Are You Financially Ready to Buy a Home?

You’ve scrolled through hundreds of home listings and feel ready to buy a home. But wait! Have you done your homework to figure out what you can afford, where your down payment will come from, and if you can get a mortgage for the rest? There’s a lot to know and do before buying a home, especially when it comes to the financial elements, so let’s help you get started.

1. Understanding down payments
2. Saving for down payments
3. Other home buying costs
4. Shopping for a mortgage
5. Other things to know about mortgages
6. Getting a mortgage pre-approval
7. Determining how much you can borrow
8. Repeat home buyers
9. Buying your current home before selling
10. Carrying two mortgages

Understanding down payments

Buyers must put down a minimum of 5% of the home’s purchase price, but that doesn’t mean they should stop there, says Sheldon Craig, a financial planner with Alaphia Financial Wellness in Osoyoos, British Columbia. 

 “It’s so important to have a healthy down payment because it’s the equity you have in your home,” explains Craig. 

In Canada, buyers who put down anything less than 20% of the price of the home must also pay for mortgage insurance, notes Steven Levine, a certified mortgage broker with Team Levine in Montreal, Quebec. 

“That insurance premium will be added onto your mortgage and paid through the lifetime of the mortgage,” says Levine, adding that increasing your down payment will reduce the amount of mortgage insurance you must pay. 

“If you put 10% down, the premium is 3.1% of the mortgage amount. If you’re putting 15% down, it’s 2.8%. If you can swing 20%, you’re saving that insurance premium and not paying interest on it through the life of the mortgage.”

Of course, if you want to become a homeowner and can only afford to put down 5%, it’s perfectly acceptable to do so. It allows you to get into the market and achieve your goals of homeownership sooner.

What’s the best way to save for a down payment? 

In addition to cutting down on expenses, following a budget and paying off your debt, first-time home buyers can gather money for a down payment by tapping into government programs and incentives.

The federal government recently introduced a new registered plan, the Tax-Free First Home Savings Account (FHSA), which is slated to launch later in 2023. This program will enable first-time home buyers to save up to $8,000 per year tax-free, up to a maximum of $40,000. Like a Registered Retirement Savings Plan (RRSP), contributions will be tax-deductible and withdrawals to purchase a first home will be non-taxable, same as a Tax-Free Savings Account (TFSA). 

The First-Time Home Buyers Tax Credit allows home buyers to claim a non-refundable tax credit of up to $1,500. You can also put away up to $6,500 each year tax-free through your TFSA, which you can then withdraw from to buy a home. 

“There’s also the Home Buyers’ Plan (HBP) where each buyer can take up to $35,000 of your RRSP, and you have 15 years to pay that back, otherwise there are tax implications,” adds Craig. Make sure to check into how this savings strategy may affect your retirement plan.

Think about all your costs, not just your down payment

Even if you’ve saved up 20% of the property’s price tag, first-time home buyers should consider the big picture, cautions Levine. 

“You don’t want to put all your money into the down payment; you need a buffer for unexpected repairs that come up,” he explains. “You also want to live your life and not be stressed that you’re living payment to payment. Part of your budgeting is seeing if putting down 20% makes sense or not.”

Craig advises homeowners to set up a home maintenance and renovation fund equal to 1% of the property’s purchase price.  

“Not many people realize that when you own a home, there are always things to do—replace the roof, the windows, the furnace. That’s why it’s so important to have that 1% allocated to a maintenance account,” he says. 

You’ll also be responsible for closing costs, including real estate appraisal fees, legal fees, and title insurance, so keep a financial cushion in place. The Bank of Montreal suggests budgeting between 3% and 4% of the purchase price of your home to go towards closing costs. 

What’s the best way to shop for a mortgage?

When you’re looking for a lending institution, it can feel overwhelming. The first step is learning the difference between a mortgage specialist and a mortgage broker. Mortgage specialists only work for one specific bank and have access to that bank’s rates and products. 

 “Mortgage brokers don’t work for a particular bank; [they’re] intermediaries between the clients and the banks,” explains Levine. “[They] have access to a dozen lenders’ rates and products, so [they] shop around for you and match clients with the best product, lender, and rate.”  

To find the right professional for you, Levine suggests asking friends and family for referrals and reading online reviews. Your REALTOR® can also be a great resource and offer recommendations on who to work with.  

“When speaking to the person you’re considering, see how knowledgeable they are, and whether you’re comfortable with them,” he adds.

What else do you need to know about mortgages?

Interest rates are just one component to evaluate when shopping for a mortgage. You also need to consider the types and terms of a mortgage:

• An open mortgage offers the flexibility to pay part or all your mortgage anytime throughout the term with no penalties. Interest rates are usually higher for this type of mortgage.
• A closed mortgage offers a lower interest rate, but it cannot be prepaid or renegotiated before your term ends without paying a penalty to the lender. If rates drop, you cannot get your rate reduced; you’re locked into your mortgage for the length of your term.

“With a closed mortgage, if you sell the home before the end of your term, you’ll pay a penalty,” notes Levine. “With an open mortgage, you can leave at any time without paying a penalty, so open rates are a lot more expensive than closed ones. Anyone looking at staying in their property for more than five or six months will want to take a closed rate.” 

Hybrid mortgages—where a portion is fixed and a portion is variable at the same bank—are less popular, notes Levine. 

“We don’t have many requests for that because when you need to take both products with the same bank, you’re not getting the best rates.”

Speaking of rates, you’ll need to choose between fixed, which doesn’t change, and variable, which can go up or down according to market rates. It’s also important to ask about your prepayment options in case you want to pay the mortgage off faster, advises Levine. 

 “If you pay a mortgage over a 25-year amortization term, you’re paying the bank a lot of interest, and some people want to minimize that interest,” he explains. “Prepayment options can include making lump sum payments that go 100% towards paying down your capital or doing increased payments where the percentages vary depending on which bank you choose.”

After choosing a lender, it’s time to get mortgage pre-approval

Getting pre-approved for financing should be taken care of early on in your home buying journey. This way, sellers know they’re dealing with a serious buyer who has already lined up a lender. Start the process by doing some math to see what you can afford, says Levine. Ultimately, the lender will provide you with the upper limit you can handle—this is not an open invitation to go and max out your pre-approval limit.

“Calculate your budget. If you’re looking at purchasing in a certain price range, how much will that cost you per month? Check out an online mortgage calculator and see what’s within your budget,” he says, adding first-time buyers also need to consider heating, electricity, property taxes, and home insurance—an affordability calculator can help you figure out what you’re comfortable spending.

“Then, find a REALTOR® you trust so they can start the home search. Your next step is to obtain a mortgage pre-approval.”

Looking for a REALTOR®? Use the https://mtanveerahmad.ca to connect with someone in your area who can help find your next home.