DON’T Believe These 3 Mortgage Myths!
In this blog, I will be busting the top 3 real estate myths many Canadians are misinformed about regarding the real estate/home buying process. These myths include the required down payment percentage to purchase a home, the difference between pre-qualification and pre-approval, and why the lowest interest rate doesn’t always make the most sense.
Myth #1: You Need a 20% Down Payment
In Canada, the required down payment for a home depends on the purchase price of the property. Here are the actual rules:
- For homes priced at $500,000 or less: The minimum down payment is 5% of the purchase price.
- For homes priced between $500,000 and $999,999: The minimum down payment is 5% of the first $500,000 and 10% of the portion of the price above $500,000.
- For homes priced at $1,000,000 or more: A minimum down payment of 20% is required.
Examples of Down Payments at Different Price Points
To illustrate these rules, let’s look at three different examples of down payments required for homes at various price points:
- Home Price: $400,000
- Required Down Payment: 5% of $400,000
- Calculation: $400,000 x 0.05 = $20,000
- Down Payment: $20,000
- Home Price: $750,000
- Required Down Payment: 5% of the first $500,000 + 10% of the remaining $250,000
- Calculation: ($500,000 x 0.05) + ($250,000 x 0.10) = $25,000 + $25,000 = $50,000
- Down Payment: $50,000
- Home Price: $1,200,000
- Required Down Payment: 20% of $1,200,000
- Calculation: $1,200,000 x 0.20 = $240,000
- Down Payment: $240,000
The idea that you need a 20% down payment to buy a home in Canada is a myth. While having a larger down payment can reduce your mortgage and monthly payments, it is not a strict requirement for all home purchases. Understanding the actual down payment rules can make homeownership more accessible for many Canadians. Whether you’re buying a home for $400,000 or $750,000, knowing the correct down payment requirements can help you plan and make informed decisions.
Myth #2: Prequalification and Preapproval Are the Same
Another common myth in the Canadian housing market is that pre-approvals and pre-qualifications are the same thing. Many prospective homebuyers believe that these terms can be used interchangeably, but this misconception can lead to confusion and potential setbacks in the home buying process. In reality, pre-approvals and pre-qualifications are quite different. Let’s debunk this myth and understand the distinct differences between the two.
Understanding Pre-Qualification
Pre-qualification is an initial step in the mortgage process. It provides a rough estimate of how much you might be able to borrow based on a preliminary review of your financial information. Here’s what you need to know about pre-qualification:
- Informal Process: Pre-qualification is usually a quick and informal process that can often be done online or over the phone.
- Self-Reported Information: It is based on self-reported information, such as your income, assets, debts, and credit score.
- No Credit Check: Typically, pre-qualification does not involve a credit check.
Understanding Pre-Approval
Pre-approval, on the other hand, is a more thorough and formal process. It involves a detailed review of your financial situation by a lender. Here are the key points about pre-approval:
- Formal Process: Pre-approval is a more comprehensive process that requires submitting a formal application.
- Verified Information: The lender verifies your financial information, including income, assets, debts, and credit history.
- Credit Check: A hard credit check is performed, which can affect your credit score slightly.
- Conditional Commitment: You receive a conditional commitment from the lender, stating how much you can borrow and the interest rate you qualify for, subject to property appraisal and other conditions.
- Stronger Position: With a pre-approval, you are in a stronger position when making an offer on a home, as sellers know you have been vetted by a lender.
Key Differences Between Pre-Qualification and Pre-Approval
- Level of Detail: Pre-qualification is based on estimated, self-reported information, while pre-approval involves verified financial data and a credit check.
- Formality: Pre-qualification is an informal, non-binding estimate, whereas pre-approval is a formal, conditional commitment from a lender.
- Impact on Credit: Pre-qualification does not affect your credit score, while pre-approval includes a hard credit inquiry.
The myth that pre-approvals and pre-qualifications are the same can lead to misunderstandings during the home buying process. Understanding the differences between the two can help you make more informed decisions and better prepare for purchasing a home. Pre-qualification is a helpful first step to get an idea of your borrowing potential, but pre-approval provides a stronger, more reliable foundation when you’re ready to make an offer on a property.
Myth #3: The Lowest Rate Is Always the Best Option
The third myth we are going to bust in the Canadian housing market is that the lowest interest rate is always the best option when choosing a mortgage. Many homebuyers focus solely on securing the lowest rate, believing it will save them the most money. However, this misconception overlooks the many other critical aspects of a mortgage product that can significantly impact the overall cost and suitability of the mortgage. Let’s debunk this myth and explore why the lowest rate isn’t always the best choice.
Understanding the Importance of Mortgage Features
While the interest rate is an important factor, it is just one piece of the puzzle. Other features and terms of the mortgage can play a crucial role in determining the best option for your financial situation and long-term goals. Here are some key considerations beyond the interest rate:
- Amortization Period: The length of time over which you agree to repay your mortgage. A longer period may lower monthly payments but increase the total interest paid.
- Prepayment Privileges: The ability to make additional payments without penalties. This feature can help you pay off your mortgage faster and save on interest.
- Portability: The option to transfer your existing mortgage to a new property without penalties, which can be beneficial if you plan to move.
- Penalties for Breaking the Mortgage: Understanding the costs associated with breaking your mortgage term early can help you avoid unexpected expenses.
- Flexibility: Terms and conditions that allow for adjustments based on changing financial circumstances.
Examples of Mortgage Considerations
- Amortization Period
- Scenario: You choose a mortgage with a slightly higher rate but a shorter amortization period.
- Result: You pay off your mortgage faster, saving thousands in interest over the life of the loan, even with a higher rate.
- Prepayment Privileges
- Scenario: You select a mortgage with prepayment privileges, allowing you to make extra payments annually.
- Result: You can reduce your principal balance quicker, significantly lowering your total interest paid.
- Penalties for Breaking the Mortgage
- Scenario: You pick a mortgage with a low rate but high penalties for breaking the term.
- Result: If you need to sell or refinance, the penalties could outweigh the savings from the lower rate.
Why the Lowest Rate Isn’t Always the Best Choice
- Total Cost of Borrowing: The interest rate impacts the amount of interest you pay, but other factors like fees and penalties can increase the total cost of borrowing.
- Financial Flexibility: Mortgage products with more flexible terms may better accommodate your financial situation and future plans, even if they come with a slightly higher rate.
- Long-Term Savings: Features such as prepayment privileges and lower penalties for breaking the mortgage can lead to substantial long-term savings, outweighing the benefits of a lower rate.
The myth that the lowest rate is always the best option can lead to costly mistakes for homebuyers. It’s essential to look beyond the rate and consider the full range of features and terms offered by different mortgage products. By understanding the complete picture, you can choose a mortgage that best aligns with your financial goals and needs, potentially saving you more money in the long run.
By debunking these myths, we hope to equip you with the knowledge to make informed decisions and approach the housing market with confidence. Whether you’re a first-time homebuyer or looking to refinance, understanding these key aspects can help you navigate the process more effectively and achieve your homeownership goals. If you have any questions, you can reach my office at 519-250-4848 and either myself or one of my team members will be happy to help.
It’s Rasha Ingratta, a mortgage agent with Mortgage Intelligence in Windsor, Ontario. Thanks for reading and have a great day!
