November 16, 2016 / Published 7:00 AM EST / Alyssa Charles

Financial literacy 101: Home ownership

There’s a lot to wrap your head around when it comes to your finances, but a good understanding of some basic financial concepts can really take you a long way. November is financial literacy month in Canada and although Canadians received high scores when their financial knowledge was tested, many still lack confidence in their skills. In part two of our three-part series on financial literacy, we asked Manulife Mortgage Specialists, Carla Noble and Sean Connolly to weigh in on some frequently asked home ownership questions.

What are some of the things that people overlook when getting a mortgage?

You may spend so much time thinking “how large of a mortgage can I afford?” or “what will my mortgage payments be?” that you may overlook many of other costs that come with actually having a mortgage. Here are some of the additional costs you can expect.

  • Mortgage insurance – calculated as a percentage of your loan and is based on the size of your down payment. Use this calculator to find out how much your mortgage insurance will be.
  • Home insurance – cost depends on where you live but on average Canadians pay $840 annually
  • Home inspection – plan on spending between $200 to $400
  • Property survey – plan on spending between $750 to $1,500
  • Legal costs – costs between $1,500 to $2,000 and $200- to $300 for optional title insurance
  • Land transfer tax – cost depends on where you live and is calculated based on a percentage of property value using asking price as a close estimate. Use this calculator to find out how much your land transfer tax will be
  • Condo fees – cost is calculated based on square feet and can cost upwards of $0.50/sq ft.
  • Replacements and repairs – costs vary but it’s a good idea to budget $1000 to $2000
  • Moving – cost varies but budget at least $1,500 if you plan on hiring a moving company

What’s the difference between variable and fixed mortgages? How do I know which one to pick?

“A variable mortgage has a variable interest rate that fluctuates along with the prime rate, and is generally an open term (there is a 5 year closed variable term that allows you to have the flexibility of a variable product at a lower rate, there is a penalty to pay this out prior to the end of term, but you can fix the rate into a 3 year fixed term or greater at no cost)”, Carla explains. “A fixed rate product will lock your rate in for the term chosen and there is a penalty to break this term prior to maturity.”

The best option really depends on the person. “If you are someone that worries about rates going up and will lose sleep over that, then you are better to lock into a fixed term so that you know what rate you will have for the next 3, 4, 5, 7, 10 years, whichever term you lock into”, says Carla. “If you are a bit of a gambler and want to take a risk at going for a potentially lower variable rate, not knowing if it will go up, or want to have an open term if you are uncertain of your future plans and do not want to have to pay a penalty in the future, then a variable is the better option.”

How can I pay off my mortgage faster?

One of the easiest ways to pay off your mortgage faster is by simply living within your means. “Don’t rely on your line of credit for everyday expenses,” says Sean, “otherwise you’ll never pay it off.” If your goal is to pay off your mortgage quickly, you’ll have to refrain from frivolous spending and contribute extra money towards your mortgage. An easy way contribute more is by rounding your payments up suggests Carla. For example, on a $100,000 mortgage over 25 years, if your biweekly payment is $215, and you round up to $220, this will save you about $1540 in interest costs and 1 year off your mortgage amortization (based on a 5 year fixed term at 2.89%). “This small change can make a big difference” she says. You can also pay off your mortgage faster with a Manulife One account.

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