Being a financially savvy homeowner

Before you start thinking about the kind of home you want and where you want to live, it's a good idea to take a financial inventory.

This stage of the process - saving, budgeting, planning - is not as exciting as choosing a neighbourhood and looking at homes. But it will put you in the best position when it comes time to talk mortgages. Click below for more information.

 Preparing to buy a home

   If you are already a homeowner, click through the links below for tips on how to manage your prized asset in a financially smart manner.

 Doing renovations the right way
 Refinancing your mortgage
 Using your home equity for other goals


Preparing to buy a home

   For most of us, the first step in the home-buying process is to ramp up savings - the more you can put towards a down payment, the less interest you'll pay and the more you may save on mortgage insurance.

    Paying down debt and building a good credit history are also part of this process. The better your credit history, the more leverage you'll have when negotiating a mortgage. Last month's Vault article, "Managing credit now brings future financial rewards," offers valuable suggestions on how to build a good credit rating and reduce unnecessary debt.

Now, how much home can I afford?
Our convenient mortgage calculator will give you a good idea of how large a mortgage you can qualify for. The calculations are based on some traditional debt-to-income principles:

   The first lending principle states that your monthly housing costs - including mortgage payments, insurance, property taxes, applicable condo fees - should not exceed 32% of your family's gross monthly income. This is also known as the Gross Debt Service Ratio (GDSR) calculation.

   The second lending principle states that monthly housing costs plus all other debt (loans, credit cards, lease payments) should not exceed 40% of your family's gross monthly income. This is also known as the Total Debt Service Ratio (TDSR) calculation.


Pre-approved mortgages

   Once you've set your savings plan, and determined how much home you can afford, getting pre-approval is the next step. Having a pre-approved mortgage tells potential sellers that you are serious about entering the housing market.

   A pre-approved mortgage qualifies you for mortgage financing at an interest rate that is typically guaranteed for 60 days from the time that financing is arranged.

   To prepare yourself for the kinds of questions that mortgage lenders will be asking, have a look at Scotiabank's "Borrowing tips."

   Fast fact: You can purchase a home with as little as 5% down. However, if your down payment is less than 25% of the home's appraised value or its purchase price, you are required by law to purchase mortgage insurance.

Additional resources:
What to look for in a home and neighbourhood

• Web site.
• Ready to start your search in earnest? Take along the handy
• Check out the Canadian Mortgage and Housing Corporation's site for valuable tips on what to look for.

Paying for the renovations
If you are making modest renovations on your own, paying for the materials with your credit card may make sense - provided you pay your balance monthly.

   For more extensive work, resist the temptation to draw cash advances on your cards. A personal line of credit is a much more cost-effective way to get the cash you need. Drawing on a personal line of credit has another advantage: you pay interest only on the amount borrowed. This can be particularly useful when paying a contractor in stages.

   For major renovations, you may want to tap into the existing value of your home. See below, Using your home equity for other goals, for more information.

Additional resources
The CMHC web site has a comprehensive section on home renovations. Go to the "Building, renovating, and maintaining" section at: www.cmhc-schl.gc.ca/en/burema/index.cfm

Refinancing your mortgage

With today's low interest rates, many homeowners are taking a hard look at the financing of their most important asset. Before you decide to renegotiate your mortgage, carefully consider the potential costs involved.

   If your mortgage is closed (that is, you can't pay it ahead of schedule), you may face a penalty when you renegotiate. It may still be worthwhile to refinance. The key is to determine whether the potential interest-rate savings outweigh the penalty.

   The rough guideline is that refinancing makes financial sense if the refinancing rate is at least two percentage points below your current rate.
   Your mortgage specialist can help you crunch the numbers.

Using your home equity for other goals

Your home equity is the current value of your home less what you still owe on it. For example, if your home is valued at $250,000 and your outstanding mortgage is $120,000, your equity is $130,000.

   The equity you have built in your home can be a valuable source of financing. You can borrow against it to pay for your child's tuition, purchase an investment portfolio, pay for large-scale home renovations, or buy an income property. In some instances, the interest may even be tax-deductible.

   Your tax advisor and mortgage specialist can help you decide whether it makes financial sense to tap into your home's equity.