Nov. 27, 2009- With the housing market in Canada heating up, of great concern is Canadians over-leveraging themselves and feeling unprepared for rising interest rates. However, although there's much fuss surrounding the issue, some experts feel first-time homebuyers are well prepared.
"Canadians are historically more conservative than our cousins south of the border. Our lending guidelines are different so the banking system is a lot more stable than the rest of the world. Generally speaking, the Canadian culture is a lot more conservative as well," says John Turner, director of mortgages for Bank of Montreal (BMO).
Canadian home sales have surged 63 per cent from their historic lows in January. Since September, existing home prices have risen 13.6 per cent above the same levels a year ago. Because of this, many first-time homebuyers are more eager than ever to purchase their first home.
Turner has a few very important recommendations for first-time homebuyers when it comes to choosing the type of mortgage that's best for them.
With interest rates at historic lows, Turner recommends taking advantage of the low rates and locking in to a fixed mortgage. In doing so, a first-time homebuyer can make weekly or biweekly payments, and inevitably pay off their mortgage sooner.
Although some are worried increasing interest rates will over-leverage first-time homebuyers, Turner says there are longer-term benefits to locking into a fixed mortgage.
"For those who've opted for a fixed term mortgage and if interest rates go up, they're insulated from that. Their payments and mortgage rates will stay at what they originally locked in to, so there's really no impact for them. That's one of the advantages of opting for a fixed rate mortgage," says Turner.
For those who lock in to fixed rate mortgages now, there is still a possibility that interest rates will rise in 2010. An essential step for first-time homebuyers to avoid the pitfalls of the rise in interest rates is to have a plan.
"It's important that any first-time homebuyer have a financial plan and a mortgage plan so that they can be prepared for swings in interest rates. If you have a plan, then you have certainty for what you need to do when something [in the market] happens," says Turner.
A first-time homebuyer can better prepare themselves by putting together a great team of lawyers, a mortgage specialist, and a Realtor.
"Have an 'A' team together so you can go out and know what you're doing and know how you're doing it is within your means," says Turner.
Turner also recommends that after a first-time homebuyer has been pre-qualified, it's essential to start practicing making the mortgage payments.
"Practice makes perfect. That prepares you for the inevitability for the change in lifestyle that comes with owning a home. It gets you ready and you're actually saving your down payment," says Turner.
A final piece of advice for first-time homebuyers is to establish a credit history. This is because many don't have an established credit history.
"Don't run out and apply for a bunch of credit cards, apply for an RRSP loan instead. It's something that appears on your credit report, and you're building a potential down payment plan [by doing so]. In the end, you're saving," says Turner.