If you’re planning on buying a home, you have probably become an investigator.  You’ve looked carefully into the neighbourhood you would like to live in, the style of house you’d like, the number of bedrooms you’ll need, and a host of other lifestyle considerations large and small that will determine your final choice – including a price you can afford, of course.

And speaking of price, if you’re like the vast majority of Canadians, you’ll need a mortgage to finance your new home purchase.  And here’s where it can pay to be an investigator, too.  To begin with, you should look at your mortgage as both a debt and an investment.  It’s a debt that you must pay, but it’s also an investment through which you add to the equity in your home with each payment – and some day, that debt will be paid off and that home (and its total worth) will be all yours. Here are some planning tips to help ensure you mortgage your home and not your financial future:

How much home can you really afford? When you’re investigating the maximum home price you can afford, there is much more to think about than just the “sticker” price. 

·         Be sure that your monthly housing costs – this includes your mortgage principal payments plus interest, taxes, heating expenses, and condominium fees (if applicable) – are no more than 32 per cent of your household’s gross monthly income.

·         Be sure that your monthly debt load – this includes your monthly housing costs plus all other loans or required monthly payments, including car loans and credit card payments – does not exceed 40 per cent of your household’s gross monthly income.

·         Be prepared for extra expenses such as GST and other provincial sales taxes (where applicable), appraisal fees, property tax, survey fees, property insurance, land transfer tax, legal fees, service charges, home inspection fees, mortgage loan insurance premium and application fee, moving costs and, perhaps, immediate renovation and repair expenses.

What type of mortgage is best? The term of a mortgage, the interest rate, the amortization period and the payment frequency all have a direct impact on the size of your monthly payments and the overall cost of your mortgage. As a general rule a shorter amortization period is financially beneficial, as is the flexibility to increase your payment frequency (say from monthly to bi-weekly) or to make yearly lump sum payments without penalty.

How much down payment do you need? The larger your down payment, the lower your monthly mortgage payment can be, and the sooner you’ll be able to pay off your mortgage.  The “traditional” down payment is 25 per cent of the cost of the home, but you can get a “high-ratio” mortgage that allows you put down as little as 5 per cent (although you’ll need mortgage loan insurance for this type of mortgage).

If you’re buying a home for the first time, you can take advantage of the Home Buyers Plan (HBP) that allows you to withdraw up to $20,000 from your RRSP without immediate tax to use as a down payment or for other home expenses. If there are joint applicants, each borrower can withdraw up to $20,000.  You must repay this withdrawal in annual instalments within 15 years to avoid being taxed on it.

Get your savings working for you

To further simplify the management of your finances, some financial institutions offer a “single account solution”, through which you can use your home equity to consolidate all your financing in one account that can save on interest charges while enjoying repayment and borrowing flexibility.  This type of account typically includes mortgage financing, a line of credit, immediate access to cash by cheque, automated banking machine (ABM), Interac™ or direct banking, and pays interest on the credit balances.  It may also have an exemption from most banking charges and management fees, and the flexibility to quickly seize investment opportunities as they arise.

Most Canadians want a mortgage they can payoff as quickly as possible.  But doing that at the expense of other priorities like building retirement savings or protecting their families from the risk of financial hardship is shortsighted.  Your financial advisor can help ensure your mortgage plan achieves the delicate balance between paying down your mortgage as efficiently as possible, while taking care of other, equally important financial matters.