Let's get one thing straight. You want to borrow as little as possible, at the lowest interest rate possible, and you want to pay it off as quickly as possible. Apply these cardinal rules of borrowing to buy a condominium home, and all the rest will make sense.
So, you're shopping for a two-bedroom condo home in a Canadian city, and think you'd better stick to a price ceiling of $300,000. Your first stop should be to call two lenders, preferably one a bank, the other a mortgage broker, and let them tell you 1/ what interest rate they'd charge you and, 2/ how much they'd loan you to buy your first home. You'll likely find you can borrow more than you thought, and one party will offer a lower rate than the other. Get those points in writing from the party that did better than the other. But don't spend more just because a lender offers more. Stick to your personal spending ceiling, and let a condo-specialist Realtor show you what that will buy. If it's not good enough, only then consider raising your price ceiling.
Keep in mind that if you're putting down less than 20% of the purchase price (yes, that's a lot of money), you'll need to pay Canada's mortgage insurance agency, CMHC, a sliding-scale fee. Otherwise the lender won't extend you the loan, fearing you might not repay. With the insurance, lenders will come up with as much as 95% of the purchase price. But wait, with only 5% down, CMHC charges (at the time writing this) 3.75% of the borrowed amount, whereas if you put down 10%, CMHC's insurance fee drops to 2.5% of the borrowed amount. You can save more by putting down even more, but the greatest CMHC insurance fee saving is between 5% down and 10% down. If you can, plunk down the 10%. Yes, check with Mom, Dad and Grandma to see if they'll help.
Reality, though, dictates that most of us don't have $30,000 to plunk down. Most Canadians simply have to make do with 5% down, roll the 3.75% CMHC fee into the mortgage, and get on with life. Resist taking a "cash back" mortgage, which will increase your interest rate. Avoid so-called "zero down" mortgages, which are not illegal, but likely should be. Zero down is rare, so let's not take time exploring that here, but be warned. If you have absolutely no money for a down payment, it would be wise not to buy until you do.
Those with little cash for a down payment likely qualify to borrow up to $20,000 from their RRSP, repayable over 15 years in equal annual installments. There's also a neat trick in which you can borrow money for an RRSP contribution, creating an income tax refund. That refund becomes part of your down payment. Then you collapse the RRSP to pay off the loan. After two years, you begin to repay yourself the RRSP savings over 15 years. If you fail to make the repayments, however, that 1/15 each year is added to your taxable income. Use these devices if you must, but avoid them if you can. Disciplined saving is, sad to say, the way most of us accomplish home ownership. Scrape together all that you can, so you can get past the down payment question and go on with discussing mortgage options.
Mortgage assumptions are possible, but at a time of low or declining rates, only consider taking on someone else's mortgage if you know how it benefits you. Some questions: Why is the seller inviting you to assume their mortgage? How does the interest rate compare to what you can get down the street? Who saves how much in pay-out penalty or new-mortgage preparation costs? Let me be direct; an experienced Realtor can keep you out of trouble in this field.
Sellers sometimes invite assumption of their mortgage to avoid paying a penalty to the lender. In other instances, sellers are charging a premium on the property's value. They are willing to sell to someone who has bad credit, and who simply can't qualify for their own mortgage. That's a dangerous game for sellers, but some people do well playing it. As a buyer, you should avoid an over-priced property, but shop the entire market, armed with your own borrowing ability. If you're targeting a good condo home, priced right, you might negotiate assumption of the mortgage to mutual benefit. You don't have to pay to draft and register a new mortgage, while the seller avoids a pay-out penalty. In that case, everyone can win.
Calgary Condominium Directory
