Proper Budgeting On a New Mortgage

Acquiring a new property is one of the most exciting investments you can make. You might be purchasing a new home for the first time, eager to set up roots and start a family. Or perhaps be in the midst of a downsize, excited to live in a new neighborhood and enjoy the fruits of your labor. If you are in business, wanting to rent out your new property to residential or commercial tenants. 

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Budgeting for your New Mortgage

No matter who you are, no matter what your reasons for getting a new property, you’re probably going to need a mortgage because few people have hundreds of thousands (or millions) of dollars in liquid cash. Before you sign your mortgage, you’ll need to crunch some numbers. Be sure to search for the correct region. For example, in France, you will want an all things interest only french mortgage. This online mortgage calculator will involve looking at how much you have to pay towards the mortgage each month, how much you’ll be taxed on the property, and what rebates you might be able to look forward to.

Before we get into the details, it’s worth noting that you’ll need a team of professionals to help you assess what property is right for you. Your mortgage broker is a specialist in the matter; we’ll help you find the best mortgage for the property you want. You might also want to employ a local lawyer as they’ll help ensure that all of the paperwork is in order and that the transaction is legal. You might also enlist the help of a CPA accountant – they can help you assess your own financial health and guide you towards making a purchase that suits your financial goals and needs.

How Much Should You Spend?

Budgeting for your mortgage has to involve a calculation of how much you should spend. There’s a rule of thumb that’s often touted – 28% of your monthly income can go towards housing costs. That includes heating, cooling, repairs, property taxes and the like. The less you spend on housing per month, the more secure your finances will be, but the more you’re willing to spend, the more valuable your asset may be, so it’s not unreasonable to play around with the 28% figure a bit in order to find a property that suits your needs. This rule is, of course, for housing costs. If you’re purchasing properties as a business venture, you’ll want to make a profit, so there isn’t an easy figure to calculate with.

One of the things that’s going to be calculated into your monthly costs is the interest rate of your mortgage. You may already be aware that there are two types of interest rates: fixed and variable. Fixed interest rates are usually a bit higher than variable interest rates, but they’re incredibly useful for budgeting: you’ll know exactly how much you’ll pay towards your mortgage each month and exactly when it will be paid off. That said, variable interest rates often start lower than fixed rates. If you think the market will keep interest rates low, variable might be the way to go. Your mortgage broker can give you more insight into these two options.

Here’s another thing to consider: let’s say you could pay off your mortgage in 5 years with a 5% interest rate or in 10 years with the same interest rate. The 5 year plan is saving you money because you have 5 fewer years of interest to pay – definitely worth considering. The term of your mortgage being longer may reduce the amount you have to pay monthly and may even reduce your interest rate, but you may end up paying more in the long run.

And what about people who do freelance work or get bonuses from their work? These people might benefit from what’s known as an open mortgage. With an open mortgage, you can pay more than the amount due every month and pay off your mortgage more quickly. That could potentially mean less money for the lender, so the interest rate will be higher. Only consider this option if you’re quite sure you’ll use your funds to pay it off early (even then, a shorter term might be a better option). The final point we want to make is that the bigger the down payment you make, the less your mortgage will cost you. 

Taxes

We’d be remiss if we didn’t talk about taxes while we talked about budgeting. There are really two broad categories of tax we want to look at: the taxes themselves, and the tax rebates you can get. Property taxes are the first category we’ll look at. They’re a bit complex, but we’ll try to make things concise. Who charges you property taxes depends on where you live.

Those living in rural areas will have taxes levied by the province/states. Governments change and policies change so your property taxes will fluctuate over the years. Additionally, if your property increases in value, you’ll have to pay more in property taxes because they’re taxed as a percentage of the value of your property. In other words, the more money your house is worth, the more you’ll have to pay in taxes each year. Members of your home buying team like your mortgage broker and your accountant can go over property taxes with you. 

You may also be charged taxes based on the usage of the property you’ve purchased and your citizenship status. BC has recently introduced a speculation and vacancy tax that aims to reduce the number of home buyers who purchase homes just to sell them later as well as the number of homes purchased by people who don’t pay taxes to the province. Being aware of taxes like this will help you make the right home buying decisions.

Hopefully this article has given you a better idea of what you need to be aware of when budgeting for a new home. There’s a lot of information and if you have any questions about any of it, don’t hesitate to give us a call; we’re mortgage specialists, after all!

This is a contributed post.

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Proper Budgeting On a New Mortgage