Signing the agreement to secure your first home loan can be more than a little nerve wracking. With the average Canadian house price hovering at around $300,000, the amount of most first home loans is well over $200,000 – a significant sum, to say the least.
To keep costs manageable over the short and long term, it is essential to shop around for the most favorable mortgage rates and terms, especially when buying your first home. When looking for home financing, it is often helpful to evaluate not only your current finances but also your risk tolerance.
Why Risk Tolerance Matters
There is a bewildering array of first home loans on the market. To help narrow your focus, it is helpful to know what you can afford to pay for your home.
An honest, detailed assessment of your current financial situation can tell you what kind of monthly payment you can afford, based on your income, your down payment and any other outstanding loans you might have.
You should then use this assessment to determine how comfortable you are with risk. Given your current situation, are you comfortable taking a chance with interest rates, or does watching the ups and downs of these rates make you queasy? Knowing the answer to that question before you enter the first home loans market will help you make the right financial choice.
Assessing Risk
Knowing what kind of loan is best suited to your lifestyle before you start shopping will be helpful in evaluating the many types of first home loans on offer.
Borrowers tend to fall into one of three categories of risk tolerance – high, medium, and low. The outline below discusses the type of first home loans that suit each kind of borrower.
• Low – Many first time buyers fit into this category. Having made the first big investment of their lives, they seek the security of consistent monthly payments. They are not typically concerned with pre paying their mortgage, so a closed, fixed rate mortgage is often the best choice. If you fall into this category, you may want to consider first home loans with some flexibility built in. Some mortgage products allow for extra lump sum payments for times when you have additional cash, like a large tax return. You may want to verify that you can make payments like this without penalty.
• Medium – These borrowers tend to play with rates a little. They want to lock in to a good rate, but not pay penalties to make changes. They also want the flexibility to accelerate their payments when their financial situation changes. They often require specialized mortgages negotiated with their financial institution or mortgage broker.
• High – Willing to bet on interest rates, these borrowers seek the flexibility of short term, open mortgages. These buyers are often planning to sell in the near future, or are willing to refinance to get a lower rate.
With so many options for first home loans out there, you are sure to find the one that suits your level of risk tolerance and your overall financial goals.
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