How to navigate your first mortgage

Buying your first home is an exciting milestone. You’ll have a place to call your own, where you can put down roots, build traditions, and make memories. But first, you have to find the best way to pay. Unless you can buy a home in cash, you’ll typically need a mortgage, which is a type of home loan. If you’re a first-time homebuyer, you may not know where to start. The following guide can help you break down the process and guide you on the path toward home ownership.

Review your finances

Before you can start shopping around for a mortgage, you should assess your finances. Two factors are crucial in determining your mortgage options and interest rates: your credit score and debt-to-income ratio. Good financial hygiene, like paying your bills on time each month, can help you build a strong credit score.

Your debt-to-income ratio, on the other hand, measures your total monthly debt payments—including loans and credit card balances—compared to your total monthly income. You can improve your debt-to-income ratio by paying down debts or increasing your income.

Set your budget

Your financial circumstances should shape your budget. Consider both your upfront expenses and your long-term costs. How much are you comfortable putting aside for your down payment and fees? What regular mortgage payments can you afford with your current income? These questions can help you determine your loan type and how much money to borrow.

Start saving for your down payment 

While lenders may have different requirements, it’s often a good idea to spend more on your down payment if you can. It is often recommended to put down 20% of your total loan amount, though certain types of insured mortgages may have different requirements, allowing for a smaller down payment. A bigger down payment means lower mortgage payments and less interest paid over the lifetime of the mortgage.

The right savings plan for you depends on your financial circumstances. For example, you may want to cut out extra expenses, like vacations or concerts, or put a portion of each paycheck into a high-interest savings account. Whatever your approach, starting early is vital.

Compare your options

In Canada, you can get a mortgage from banks, credit unions, and specialized mortgage lenders. Compare the following factors to find the best fit.

Interest rates

Interest is the amount you pay to borrow money, expressed as a percentage of your loan amount. Your mortgage may have a fixed interest rate, which remains the same throughout your term, or a variable interest rate, which fluctuates with market conditions.

Terms and amortization periods

Your loan term is the length of your specific mortgage agreement. Your amortization period is the total amount of time it takes to repay your loan. To choose a term, consider how long you’d like to lock in your rates. If you’re pleased with your agreement, you may want a longer term.

The right amortization period depends on whether you prioritize long-term or short-term savings. A shorter amortization period means you’ll repay your mortgage sooner, saving on interest. However, you’ll likely have higher payments. With a longer amortization period, you can minimize your payments, but your loan will have time to accrue more interest.

Fees

When obtaining a mortgage, you may encounter various fees, such as appraisal fees, legal fees, and closing costs. These fees can vary, so understanding any potential additional costs ensures you have a clear picture of the overall expenses involved, helping you avoid unexpected surprises.

See if you’re pre-approved

Mortgage pre-approval helps you find out the loan amount and terms you qualify for with a lender. Many lenders also let you lock in a pre-approved interest rate, which they’ll hold for a certain period—typically 100 to 150 days.

Pre-approval is different from pre-qualification. Pre-qualification gives you a quick estimate of how much you might be able to borrow, while pre-approval is more detailed and reliable. To get pre-approved, you’ll likely need to provide thorough financial information, like proof of income, credit history, and other documents.

Apply for a mortgage

Finally, after you’ve saved, done your homework, and compared your options, you can apply for your loan. Mortgage applications often require extensive information and supporting documentation. Be ready to provide identifying documents like your driver’s license, pay stubs or other proof of employment, tax documents, bank statements, proof of your assets or investments, confirmation of your down payment, and information about the home you’re buying.

It may take anywhere from a few hours to a few weeks for the lender to assess your application, depending on your loan details and financial situation. If your application is declined, you may have an opportunity to negotiate new terms.

Finalize your mortgage

Once a financial institution approves your application and offers you a loan, you can close on your mortgage. Your lender can answer any questions you have along the way. After you’ve finished the paperwork and secured your loan, it’s time to move into your new home.

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