"The world of mortgages is changing"

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Once you begin to think about buying a home, the amount of information available can feel overwhelming. After reading the September 2010 issue from Media Planet dedicated to mortgages, I believe this article is an excellent beginning point of reference for those new to the mortgage process. Please enjoy, and if you like this article, I highly recommend checking out the full "Mortgages" issue.

"Buying your first home: down payment options and pre-approvals" 

As a first-time home buyer, you probably have many questions, including the right down payment amount and whether you’ll be approved for a mortgage.  One of the first steps in buying your home is obtaining a pre-approved mortgage. A preapproval will demonstrate to sellers and real estate agents that you are a serious buyer, which can help in your negotiations.  

Another advantage of having a preapproval is that you will know how much you can realistically afford and what your payments will be before you start looking at homes. This also allows you to lock in your interest rate with a 90 day guarantee which is a great feature in a rising interest rate period.

Homebuyers will generally need to have an appraisal of the property they are purchasing in order to obtain a firm approval of their purchase. When it comes to deciding on the right down payment amount, there are a number of options to consider:

Conventional Mortgage

A conventional mortgage requires a down payment of at least 20% and is offered on both a fixed or variable interest rate mortgage. Conventional mortgages have the lowest carrying costs because they do not have to be insured against default. So while it may take longer to accumulate this type of down payment, it will also save on mortgage costs over the long run. 

Low Down payment Insured Mortgage

Most lenders now offer insured mortgages for both new and resale homes with lower down payment requirements than conventional mortgages-as low as 5%. Low down payment mortgages must be insured to cover potential default of payment; as a result, their carrying costs are higher than a conventional mortgage because they include the insurance premium.

Using Your RRSP as a Down Payment

Under the federal government’s Home Buyer’s Plan, first-time home buyers are eligible to use up to $25,000 in RRSP savings per person ($50,000 for couples) for a down payment on a home. The withdrawal is not taxable as long as you repay it within a 15-year period. To qualify, the RRSP funds you plan to use must have been in your RRSP for at least 90 days.

Bernice Dunsby

Director, Home Financing, RBC

editorial@mediaplanet.com