RBC just released their 18th Annual Homeownership study, which found that a majority of young Canadians will put off buying a new home until next year.  The report said that 55 per cent of people aged 18-34 will delay stepping onto the property ladder, up 10 per cent from the national average.

It’s not at all surprising to hear that young people are acting with caution when it comes to making such a large commitment as buying a house.  This is an understandable reaction to the recent talks about worrying consumer debt levels and increasing interest rates, not to mention the speculation of a housing bubble in some areas across Canada.

According to the survey, young Canadians are most concerned about having a good down payment and raising home prices.

Other insights that came from the report include:

• 43 per cent  of young Canadians plan to purchase a home in the next two years (the national average is 29 per cent)
• Young people are more likely to use real estate websites and advice from family and friends when buying, versus older Canadians who relay more heavily on real estate agents
• Older Canadians (aged 35-54) are concerned about increasing home prices and mortgage rates

If you’re a first time home buyer facing the decision of whether or not to purchase a home, here are a few tips to consider:

Build a budget

Figure out how much you can afford.  This needs to cover two areas: 1) How much money can you afford to pay on a monthly basis for your home – make sure you’re including household expenses such as heating, insurance, cable, telephone and repairs, and 2) Find out exactly how much money you can borrow.  The banks typically follow the same rule of thumb: your gross debt service number (GDS) should not exceed 32 per cent of your gross monthly income. Your GDS number is the percentage of gross annual income required to cover payments associated with housing, including mortgage payments, property taxes, and interest. In order to calculate what you can afford as a monthly mortgage payment, simply multiply your gross income for the year by 32 per cent and divide it by 12.

Don’t forget to consider all of the costs associated with buying a home as well.

Understand the responsibilities

When it comes to homeownership, make sure you know what you’re getting into.  Speak to other homeowners about their first home buying experience, find out what they wish they knew before they bought.  Also, try to get a better idea of the type of extraordinary expenses that might come up throughout the year and how much money you need to put aside to manage these costs. It’s always a good idea to do a detailed comparison of renting versus buying a home to weight out your options.

Be informed

Don’t just talk to your bank when you’re looking for advice on a mortgage, compare the market and use a variety of resources to help you become an informed shopper.  Mortgage brokers can be a fantastic source of information.  Online websites can also help to answer any questions you might have and offer mortgage tips to help with the process.  And don’t forget to ask around, countless home buyers will tell you about the decisions and mistakes they made the first time around that they wont repeat on their second purchase.

Don’t stretch yourself

Once you’ve decided how much you can afford, make sure you stick to your budget.  Be prepared for situations that will arise that will encourage you to stretch your budget.  For example, if you enter into a bidding war or view a property that is listed at the top end of your budget, you might be faced with a difficult decision.  Try to avoid these situations all together so you don’t get tempted to go beyond your budget, or look for properties that are slightly below your price range so you can participate in bidding wars and have some room to move.

Be patient

Once you’ve made the decision to purchase a house, don’t get caught up in the excitement of home shopping.  Take your time and wait for the right property to come along.  Your real estate agent might try to encourage you to jump on a property that you’re not 100 per cent sure about, hold your ground.  Rest assured that your dream home is out there and waiting for you.

Kelly
RateSupermarket.ca

Mortgages often stretch out for 25 years or more and many homeowners only scratch the surface of their debt in the first couple of years, paying off mainly the interest before tackling the principal. But this doesn’t always have to be the case. Several options are available to you and can be selected depending on your personal and financial situation. But why wouldn’t you want to enjoy a mortgage-free lifestyle sooner rather than later?

As Frank Torchia, a mortgage specialist with Mortgage Alliance Lending Superstore states, “Especially in an unstable economy, accelerated payments can act as forced saving; planning for your future and increasing your equity by paying down your mortgage more quickly.”

How do accelerated mortgage payments work? Instead of making payments once a month, you make payments every two weeks or every week. So, with an accelerated bi-weekly mortgage payment, over the course of a year, you end up making 26 ‘half’ payments which is the equivalent to 13 ‘full’ payments. If you were on a monthly repayment schedule, you would only make the standard 12 ‘full’ payments. You therefore reduce the payment schedule and save a lot on interest by paying off an extra month a year.

For example, on a $250,000 mortgage at 4% interest, amortized over 25 years, traditional monthly payments would be $1315.05. However, by simply switching to accelerated bi-weekly payments (every two weeks) with payments of $657.52, you could pay your mortgage off within 21 years rather than 25 and save $20,454 in interest! Even better, weekly payments of $328.76 will save $20,680 in interest, and you will be mortgage free in the 20th year.

While accelerated bi-weekly mortgage payments do prove to pay off your mortgage a lot sooner than traditional monthly mortgage payments and saves you thousands of dollars in interest, it may not be for everyone. What works for one person doesn’t always work for another, therefore it is important to look at all of the options available before signing up for one.

What’s the difference between accelerated payments and other mortgage repayment options? Below is a description of the repayment plans available:

Monthly Mortgage Payments

Traditionally, mortgage payments are made monthly. Unless otherwise arranged, monthly mortgage payments involve making the same payment on the same day each month. These payments include both the principal and the interest and the amount of interest being paid off is determined by the interest rate. This is usually the most expensive option as you do not save money on interest fees.

Semi-Monthly Mortgage Payments

With semi-monthly mortgage payments, you make two equal payments on the same day each month. This equals to 24 payments a year. While this option does benefit interest payments, it does not make much of a difference in terms of paying off your mortgage in less time and accumulating less interest compared to making monthly mortgage payments.

Accelerated Bi-Weekly Mortgage Payments

Bi-weekly mortgage payments, or as most often referred to as accelerated bi-weekly mortgage payments, allow you to pay your mortgage off sooner compared to monthly or bi-monthly payments. By making your mortgage payments bi-weekly, you end up paying 26 times in a year as opposed to 24 times in a year. This in turn results in one month extra mortgage payment per year, paying off your mortgage in less time and saving a lot of money in interest. In addition, by making payments on a bi-weekly basis, you can more easily coordinate your payment schedule with your employment pay periods, making payments easier to follow.

Accelerated Weekly Mortgage Payments

Weekly mortgage payments are similar to bi-weekly payments, as you are making more payments throughout the year. With weekly payments, you end up saving yourself thousands of dollars in interest and paying your mortgage off in less time than you would with a traditional monthly mortgage payment plan.

*The chart below further explains the different types of payment plans and the interest you save with each one. (Please note, this chart is based on estimates only. Speak with your mortgage specialist to obtain latest mortgage rates.)

Purchasing a home is the biggest investment you will ever make; an investment towards your future. With accelerated mortgage payments, you are quite literally accelerating to a future of living mortgage free and enjoying financial freedom.

Caroline
PR@RateSupermarket.ca