Leaping into the housing market is a big decision for first-time buyers and then they have to learn a whole new language: mortgage talk.

“There’s a lot of things people don’t even think about,” said Chris Pughe, a mortgage-development manager for VanCity Credit Union.

Pughe’s job is to lead home buyers through the process of applying and qualifying for a mortgage, then helping them choose how to repay it.

One of the first questions is whether a prospective buyer has a good credit history.

“If you want to qualify on your own, you need to have some kind of credit history, and most first-time buyers do,” Pughe said. “If they don’t have any history, then we’re looking for a guarantor.”

The next step is determining how much a buyer can borrow, and for that, institutions want to know your income, where it comes from and how much money you have for a downpayment.

Most first-time buyers have a downpayment of less than 25 per cent, which means they will have to qualify for a high-ratio mortgage.

The Canada Mortgage and Housing Corp. will insure mortgages, for a one-time fee, which allows buyers to finance as much as 95 per cent of the purchase price. And as of March 1, CMHC changed its policies to allow homebuyers to borrow the remaining amount, effectively meaning a buyer can finance 100 per cent of the purchase price.

Buyers who require high-ratio financing also have to meet CMHC’s debt-to-income ratios. Total housing costs — mortgage, property taxes and strata fees — cannot exceed 32 per cent of the family’s gross income. Total debt — housing plus any other loans or credit card payments — cannot exceed 40 per cent of gross income.

“I always ask how much people think they can afford and most of the time it’s pretty close to what they qualify for,” Pughe said.

Prospective purchasers don’t always realize all the costs associated with buying a home and setting up a mortgage.

Paul Lermitte, a registered financial planner with IFC Planning Group in Vancouver, advises people not to buy their first home until they have saved 10 per cent of the price and can afford to repay the mortgage over 20 years rather than the usual 25-year amortization financial institutions offer.

He also says people should shop around for the best mortgage rates and terms by consulting mortgage brokers before negotiating with your financial institution.

Finally, Lermitte suggests calculating the mortgage payment based on an interest rate that is two per cent higher than the current rate to see whether it’s still affordable.

“If you can’t afford it, rent,” he says. “There’s no risk. If you buy when you can’t afford it, there’s a high risk of damaging your credit rating — and bankruptcy — if something goes wrong.”

© The Vancouver Province 2004