point in their lives. Knowing this, there is absolutely no excuse to defer ownership to someone else.”

Smash the stigma, and get radically transparent about your salary, your financial situation, your debts, your windfalls, and your savings goals.

And, hey, we get it – there’s a sense of comfort, albeit a false one, that comes with avoiding fiscal responsibility, because it temporarily absolves us of having to do anything, but remaining on the sidelines gives money a leg up on you. So if you want to be truly in control, increasing your knowledge about money, and how to save it, is a critical part of the confidence-building process

Published by DLC Marketing Team
February 1, 2022

When it comes to mortgages, it is easy to focus on the rates and your current situation, but the reality is that life happens and when it does, rates won’t be the only thing that matters.

First and foremost, the most important thing to remember is that a mortgage is a contract. That means that there is a penalty involved if the contract is ever broken. This is something that every homeowner agrees to when you sign mortgage paperwork, but it can be easy to forget – until you’re paying the price.

why break your mortgage?
You’re probably wondering why you would ever break your mortgage contract? Well, you might be surprised to find out that 6 out of 10 mortgages in Canada are broken within 3 years and there are typically nine common reasons that this happens:

Sale and purchase of a new home
To utilize equity
To pay off debt
Cohabitation, marriage and/or children
Divorce or separation
Major life events (illness, unemployment, death of a partner)
Removing someone from title
To get a lower interest rate
To pay off the mortgage
It is always important to think ahead when signing a mortgage agreement, but not everything can be planned for. In that event, it is important to understand the next steps if you do indeed need to break your mortgage.

calculating penalties
Typically, the penalty for breaking a mortgage is calculated in two different ways. Lenders generally use an Interest Rate Differential calculation or the sum of three months interest to determine the penalty. You will typically be assessed the greater of the two penalties, unless your contract states otherwise.

INTEREST RATE DIFFERENTIAL (IRD)
In Canada there is no one-size-fits-all rule for how the Interest Rate Differential (IRD) is calculated and it can vary greatly from lender to lender. This is due to the various comparison rates that are used.

However, typically the IRD is based on the following:

The amount remaining on the loan
The difference between the original mortgage interest rate you signed at and the current interest rate a lender can charge today
In this case, these penalties vary greatly as they are based on the borrower’s specific mortgage and the specific rates on the agreement, and in the market today. However, let’s assume you have a balance of $200,000 on your mortgage, an annual interest rate of 6%, 36 months remaining in your 5-year term and the current rate is 4%. This would mean an IRD penalty of $12,000 if you break the contract.

Ideally, you will want to be aware of what your IRD penalty would be before you decide to break your mortgage as it is not always the most viable option.

THREE MONTHS DIFFERENCE
In some cases, the penalty for breaking your mortgage is simply equivalent to three months of interest. Using the same example as above – balance of $200,000 on your mortgage, an annual interest rate of 6% – then three months interest would be a $3,000 penalty. A variable-rate mortgage is typically accompanied by only the three-month interest penalty.

paying the penalty
When it comes to making the payment, some lenders may allow you to add this penalty to your new mortgage balance (meaning you would pay interest on it). You can also pay your penalty up front.

Whenever possible, if you can wait out your current mortgage term before making a change to your mortgage, it is the best way to avoid being stuck in the penalty box. If you cannot avoid a penalty, do note that, while only calculators can be great tools for estimates, it is best to call your lender or mortgage broker directly for the accurate number in the case of determining penalties.

If you are unsure about getting the best penalty terms, reach out to a Dominion Lending Centres mortgage broker today! They can help you find the best mortgage product for you.

Be mindful with money this season! Along with holiday joy come holiday bills, to avoid a sleigh-size tab, plan ahead to save money and maximize the payoff.

ORDER ONLINE Avoid getting stuck in the hustle and bustle of holiday shoppers by ordering gifts online from your laptop or phone. The time you save can be put towards spending more time with friends and family.

 BE THRIFTY Start early and keep an eye out for special sales. Many retailers have Black Friday and Cyber Monday deals to help you get a jumpstart on holiday shopping. Get inspired with coupons and get into the routine of flipping through flyers delivered to your home and online

TRUST YOUR BUDGET It keeps you on track during the rest of the year, so why not lean on it now? Starting the season with a plan and a maximum spending limit will help alleviate stress while shopping. There are plenty of free budget-tracking apps that connect right to your bank accounts and can be pulled out of your pocket for reference at any time – especially when you’re feeling overwhelmed at the mall.

GET CRAFTY Everyone appreciates the handmade touch in a gift, and DIY-ing this holiday can help you save money. There are wonderful options that can be found online, even for beginners. Examples include homemade wreaths, body scrubs, and fun photo scrapbooks that can be done alone or in a group, and you’ll end up with a gift that money can’t buy. If you’re not sure where to find these clever and cost-effective ideas, Pinterest is a great place to start.

GIVE THE GIFT OF TIME Instead of buying gifts, spend quality time with your friends and family while you give back to others. Sharing the experience and splitting the cost of hosting a dinner for a family in need will offset the cost of spending money on each person and double the amount of joy spread during the holidays. It feels good to pay in kind.

HOSTING A PARTY?

Think ahead: Start thinking about your ingredients early and keep an eye out for sales on nonperishable goods. By beating the holiday rush, you can afford more goodies for less.

BE RESOURCEFUL Hosting a large gathering? Ask each of your guests to bring a dish. This costeffective tip will act as conversation starter too.

EARN REWARDS A number of retailers offer cards where you can earn points toward future purchases, including entertainment.

CHOOSE WISELY Your time matters, so spend more of it with your guests and less of it in the kitchen. Pick a short and easy recipe that won’t cost a lot to make. Prepare as much as you can the morning or day before for a smoother hosting experience.

Published by DLC Marketing Team

There have been a lot of discussions around the new mortgage rules and I have had a few clients ask about what that means for them. Since stress testing on mortgages began last year, the biggest change this January will be for people who are putting more than a 20% down payment on their new homes.

What do the new mortgage rules mean for them?
The impact of the new mortgage rules as of January 1, 2018, will require all uninsured mortgage borrowers to qualify for their mortgage using the Bank of Canada five-year benchmark rate, or at their current rate plus an addition 2%. (Uninsured mortgage borrowers are typically those who purchase a new home with more than 20% of its total value.)The government is stress testing our current finances as a way to help prevent any unnecessary financial risks from Canadians. This change was primarily intended to help curb the housing bubbles in Toronto and Vancouver, but will affect homebuyers across the country, including those looking to qualify for a mortgage in Edmonton.

Why are new mortgage rules being introduced?
The revisions have been put in place to help ensure that uninsured borrowers can cope with higher interest rates. In the past, when there was a change in the market (increased interest rates, low employment, reduction in house values, etc.), Canadians were finding it difficult to keep up with their mortgage payments. In the past year, we have seen an increase in interest rates which has caused some concern with the government. The overnight rate – the interest rate set as the Bank’s policy interest rate, which influences mortgage rates, sat at a historically low 0.5% earlier in 2017 – has been raised 75 basis points by the Bank of Canada since July. A third rate hike took place this month. Although an unexpected surprise for many, the hike in interest rates is essentially providing Canadians with an opportunity to act more financially responsible. This new regulation will help make it more difficult for Canadians who were borrowing against the value of their homes to make new financial investments, thereby reducing the country’s financial risk.

Despite the changes to the new mortgage rules, people will still be looking to buy new homes with mortgages, but will be shifting their outlook on what they need. In Edmonton, where housing price are still very affordable, the shift may not be as difficult as in other markets. In a recent interview with BuzzBuzzNews, real estate broker and TalkCondo operator, Roy Bhandari said, “The new rules won’t slow sales. Instead, buyers will look at more affordable options on the market.”

If you have any questions, contact your trusted Dominion Lending Centres mortgage broker.

By Max Omar

Ask any mortgage broker and they can tell you that there are a handful of misconceptions that the public has about working with a mortgage broker. From questioning their credentials (we all are regulated and licensed with in our own province, and are constantly re-educating ourselves) to assuming that the broker does not have access to the same rate as the banks (we do in fact—plus access to even more lending options) mortgage brokers have heard it all!

With the recent changes to the B-20 guidelines taking full effect as of January 1, 2018 the mortgage landscape is changing and we firmly believe in keeping our clients educated and informed. With these changes, there have been a number of misconceptions that have come to light regarding mortgage professionals and their “limitations” and we felt it was time to address them:

Myth 1: Independent Broker’s don’t have access to the rates the banks do.

Fact: Not true. Brokers have access to MORE rates and lenders than the bank. The bank brokers only have access to their rates-no other ones. A mortgage professional has access to:

• Tier 1 banks in Canada
• Credit Unions
• Monoline Lenders
• Alternative Lenders
• Private Lenders

This extensive network of lender options allows brokers to ensure that you are not only getting the sharpest rate, but that the mortgage product is also aligned with the client’s needs.

Myth 2: The consumer has to negotiate a rate with a lender directly.

Fact: Not true at all! Your mortgage professional will shop the market to find the best overall cost of borrowing for the client. Broker’s will look at all angles of the product to ensure that the client is getting one that will suit their unique and specific needs. Not once will the client be expected to shop their mortgage around or to speak to the lender. This is different from the bank where you are limited to only their rates and are left to negotiate with the bank’s broker—who is paid by the bank! We don’t know about you, but we would much rather have a broker negotiate on our behalf. Plus, they are FREE to use (see myth #6)

Myth 3: A Broker’s goal is to move the mortgage on each renewal.

Fact: A Mortgage Broker’s goal is to present multiple options to consumers so they can secure the optimal product for their specific and unique needs. This entails the broker looking at more than just the rate. A broker will look at:
• Prepayment options
• Costs of borrowing
• Portability
• Penalty to break
• Mortgage charges

And more. If the Broker determines that the current lender is the most ideal for their client at the time of renewal, then they will advise them to remain with that lender. The end goal of renewal is simple: provide clients the best ongoing, current advice at the time of origination and at the time of renewal

Myth 4: The broker receives a trailer fee if the client remains with the same lender at renewal.

Fact: This is on a case-to-case basis. At times, there is a small fee given to the broker if a client opts to renew with their current lender. This allows for accountability between the lender, broker, and customer in most cases. However, this is not always the case and the details of each renewal will vary.

Myth 5: If a Broker moves a mortgage to a new lender upon time of renewal then the full mortgage commission is received by the broker, allowing the broker to obtain “passive income” by constantly switching clients over.

Fact: Let’s clarify: If a client chooses to move their mortgage at renewal after a broker presents them with the best options, then it is in fact a new deal. By being a new deal, this means that the broker has all the work associated with any new file at that time. It is the equivalent of a brand-new mortgage and the broker will have to do the correct steps and work associated with it.

A second point of clarification-although the broker will earn income on this switch, the income (in most cases) is paid by the financial institution receiving the mortgage, NOT the client.

Myth 6: It costs a client more to renew with a mortgage broker.

Fact: Completely false. Clients SAVE MONEY when they work with a mortgage broker at . A broker has access to a variety of lenders and can offer discounts that the bank can’t. Additionally, most mortgage brokers offer continuous advice and information to their clients. Working with a broker is not a “one and done” deal as it is a broker’s goal to keep their clients informed, educated, and well-versed as to what is happening in the industry and how it will affect them. When you work with a broker instead of the bank, you not only get the best mortgage for you, but you also have access to a wealth of industry knowledge continuously.

Mortgage Brokers are a dedicated group of individuals who work directly for the client, not the lenders or the bank. Brokers are problem-solvers, advisors and honourable individuals. We work hard to give our clients the best that we can in an industry that constantly is evolving and changing.

We encourage you to reach out to your local Dominion Lending Centres mortgage professional if you have any misconceptions or questions about working with a broker-we are happy to answer them and help you with your mortgage, your renewal, and everything and anything in between.

By Geoff Lee

Every year Canadian families are caught in unexpected bad circumstances only to find out that in most cases the banks and the credit unions are there to lend you money in the good times, not so much during the bad times.

This is where thousands of families have benefited over the years from the services of a skilled mortgage broker that has access, as I do, to dozens of different lending solutions including trust companies and private lending corporations. These short-term solutions can help a family bridge the gap through business challenges, employment challenges, health challenges, etc.

The key to taking on these sorts of mortgages is always in having a clear exit strategy, which in some cases may be as simple as a sale deferred to the spring market. Most times, the exit strategy involves cleaning up credit challenges, getting consistent income back in place and moving the mortgage debt back to a mainstream lender. Or as we would say in the business an ‘A-lender’.

The challenge for our clients over the last few years has been the constant tinkering with lending.

Guidelines by the federal government and the changes of Jan. 1, 2018 represent far more than just ‘tinkering’.

This next set of changes are significant, and will effectively move the goal posts well out of reach for many clients currently in ‘B’ or private mortgages. Clients who have made strides in improving their credit or increasing their income will find that the new standards taking effect will put that A-lender mortgage just a little bit out of reach as of the New Year.

There is concern that the new rules will create far more problems than they solve, especially when it seems quite clear to all involved that there are no current problems with mortgage repayment to be solved.

Yet these changes are coming our way fast.

Are you expecting to make a move to the A-Side in 2018?

It just might be worth your time to pick up the phone and give your Dominion Lending Centres Mortgage Specialist a call today.

I’m here and I’m ready to help.

By Tracy Valko

When your mortgage application goes through the approval process, they are not only looking at you, but also the property in question. In fact, sometimes when an application is denied it has nothing to do with you, and everything to do with the property.

To improve your chances of success when it comes to financing, there are three main things to consider:

1. The type of property
2. The location of the property
3. The usage of the property

Let’s take a look at some of the specifics for each of these considerations.

type of property

There are various types of properties when it comes to home ownership – detached houses, semi-detached, condos, townhouse, duplex, carriage or heritage home. Depending on the type of property you have chosen, there may be specific considerations.

CONDOMINIUMS

When it comes to condo properties, the lender (and potentially the insurer) will consider the age of the building. In addition, they will look at maintenance history (or lack thereof), as well as the location for marketability. Some lenders may have stipulations that limit themselves to buildings with a certain number of units, or past a certain age.

If the condo you wish to buy is lacking a depreciation report, has a low contingency fund or large special levies pending, these will be red flags for the lender. Any of these situations will require a more thorough review. These items should also serve as strong considerations for you as it indicates the management (or lack of) for that condo building.

ADDITIONAL UNITS

If you are looking at a property with additional units, it is important to consider that buildings with over four units, are considered a ‘commercial’ property and would be evaluated on that basis.

HERITAGE HOMES

Whether registered or designated, heritage homes require a more detailed review and often come with special considerations for financing.

LEASEHOLD OR CO-OP PROPERTIES

These properties also have specific requirements, particularly when it comes to the maximum loan-to-value which means they will require a larger down payment. These types of properties also typically call for additional documentation, and may have varying interest rates.

If you shift from a standard condo to a lease-hold property, your down payment amount will likely change. If you want to move to a small rural town or a small island, there will be fewer options. In addition, you may have to pay a higher rate as well as provide more documentation on the property.

location considerations

You’ve heard it before – location, location, location! Location matters just as much to the potential homeowner as it does the lender. Some things to keep in mind when it comes to location include:

POTENTIAL RESALE VALUE

If the location limits the potential resale value for the building, lenders may not provide financial approval on that property. This is due to the increased risk if the borrower defaults. In that case, the lender may not be able to foreclose the property and get enough funds back due to the low resale. That said, some lenders may allow these properties but they might reduce the loan amount if the building is located outside of a major market area, or they may add a premium to the interest rate.

RURAL CONSIDERATIONS

For properties with water access only, or with no access to municipal utilities (heat, water, electricity, sewage), there will be additional requirements to assess lender risk. These requirements might include: Insurance coverage, water testing, septic tank inspection, seasonal access and condition of the property.

TRANSFER TO ANOTHER PROVINCE

It is also important to note that if you purchase a home in one Province and are transferred or move to a different province, some lenders won’t be able to port the mortgage due to being provincially based.

usage considerations

The use of the property can include things such as personal, investment, recreational, agricultural and also consider previous activities. A few things to keep in mind are:

CONDOMINIUMS

If you are looking at purchasing a condo on a property that has either a commercial component in the building (such as shops on the first floor), or allowable space in the unit for businesses (live/work designation), you may have limited lender options. In some cases, lenders will avoid these types of properties at all costs, while others may require approval from the insurer (i.e. CMHC).

RENOVATION REQUIRED

If the property requires renovations, the extent of the upgrades, as well as the property value will be taken into consideration.

PREVIOUS GROW-OPS

Homes that previously existed as grow-ops, have special lending options. These typically come with higher interest rates and costs due to decreased value.

RENTAL SUITES

For owner-occupied homes that contain rental suites, it is important to consider potential rental income. If the house is purchased for investment, rental income is automatically considered. This can result in a different interest rate than simply an owner-occupied dwelling. In these cases, the rental income can also increase the resale value of the property. However, an appraisal of the property must be conducted and reviewed to ensure the condition. This will also uncover whether any renovations were completed to add value.

SECOND PROPERTIES

Purchasing a second home for recreational use will require a review to determine if it is seasonal or year-round access.

Before you begin your home search, it is best to discuss your future plans with a Dominion Lending Centres Mortgage Professional. This will ensure you receive accurate information to understand the specific requirements your potential property might require. Seeking expert advice early on will also give you ample time to find the right fit! This will also ensure you can submit a full financing review before subject removal on a purchase.

There are 9 million Millennials in Canada, representing more than 25 percent of the population. Born between 1980 and 1999, the eldest are in the early stages of their careers, forming households and buying their first homes. Buying a home is a daunting process for anyone, but especially so for the first-time home buyer. This is the largest and most important financial decision you will ever make and it should be done with the appropriate investment in time and energy. Making the effort to be financially literate will save you thousands of dollars and assure you make the right decisions for your longer-term financial security.

1. Don’t rush into the housing market–do your homework: learn the basics of savings, credit and budgeting.

Lifelong savings is a crucial ingredient to financial prosperity. You must spend less than you earn, ideally saving at least 10 percent of your gross income. Put your savings on automatic pilot, having at least 10 percent of every paycheck automatically deducted. Money you don’t see you won’t spend. Contributing to an RRSP, at least enough to gain any matching funds your employer will provide, is essential. The Tax Free Savings Account (TFSA) is an ideal vehicle for saving for a down payment and now you can contribute as much as $10,000 a year.

You also need to establish a good credit record. Lenders want to see a record of your ability to pay your bills. As early as possible, get a credit card and put your name on cable, phone or other utility bills. Pay your bills and your rent in full and on time. Do not run up credit card lines of credit. The interest rates are exorbitant and the only one who benefits is your bank. Keep your credit card balances well below their credit limit.

Do a free credit check with Equifax every six months to learn your credit score and to see if there are any problems. Equifax tracks all of your credit history, which includes school loans, car loans, credit cards and computer loans.  Equifax grades you based on your responsible usage and payments.

Budgeting is also essential and it is easier than ever with online apps. You need to know how you spend your money to discover where there is waste and opportunity for savings. The CMHC Household Budget Calculator helps you take a realistic look at your current monthly expenses.

2. Make a realistic projectory of your future household income and lifestyle and understand its implications for choosing the right property for you.

Millennials are likely relatively new to the working world. Lenders want to see stability in employment and you generally need to show at least two years of steady income before you can be considered for a mortgage.  This also applies if you have been working for a few years in one career and then decide to change careers to something completely different. Lenders want to see continuous employment in the same field. If you are self-employed, it is more challenging, and you need professional advice on taking the proper steps to qualify for a mortgage.

Assess the stability of your job and the likely trajectory of your income. Millennials will not follow in the footsteps of their parents, working for one employer for forty years. In today’s world, no one has guaranteed job security. Take a realistic view of your future. Will your household income be rising? Will there be one income or two? Are there children in your future? Will you remain in the same city? The answers to these questions help to determine how much space you need, the appropriate type of residence, its location and the best mortgage for you.

Financial planning is key and it is dependent on your goals and expectations.

3. This is not a Do-It-Yourself project: build a team of trusted professionals to guide you along.

You need expert advice. The first person you should talk to is an accredited mortgage professional. There is no out-of-pocket cost for their services. Indeed, they will save you money.

These people are trained financial planners and understand the ever-changing mortgage market. Take some time with them to understand the process before you jump in and find your head spinning with all the decisions you will ultimately have to make. They will give you a realistic idea of your borrowing potential. Before you fall in love with a house or condo, make sure you understand where you stand on the mortgage front. Mortgages are complex and one size does not fit all. You need an expert who will shop for the right mortgage for you. There are more than 200 mortgage lenders in Canada and they will compete for your business.

It is a very good idea to get a pre-approved mortgage amount before you start shopping. This is a more detailed process than just a rate hold (where a particular mortgage rate is guaranteed for a specified period of time). For a pre-approval, the lender will review all of your documentation except for the actual property.

There is far more to the correct mortgage decision than the interest rate you will pay. While getting the lowest rate is usually the first thing on every buyer’s mind, it shouldn’t be the most important. Six out of ten buyers break a five-year term mortgage by the third year, paying enormous penalties. These penalties vary between lenders. The fine print of your mortgage is key and that’s where an expert can save you money. How the penalty for breaking a mortgage is calculated is key and many monoline lenders have significantly more consumer-friendly calculations than the major banks.[2] A mortgage broker will help you find a mortgage with good prepayment privileges.

The next step is to engage a real estate agent. The seller pays the fee and a qualified realtor with good references will understand the housing market in your location. Make sure the property has lasting value. Once you find the right home, you will need a real estate lawyer, a home inspector, an insurance agent and possibly an appraiser. Make any offer contingent on a home inspection and remediation of significant deficiencies.

4. Down payments, closing costs, moving expenses and basic upgrades need to be understood to avoid nasty surprises.

The size of your down payment is key and, obviously, the bigger the better. You need a minimum of 5 percent of the purchase price and anything less than 20 percent will require you to pay a hefty CMHC mortgage loan insurance premium, which is frequently added to the mortgage principal and amortized over the life of the mortgage as part of the regular monthly payment.

Your lender will want to know the source of your down payment. Many Millennials will depend on the largesse of their parents to top up their down payment.

The down payment, however, is only part of the upfront cost. You can expect to pay from 1.5-to-4 percent of the purchase price of your home in closing costs. These costs include legal fees, appraisals, property transfer tax, HST (where applicable) on new properties, home and title insurance, mortgage life insurance and prepaid property tax and utility adjustments. These amount to thousands of dollars.

Don’t forget moving costs and essential upgrades to the property such as draperies or blinds in the bedroom.

5. Test drive your monthly housing payments to learn how much you can truly afford.

Affordability is not about how much credit you can qualify for, but how much you can reasonably tolerate given your current and future income, stability, lifestyle and budget. Most Millennials underestimate what it costs to run a home, be it a condo or single-family residence.

The formal qualification guidelines used by lenders are two-fold: 1) your housing costs must be no more than 32 percent of your gross (pre-tax) household income; and, 2) your housing costs plus all other debt servicing must be no more than 40 percent of your gross income.

Lenders define housing costs as mortgage payments, property taxes, condo fees (if any) and heating costs.[3] But homes cost more than that. In your planning, you should also other utilities (such as cable, water and air conditioning), ongoing maintenance, home insurance and unexpected repairs. Taking all of these costs into consideration, the 32 percent and 40 percent guidelines might well put an unacceptable crimp in your lifestyle, keeping in mind that future children also add meaningfully to household expenses and two incomes can unexpectedly turn into one.

The best way to know what you can afford is to try it out. Say, for example, you qualify for a mortgage payment of $1400 a month and adding property taxes and condo fees might take your monthly housing expense to $1650.  A far cry from the $500 you pay now to split a place with 3 roommates. Start making the full payment before you buy to your savings account and see how it feels. Do you have enough money left over to maintain a tolerable lifestyle without going further into debt?

Keep in mind that this is not a normal interest rate environment. Don’t over-extend because there is a good chance interest rates will be higher when your term is up. Do the math (or better yet have your broker do it for you) on what a doubling of interest rates five years from now would do to your monthly payment.  A doubling of rates may be unlikely, but it makes sense to know the implication.

Do Your Calculations Look Discouraging?

If so, here are some things you can do to improve your situation:

• Pay off some loans before you buy real estate.
• Save for a larger down payment.
• Take another look at your current household budget to see where you can spend less. The money you save can go towards a larger down payment.
• Lower your home price — remember that your first home is not necessarily your dream home.

Footnotes:

[1] I would like to acknowledge and thank the many mortgage professionals of Dominion Lending Centres who made contributions to this report.

[2] People break mortgages because of job change, decision to upsize, change neighbourhoods, change in family status or refinancing. The last thing you want to discover is that discharging a $400,000 mortgage 3.5 years into a 5-year term is going to cost you $15,000.

[3] Lenders now also assess your qualification compliance if interest rates were to rise meaningfully, a likely scenario in this low interest rate environment.

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

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