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While a slowing real estate market and low interest rates have created what many are calling a buyer's market, you may still be uncertain about whether this is the right time to take the plunge into home ownership.
In any economy, your decision should be based on a realistic review of your financial circumstances and goals. It's important to know how much you can comfortably afford to pay for a home, without feeling overextended. As a mortgage lender, we provide expert advice that helps you understand your options, to decide whether owning is the best solution for you.
Consider your down payment options
When you purchase and finance a home, the minimum down payment required is 5% of the purchase price. This type of mortgage is classified as a low down payment mortgage and requires mortgage default insurance which, along with applicable provincial sales tax, can be paid up front or added to the amount you borrow.
If you have the funds available to put down 20% or more, you'll qualify for a conventional mortgage or the RBC Homeline Plan® account, which means you won't incur the additional cost of mortgage default insurance.
You may wish to consider tapping into your registered Retirement Savings Plan (RSP) as a down payment source. The federal government's Home Buyers' Plan (HBP) allows first-time buyers and their partners to borrow up to $25,000 ($50,000 for couples) from their RSP tax-free, provided the money is repaid to the plan over the next 15 years.
Most importantly, the larger your down payment, the lower your monthly mortgage payments and the lower your interest costs.
Know what you can afford
To make a realistic assessment, you'll need to consider many factors, including your income, financial obligations and lifestyle.
If you want an idea of what that purchase price might look like, take advantage of our online calculator, How Much Can You Afford. This tool lets you see how different interest rates and amortization periods will affect your payments. An RBC® Mortgage Specialist can also work with you to figure out the best solution for you, based on your financial needs.
Look beyond interest rates
A low rate helps you save money over the term of your mortgage and plays a key role in affordability. But while rates are important, you should also consider the mortgage type, payment structure, terms and flexibility. All these factors together can have a huge impact on how much you pay for your home in the long run. Here are some things that will be part of your decision:
- Variable vs. fixed rates. A variable rate mortgage fluctuates with the Prime rate, which allows you to take advantage of changing interest rates. When rates go down, more of your payment goes to pay the principal and less to interest, enabling you to pay off your mortgage sooner. When rates go up, the reverse happens: less of your payment goes toward the principal and more to interest, extending the time it takes to pay off your mortgage. A fixed rate mortgage locks in your interest rate for the term of your mortgage, which can provide the peace of mind of knowing exactly how much principal and interest you'll pay for the entire term, as well as what your mortgage balance will be at the end of term. Or you can choose both fixed and variable rate mortgages. If you have a down payment of at least 20%, you can diversify your mortgage and enjoy the advantages of both variable and fixed rates with the RBC Homeline Plan account.
- Payment schedule. Making more frequent payments is one of the ways you can pay off your mortgage sooner and save on interest costs. At RBC Royal Bank®, you have the choice of weekly, biweekly, semi-monthly or monthly payments. Weekly and biweekly payments can be accelerated, which means that you make a slightly larger payment each time, which amounts to the equivalent of one extra monthly payment a year.
- Amortization. The amortization period is the number of years it will take to pay off your mortgage in full. Amortization periods can range from five to 35 years. The typical, and most recommended, is 25 years. Remember, the shorter the amortization period, the higher the mortgage payment, but the more you'll save in interest costs over time. So, while an amortization period of 30 or 35 years can make a home more affordable by keeping monthly payments lower, it can increase your interest costs by as much as 50% over the life of your mortgage compared to a 25-year amortization. You can re-evaluate your amortization period each time you renew your mortgage.
- Payment options. To address the realities of homeownership at different life stages and through changing personal situations, we have developed flexible payment options, like Double-Up®, to pay your mortgage off faster, or Skip-a-Payment* , in case you need it.
Home ownership that feels right
Making a sound home-buying decision means considering your housing needs, financial situation and lifestyle goals, and choosing the right mortgage option and terms for you. RBC Mortgage Specialists are here to help, so you'll be comfortable making this important decision and feel secure about your future.
Whether you want to learn more about your options or start the pre-approval process to understand how much you can afford, contact an RBC Mobile Mortgage Specialist today, visit your local branch or call 1-866-220-7530.
*Interest accrues during the skipped period and is added to the principal balance of the mortgage. Terms and conditions apply. See www.rbcroyalbank.com/skipapayment for details.
Personal lending products and residential mortgages are offered by Royal Bank of Canada and are subject to its standard lending criteria.
® Registered trademarks of Royal Bank of Canada. RBC and Royal Bank are registered trademarks of Royal Bank of Canada.
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