MORTGAGE Blog & ARTICLES
Getting A Mortgage in Your Early 20s
You’re twenty-something and you’re considering buying a place. Maybe you moved back in with your parents to save for a down payment – or you’re living in a rental that gobbles up a huge chunk of your first grown-up paycheck and you don’t feel you have anything to show for it. Unless Mom and Dad are rich, your great aunt left you a trust fund or you’re a brand-new internet mogul, you probably won’t be able to straight out buy a home without taking on some debt.
That’s when it’s time to consider a mortgage – likely to be the biggest debt you ever take on in your life. Acquiring a mortgage, especially this early in your life, ties up a lot of your money in a single investment. It also ties you down and makes it less easy to relocate. On the other hand, it means you’re starting to build up equity in a home, and – if you handle it well – will add to your positive credit history.
Read on to understand what you’re getting yourself into and decide if it makes sense for you.
What Is a Mortgage and How do You Get One?
In simple terms, a mortgage is a loan you used to buy a home where the property serves as collateral. Mortgages are the primary way most people buy homes in Canada.
Unlike opening a credit card or taking on an auto loan, the mortgage-application process is long and thorough. Very thorough. Going in, be ready with your Social Insurance Number (SIN), your most recent pay stub, documentation of all your debts, three months worth of bank-account statements and any other proofs of assets, such as investment and insurance accounts. If you’ve already found a house – much of the above also applies when you’re just trying to be pre-approved for a mortgage – bring as much information as possible about the place you want to buy.
Pre-approval can make it easier to have your offer accepted when you try to buy a home, which could be especially crucial if you’re the youngest bidder.
Lenders will scrutinize your credit score and history, which may be problematic for twenty-somethings who have a limited borrowing history (or none at all). This is where having student loan debt actually helps you – if you’re making your payments on time, you’ll likely have a good enough credit score for banks to feel comfortable lending to you.
Generally the better your credit score, the lower your interest rates will be. This is why it’s absolutely vital you handle debt responsibly and build credit at an early age.
One of the biggest hurdles for first-time homebuyers is the down payment. Generally lenders want you to pay 20% of the total mortgage up front as your downpayment. You can get a mortgage for a smaller down payment, as low as 5% down, but your lender will require you take out mortgage default insurance (through CMHC, Genworth or Canada Guaranty) to cover the greater perceived risk. This will add to your home’s monthly carrying costs.
Is This the Right Time to Buy?
That’s the big question, isn’t it? Unless you somehow already own a home through divine providence, you’ve probably been paying rent and changing residences every couple of years or so.
Take into account these factors when you’re considering a mortgage:
Where do you think you’ll be in the next 5 or 10 years? A mortgage is a long-term commitment, typically spread out over 25 years. If you think you’ll move frequently for work or plan to relocate in the next few years, you probably don’t want to take out a mortgage just yet. One reason is the closing costs you have to pay each time you buy a home; you don’t want to keep accumulating those if you can avoid it.
How much real estate can you afford? What would you do if you lost your job or had to take many weeks off due to a medical emergency? Would you be able to find another job or get support from your spouse’s income? Can you handle monthly mortgage payments on top of other bills and student loans?
What are your long-term goals? If you hope to raise kids in your future home, check out the area for its schools, crime rates and extracurricular activities. If you’re buying a home as an investment to sell in a few years, is the area growing so that the value of the home is likely to increase?
Answering the questions above will help you determine which type of mortgage is best for you:
A fixed mortgage rate is one in which the interest rate of the mortgage stays the same for the life of the loan. The current real estate climate makes this is a very attractive option (more on this in a moment).
A variable mortgage rate is one where the interest rate changes at a set period according to a specified formula, generally tied to the Banks Prime (which is tied to the Bank of Canada’s prime rate). Some years you might pay less interest, in others you might pay more. These generally offer lower interest rates than fixed mortgages and might be beneficial if you plan to sell the home relatively soon. Penalties for variable mortgage rates are almost always better.
The Bottom Line
Home ownership can seem like a daunting prospect, especially as you’re starting your career and still paying off your student loans. Think long and hard before you take out a mortgage; it’s a serious financial commitment that will follow you until you either sell the property or pay it off decades from now.
But if you’re ready to stay in one place for a while, buying a the right home can be financially and emotionally rewarding.
For more information contact us at 1-888-882-0786 to discuss if home ownership is right for you!
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