By Adrian Mastracci
Portfolio Manager – KCM Wealth Management

First time home buyers develop many apprehensions, typically along the lines of: Am I doing the right thing? Can I afford it? How will I finance the home? What about the interest rate?

Today’s times can be intimidating. Mortgage rates are up and real estate prices keep rising. Nonetheless, while first-time buyers might not be able to remove all of the risks and anxieties from the equation, financial considerations and emotions can still happily coexist.

If you are a first-time home buyer, here are some tips to help you through the process:

1. The first question is often whether it makes more sense to rent or buy. Generally, it’s a matter of flexibility. Do you want to move without all the fanfare, or do you want to build your own personal nest? While it exposes you to the whims of the landlord, renting is often a better financial value. I caution not to view the purchase of a home as an investment. It’s more about a personal decision. If it turns out as an investment, it’s a bonus.
2. One smart strategy is to shop for a mortgage pre-approval because rates are typically held for 90 to 120 days. That protects you if rates rise and gives you time to find a suitable home.
3. RRSP withdrawals up to $20,000 per spouse can be used to reduce your mortgage. This money will need to be repaid over 15 years, however. Otherwise it becomes taxable income.
4. Try to stay within conventional first mortgage terms—i.e. a down payment of 20% or more. That avoids the additional fees and complications of high-ratio mortgages.
5. A frequent question is whether to get an open or closed mortgage. Remember, even closed mortgages generally allow 10-20% annual prepayments without penalty.  Plus you typically have the privilege to increase or double up your monthly payments.
6. Forget investing outside your RRSP if your home mortgage is still outstanding, particularly, if the interest is not deductible. The best risk-free investment is mortgage repayment. Consider this. A 5.75% interest rate translates to an 8.2% risk-free return if you’re in the 30% tax bracket. Once the mortgage is repaid, then you can redirect your payments towards investing.
7. People worry about how to protect themselves if the unthinkable happens, like losing a job or the ability to work. One smart solution is to create an emergency fund covering three to six months of expenses. Hold it in a risk-free savings account at an institution where you have no loans or credit cards.
8. Become aware of the impact of decreasing your amortization. The example below shows how someone with a $240,000 mortgage can save over $92,800 by going from a 25-year to a 15-year amortization.

Sample condominium purchase

Purchase price: $300,000

Down payment: $60,000 (20%)

Mortgage financing: $240,000

Mortgage rate: 5.75% (5-year, closed)

Mortgage payment/month for various amortizations:

35-yr: $1,318
30-yr: $1,390
25-yr: $1,500
20-yr: $1,675
15-yr: $1,985

Total interest paid at 5.75% during full amortization:

35-yr: $313,410
30-yr: $260,500
25-yr: $210,015
20-yr: $162,180
15-yr: $117,170

Income required: $65,000 to $89,000*

* Based on a gross debt service (GDS) ratio of 30%. (i.e.  30% of pretax income goes to principal, interest, taxes, and heat)

I maintain that mortgage amortizations longer than 25 years bring new meaning to home ownership. Or, more to the point, I think of them as “long-term renting” from the mortgage lenders.

Moreover, I’m firmly in the camp of repaying the non-deductible mortgage as soon as possible. Then the borrower can devote full attention to accumulating an investment portfolio.

The key is to always design a suitable game plan. It helps tremendously in reaching your personal goals. There is a lot at stake. Your comments are welcome and I am always available for a discussion.

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Adrian Mastracci is private-client portfolio manager at KCM Wealth Management Inc. You can visit him at www.kcmwealth.com or email him at kcm@kcmwealth.com. Please note: The information provided is for general informational purposes only. Please consult a qualified financial advisor before acting on this information.