3 mortgage essentials for rookie homebuyers

There are three key home financing decisions for first-time buyers to consider: down payment, mortgage options and accelerated payments, says TD.

“Prospective buyers [must] understand home financing options in order to manage their overall monthly costs, assess the flexibility they will need, and help plan for the future,” says Farhaneh Haque, director of mortgage advice at TD Canada Trust.

Read: Housing affordability improves

Here are some tips for your clients.

1. Down payment: how much?

Homebuyers with a down payment that’s more than 20% don’t have to obtain mortgage default insurance — the premium that’s calculated as a percentage of the mortgage and is paid upfront or added to the principal. So, the larger the mortgage, the higher the monthly payments. Eliminating or decreasing this premium can result in savings.

Read: Qualifying for the first-time homebuyers tax credit

“Homebuyers can also consider withdrawing up to $25,000 from an RRSP to put towards the down payment on a first home,” says Haque. “While this can be a huge help upfront, among other conditions it must be repaid within 15 years, so make sure to factor in the repayment schedule into the monthly budget.”

2. Mortgage options: fixed or variable, open or closed?

With a fixed rate, the interest rate and monthly payments do not change throughout the term of the mortgage and clients will know how much will be paid off at the end. With a variable rate, the interest rate may fluctuate. If rates go down, more of the monthly payment is applied to the principal, helping to pay it off faster. If interest rates rise, more of the monthly payment is applied toward interest. And buyers may have to revise their payment arrangements.

Read: Say goodbye to mortgage wars Meanwhile, with a closed mortgage a homeowner agrees to a term anywhere from six months to 10 years. There are conditions that limit when a closed mortgage can be renegotiated or refinanced and there may be a prepayment charge for doing so. Often negotiated for a shorter term, an open mortgage can be paid off at any time without prepayment charges. While it offers greater flexibility in terms of repayment, the interest rate for an open mortgage may be higher than for a closed one.

3. Accelerated payments

Homebuyers can pay off their mortgage faster and save money on interest by choosing a shorter amortization period or setting up an accelerated weekly or biweekly payment schedule instead of monthly payments.

Read: Steady gains in housing market

Prepayments are another way for homebuyers to pay their mortgages faster without locking into a payment schedule.

“There are ongoing expenses that come with homeownership such as property taxes, utility bills and maintenance,” warns Haque. “Homebuyers [should] budget for these expenses when deciding on the mortgage payment schedule they can afford.”