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Being a financially savvy homeowner
Before you start thinking about the kind of home
you want and where you want to live, it's a good idea to take a financial
inventory.
This stage of the process - saving,
budgeting, planning - is not as exciting as choosing a neighbourhood and
looking at homes. But it will put you in the best position when it comes
time to talk mortgages. Click below for more
information.
• Preparing
to buy a home
If you
are already a homeowner, click through the links below for tips on how to
manage your prized asset in a financially smart manner.
• Doing
renovations the right way
• Refinancing
your mortgage
• Using
your home equity for other goals
Preparing to buy a
home
For most
of us, the first step in the home-buying process is to ramp up savings -
the more you can put towards a down payment, the less interest you'll pay
and the more you may save on mortgage insurance.
If you don't already have a budget, check out our articles, "How
to budget for life: Parts 1 and 2," for tips to help boost your
savings in the archives section.
Paying down
debt and building a good credit history are also part of this process. The
better your credit history, the more leverage you'll have when negotiating
a mortgage. Last month's Vault article, "Managing
credit now brings future financial rewards," offers valuable
suggestions on how to build a good credit rating and reduce unnecessary
debt.
Now, how much home can I afford?
Our convenient mortgage
calculator will give you a good idea of how large a mortgage you can
qualify for. The calculations are based on some traditional debt-to-income
principles:
The first lending principle
states that your monthly housing costs - including mortgage payments,
insurance, property taxes, applicable condo fees - should not exceed 32%
of your family's gross monthly income. This is also known as the Gross
Debt Service Ratio (GDSR) calculation.
The
second lending principle states that monthly housing costs plus all
other debt (loans, credit cards, lease payments) should not exceed 40% of
your family's gross monthly income. This is also known as the Total Debt
Service Ratio (TDSR) calculation.
Pre-approved
mortgages
Once you've set your savings plan, and determined
how much home you can afford, getting pre-approval is the next step.
Having a pre-approved mortgage tells potential sellers that you are
serious about entering the housing market.
A
pre-approved mortgage qualifies you for mortgage financing at an interest
rate that is typically guaranteed for 60 days from the time that financing
is arranged.
To prepare yourself for the kinds
of questions that mortgage lenders will be asking, have a look at
Scotiabank's "Borrowing
tips."
Fast fact: You can purchase a
home with as little as 5% down. However, if your down payment is less than
25% of the home's appraised value or its purchase price, you are required
by law to purchase mortgage insurance.
Additional
resources:
What to look for in a home and neighbourhood
Doing
renovations the right way
Today's low
interest rates are a double-edged sword for homeowners who want to move
up. On the one hand, mortgages are available at bargain rates. On the
other hand, real estate prices have skyrocketed in key centres across the
country.
Many homeowners have turned to
renovation as a cost-effective alternative to a new home. In addition to
sprucing up your home and making it more attractive to inhabit, the right
renovations can increase its resale value.
According to the most recent (1999) Renovations
and Home Value Survey conducted by the Appraisal Institute of Canada, here
are the top 10 reno projects, along with the average potential "payback"
when the home is sold (expressed as a percentage of the cost of the
reno):
- Painting and
decor, interior - 73%
- Kitchen reno -
72%
- Bathroom reno -
68%
- Painting,
exterior - 65%
- Flooring
upgrades - 62%
- Window/door
replacement - 57%
- Main floor
family room addition - 51%
- Fireplace
addition - 50%
- Basement
renovation - 49%
- Furnace/heating
system replacement - 48%
Paying for the
renovations
If you are making modest renovations on your own,
paying for the materials with your credit card may make sense - provided
you pay your balance monthly.
For more extensive
work, resist the temptation to draw cash advances on your cards. A
personal line of credit is a much more cost-effective way to get the cash
you need. Drawing on a personal line of credit has another advantage: you
pay interest only on the amount borrowed. This can be particularly useful
when paying a contractor in stages.
For major
renovations, you may want to tap into the existing value of your home. See
below, Using
your home equity for other goals, for more information.
Additional resources
The CMHC web site has a
comprehensive section on home renovations. Go to the "Building,
renovating, and maintaining" section at: www.cmhc-schl.gc.ca/en/burema/index.cfm
Refinancing your mortgage
With today's low interest rates, many homeowners are
taking a hard look at the financing of their most important asset. Before
you decide to renegotiate your mortgage, carefully consider the potential
costs involved.
If your mortgage is closed (that
is, you can't pay it ahead of schedule), you may face a penalty when you
renegotiate. It may still be worthwhile to refinance. The key is to
determine whether the potential interest-rate savings outweigh the
penalty.
The rough guideline is that refinancing
makes financial sense if the refinancing rate is at least two percentage
points below your current rate.
Your mortgage
specialist can help you crunch the numbers.
Using your home equity for other goals
Your home equity is the current value of your home less
what you still owe on it. For example, if your home is valued at $250,000
and your outstanding mortgage is $120,000, your equity is
$130,000.
The equity you have built in your home
can be a valuable source of financing. You can borrow against it to pay
for your child's tuition, purchase an investment portfolio, pay for
large-scale home renovations, or buy an income property. In some
instances, the interest may even be tax-deductible.
Your tax advisor and mortgage specialist can
help you decide whether it makes financial sense to tap into your home's
equity.
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