For first-time homebuyers, mortgages can be pretty intimidating, causing many buyers to remark that they feel like they've 'signed their lives away.' But like the old adage, knowledge is power, and learning about this important part of the process is time well spent that could save you thousands
Making the decision to purchase your first home is monumental. While you may have a preliminary idea of what kind of mortgage payment you can afford, the more you know will help you when you meet with your lender.
Mortgage basics
Not too many people can afford to buy a home without a mortgage. To put it simply, a mortgage is a loan that is primarily used to buy a home. Lenders will loan you a large sum of money, and use your home as collateral, or security, for the loan.
In other words, when you sign for a mortgage, you're signing a legal contract that says if you fail to repay what you borrowed, the property used to secure the loan will be taken by the lender.
The amount of the loan is referred to as the principal, and you are expected to repay the principal with interest during the repayment period.
Bank versus broker
When you're ready to discuss the types of mortgages you qualify for, one of the decisions you'll have to make is whether to get your mortgage through a bank or a broker.
Joan Dal Bianco, vice-president of real estate secured lending at TD Canada Trust in Toronto, suggests first-time buyers at least have a conversation with their existing financial institutions since they already have a relationship with them. Besides adding a comfort factor, going where you're known can also make the application process easier, she says. There are certain qualifying criteria that everyone has to meet regarding credit scores, down payments and income - you have to prove your income, your credit score will be checked by the institution - and your bank will already have that information on file.
David Kuo, vice-president retail branch network for Ontario East at HSBC in Toronto says first-time buyers will often choose banks because of the overall financial advice banks can provide existing customers. "The banks will help you with overall wealth planning, because for some of these first-time homebuyers, their home is probably their biggest asset," says Kuo. If a first-time buyer has extra money, and they're not sure if they should pay down their mortgage or put it into an RRSP, RESP or tax free savings account, banks will help buyers make the decision by giving a more overall, holistic suggestion. A mortgage broker, on the other hand, might focus only on the mortgage itself, he says.
One potential limitation of dealing with a bank as opposed to a mortgage broker is that a bank is limited to whatever products they offer. If you work with a mortgage broker, you have access to a wider array of products because brokers may work with 50 different lenders, says Calgary-based Gary Siegle, regional manager of Alberta South and Saskatchewan for mortgage brokerage firm Invis. In addition, brokers specialize in mortgages only, whereas a loans officer in a bank may deal in different types of lending.
Ultimately, the decision is a personal choice. But it's important to shop around when taking this important first step.
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