While finding the perfect home may not always be challenging for Glenrosa buyers, the in-depth processes necessary to complete a sale transaction usually are somewhat formidable. Some of the most misunderstood aspects of buying a home involve finances—particularly within the realm of choosing the right kind of mortgage and calculating interest costs over the course of the loan. With this in mind, we offer a guide to understanding more about mortgage loans and interest rates in Canada.
Mortgage Payment and Interest Considerations
Most buyers are aware of the basic concept of mortgages, even if they are first-time investors. Buyers typically offer a 20% down payment towards the purchase and a financial institution covers the remainder in the form of a mortgage loan. When comparing lenders and mortgage options, one may pay careful attention to exactly how the mortgage's interest will be accrued and paid during the loan duration. This is where things can get a bit tricky, as there are two primary types of mortgages—fixed and variable.
Adjustable-rate mortgages (ARMs) have variable interest periods that may rise or fall, resulting in fluctuating interest rates. In contrast, fixed-rate mortgage payments typically remain consistent throughout the loan period. The majority of mortgages today are fully amortized, which means that borrower's making timely payments according to the amortization schedule will have their home paid off by the set loan ending date.
Amortization differs between ARMs and fixed-rate mortgages. Fixed-rate loans with fully amortized payments are considered an equal dollar amount, whereas with adjustable-rate loans, fully amortizing payments will change along with interest rate changes. Regardless of how a home is financed, it's important to remember that lower payments often mean paying longer, so buyers can ultimately end up paying much more in interest alone for a home with a 30-year mortgage versus shorter term options.
Is Mortgage Interest Tax Deductible?
While the rules for tax deductions are different for homeowners in Canada than one might be accustomed to in the United States, there are a few tax laws that can be taken advantage of within certain limitations. As a general rule, one cannot deduct mortgage interest for a private or principal residence. Should the home be sold, owners will qualify for a tax exemption on all capital gains from the sale. However, those interested in investing or building a portfolio can actually use a strategy to enjoy greater access to mortgage interest deductions.
Here's how the financial tax pros explain it in laymen's terms. Essentially, every mortgage payment made is partially applied to both interest and the principal balance. This increases the owner's equity in the abode, which can be borrowed against. With a bit of savvy guidance, one can often get a better rate on such loans as opposed to an unsecured loan.
About tax deductions, if the funds borrowed against the home's equity are then utilized to buy an income-producing investment of sorts, interest on that loan can become tax deductible. Due to the complex nature of investment portfolios, deductions and tax laws, it's recommended to seek the assistance of a financial professional who knows the Canadian tax code like clockwork.
Buying Now Versus Buying Later
Some buyers are stuck on getting the absolute lowest interest rates before buying, and others may also be trying to get a lot of home for less money at the same time. While the strength of the real estate market and the bottom line prices on homes typically will vary throughout the year, there may not be any benefit for waiting around for lower rates or desperate sellers.
Oftentimes, any savings reaped from buying a home after a price drop are eaten up with higher interests rates. Because interest rates can be unpredictable, those looking for a reliable, set mortgage payment might do themselves a favour by buying at a higher price with a lower interest rate. This is particularly true for those looking towards having long-term loans of 25-30 years.
Sitting down with a real estate professional and/or a financial planner can show buyers that this decision alone can equate to tens of thousands of dollars on even a modest home investment. In some cases with higher-end homes, one could potentially lose between $60,000-$100,000 or more if interest rates hike a mere 2%! Determining the right time to buy may ultimately boil down to making a decision based on financial savvy rather than personal preference.
Considering Buying a Home in Canada?
An inexperienced home buyer will benefit greatly by employing the assistance of real estate and financial tax professionals. Those who try to navigate the complexities of mortgages, interest rates, amortizations and tax laws might find themselves going underwater on their loan, or even worse—losing their investment entirely. Be sure to take advantage of local resources and professionals in the locality where you plan to buy a home.