5 common Mortgage mistakes made by first-time Homebuyers

By Sean Cooper

Special to the Financial Independence Hub

Buying a home is an exciting time for first-time homebuyers. It’s also a busy time. Besides hiring a real estate agent, house hunting and finding time to get all your daily errands done, you’ll also need to find time to shop for a mortgage.

While it can be easy to treat your mortgage like an afterthought, by doing that you’re doing yourself a big disservice. Buying a home is most likely the single biggest financial transaction of your lifetime, so it’s important to give it the attention it deserves: that includes your mortgage.

Many first-time homebuyers shop for a mortgage based solely on the lowest mortgage rate, when there are so many other (more important) factors to consider. That’s just one of the common mistakes first-time homebuyers make. Let’s look at this and four more common mortgage mistakes to avoid.

Mistake #1: Skipping the Mortgage Preapproval

It’s hard to go house hunting if you don’t know how much you can afford to spend on a property. A mortgage preapproval helps you come up with a budget for the property you’d eventually like to buy. By providing your mortgage broker with some basic personal and financial information, such as your income, employment history and how much you’ve saved up towards a down payment, they’ll be able to take that information to the lender and get a mortgage preapproval. A mortgage preapproval tells you the maximum amount you can spend on a home. It also usually comes with a rate hold. You’re typically guaranteed a mortgage rate for between 90 and 120 days. If rates go up during this time, you’re guaranteed the lower rate. If rates go down, you get the lower rate. It’s a win-win situation for homebuyers.

Mistake #2: Shopping based solely on the Mortgage with the lowest rate

Many first-time homebuyers are fixated on getting the lowest mortgage rate:  too fixated. They use mortgage rate comparison websites to find the mortgage rate with the lowest rate, yet forget to consider other, more important factors. As I write in this post, the mortgage with the lowest rate may not be the best mortgage for you: quite often it’s not. It’s important to consider what I like to call the “3 mortgage P’s” – penalties, prepayments and portability. Of course, there are other factors to consider, such as fixed versus variable and standard versus collateral charges. Mortgage brokers know mortgages like the back of their hand since that’s all they deal with. A mortgage broker can help identify the factors that matter most to you and choose the mortgage that’s the best fit.

Mistake #3: Not considering other options besides the 5-Year Fixed Rate Mortgage

As Canadians we are very risk averse. The media probably has something to do with it. On a daily basis we’re bombarded with new headlines designed to cause us to worry about our finances. If it’s not an article about an impending housing bubble, it’s an article about the possibility of higher interest rates or a survey that finds Canadian households would be stretched financially if interest rates were to go up (and for the record, a 100 per cent increase in interest rates only equals a 30 per cent increase in your mortgage payment).

The fear mongering by the media has many first-time homebuyers going with five-year fixed rate mortgages. While there’s nothing wrong with this mortgage, it’s important to consider other mortgage options. You wouldn’t buy the first house you see when house hunting, so it’s important to look at other mortgage products. Your mortgage broker can help crunch the numbers and see if a variable rate mortgage or a shorter term fixed rate mortgage (1 to 4 years) would make sense.

Mistake #4: Not considering Mortgage Penalties

When you sign up for a mortgage, probably the last thing on your mind is breaking it. Yet 6 out of 10 Canadians with a fixed-rate mortgage will break it at an average of 38 months in. If you asked those same homebuyers if there was any chance they’d break their mortgage when they first sign up, 10 out of 10 would likely say no. There can be many reasons that you break your mortgage:  job loss, illness, job relocation, divorce … and the list goes on.

If you sign up for a 5-year fixed-rate mortgage, the mortgage penalties can be quite costly. Depending on your mortgage balance, you could end up spending $20,000 or more to get out of your mortgage early. The big banks and credit unions tend to have the heftiest mortgage penalties (monoline lenders tend to have fairer mortgage penalties). So, be sure to ask about mortgage penalties when signing up for a mortgage. You don’t want to have a hefty penalty come back to bite you later on.

Mistake #5: Only shopping at your local bank branch

There’s nothing wrong with going to your local bank branch first to shop for a mortgage. Just make sure it’s not your only stop. Shopping for a mortgage on your own can be a lot of work. You have to set up appointments during “banker hours” and fill in mortgage applications, on top of all your other daily errands. This is time consuming and applying at too many lenders can lower your credit score. There’s has to be a better way, and thankfully there is.

A mortgage broker can shop the market on your behalf. A broker is an unbiased source who know the mortgage market inside and out. By giving them some basic personal and financial information, they can find the lenders best suited for you. A broker has access to dozens of lenders, lenders that you wouldn’t normally have access to if you walked in off the street. This increases your likelihood of finding the best mortgage product for you.

Disclaimer: Contact a mortgage professional to see if the strategies mentioned apply to youspecific situation.

Sean Cooper is author of the book, Burn Your Mortgage and managing editor ofmortgagepal.ca

2 thoughts on “5 common Mortgage mistakes made by first-time Homebuyers

  1. Who pays the broker? Usually the lender, as I understand the industry. Do commissions and finders fees not vary from lender to lender. Why would a broker then not be influenced by the amount of commission or finders fee received? I wonder if using the word unbiased is not likely misleading. That is word the broker uses….

    There are a number of other reasons as well why any mortgage seeker, not just first time home buyers, should not be complacent just because they choose to go to a broker.

    Sean, what would you be saying about a first time car buyer using an automobile brokerage that boasts extensive cross make and cross dealership shopping on a buyer’s behalf? Is the difference that great?

  2. Hi Curt. Thank you for reading the article and sharing your thoughts.
    Yes, you’re correct. In most cases the lender compensates the mortgage broker directly. This is because a broker doesn’t earn a salary. He or she only gets paid if a mortgage is funded. (Many people aren’t aware of this.) Your broker could do all this great work for you (run different scenarios, answer your questions on the phone, etc.), spend hours on your file, only for you to go with the bank (which your broker likely has access to and can negotiate on your behalf and help you get a better rate). Yes, commission and finders fees vary by lender. However, a broker must disclose how much the commission is to the client in the paperwork. A good broker wouldn’t be influenced by a higher commission. That would be very shortsighted. The client would find out. By doing what’s right for the client, he’s more likely to get a positive referral. And positive feedback is so important in the broker community. It’s the lifeblood of our industry.
    Similar to a new home builder, reputation is king with mortgage brokers. See who has a good online presence and positive client testimonials. Those are good places to start. Mortgages are a lot more complicated than they used to be. It’s better to have a broker in your corner rather than going to a mortgage rate comparison website and trying to figure it all out yourself. It’s more than just finding the lowest mortgage rate. Other things like standard vs. collateral, fixed vs. variable, mortgage penalties, prepayment, etc. matter. Oftentimes it’s better to go with a slightly higher rate since the other mortgage terms and conditions may be better. By choosing the right mortgage broker, he or she can help you choose the best mortgage based on your own individual needs.
    I can’t speak on behalf of an auto broker. I’ve never used those services before.

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