Buying a home will be the biggest purchase in your life.
With an oft-repeated statement like that, it’s no wonder first-time home-buyers feel overwhelmed when finally buying a place of their own.
With the confusing mortgage jargon, stagnant savings, and well-meaning but sometimes outdated advice thrown at them, first-time buyers might ask themselves, “Where do I start?”
“A home can be a great place to build memories with friends and family and build a financial foundation for your future,” states the Canada Mortgage and Housing Corporation’s (CMHC) homebuying step-by-step guide. “Buying a home can be exciting, but it can also be a challenging and confusing experience.”
Perspective home-buyers should consider how much they can realistically afford, how much will be needed for a down payment, and how to save money for a mortgage.
“The more you know about your current financial situation, the more prepared you’ll be when you meet with your lender or broker,” states CMHC, Canada’s national housing agency.
The first thing to look at is your current spending. You will want to establish monthly spending for household expenses, loans and debts, entertainment and savings.
Once monthly spending is determined, subtract that amount from your total monthly net income (household earnings after taxes and deductions) to establish how much money is left each month.
Next, you will need to establish what you can afford. CMHC suggests two rules to determine this.
The first rule is that monthly housing costs should be no more than 32 per cent of your average gross monthly income (I.E., the household income before taxes).
Housing costs include monthly mortgage (principal and interest), property taxes, and heating expenses, according to CMHC. If applicable, 50 per cent of condo and/or homeowners association fees, as well as any site rent for leasehold tenure, should also be included in this amount.
The second rule is that monthly total debt load should be no more than 40 per cent of your average gross monthly income. This calculation should include the housing costs calculated in the first rule, along with car loans/leases, credit card payments and line of credit payments.
“The maximum amount you can afford to spend on a home depends on these numbers and the size of your down payment,” CMHC stated. “For first-time buyers, saving a down payment can be the hardest part of buying a home.”
“The minimum amount you need for your down payment depends on the purchase price of the home,” according to the Financial Consumer Agency of Canada (FCAC).
For homes priced $500,000 or less, the minimum down payment is five per cent of the purchase price. If the home costs between $500,000 and $999,999, the down payment would be the combined total of five per cent of the first $500,000 and 10 per cent of the remaining purchase price. For example, a $600,000 home would require a down payment of $35,000 – five per cent of $500,000, which totals $25,000, plus 10 per cent of $100,000, which is $10,000.
For homes priced $1 million or more, the minimum down payment is 20 per cent, although “If you’re self-employed or have a poor credit history, your lender may require a larger down payment,” according to FCAC.
If the down payment is less than 20 per cent, you will need to purchase something called mortgage loan insurance.
“Normally, the minimum down payment must come from your own funds,” states FCAC, and you will need to prove the amount and sources of your down payment.
According to CMHC, common sources for a down payment are an RRSP withdrawal, a non-repayable gift from a family member, and funds borrowed against proven assets. Be sure to check with your lender for qualifying criteria.
“The bigger the down payment, the smaller the mortgage, which can save you thousands of dollars in interest charges,” states FCAC.
A major step in saving money is prioritizing, according to the Credit Counselling Society (CCS), a non-profit charitable organization.
“Do you go out to eat all the time, take expensive vacations, buy all the latest stuff and drive brand new cars?” asked CCS. “Or are you willing to tighten your belt and save for a house? It is up to you. Which is more important?”
Utilize the information used to determine your monthly spending to identify areas to cut back on.
The next step to successful saving involves paying off high-interest debts.
“You can’t really save money if you are paying a lot of interest to someone else,” advises CCS.
Start by tackling your smallest high-interest debt, then take the minimum payment from that debt and add it to the next smallest debt. Once the second smallest debt is paid off, the minimum payment from that debt plus the minimum from the first debt can go to the third smallest outstanding debt, and so on.
“You will notice a snowball effect as the minimum payments you are freeing up help you to make larger and larger payments against one debt at a time,” according to CCS. “This is one of the fastest ways to pay off debt.”
Keep your savings protected and easily accessible, advises FCAC. Invest in short-term savings and investment options such as guaranteed investment certificates (GIC) or low-risk mutual funds and utilize a tax-free savings account (TFSA). Money withdrawn from a TFSA won’t be taxed, making it a great resource as you save for a down payment.
If you are eligible, make sure to take advantage of the First-Time Home Buyer Incentive, which provides applicants with five to 10 per cent of a home’s purchase price to add to your down payment. The incentive must be repaid within 25 years, or when the property is sold.
As a shared-equity mortgage with the Government of Canada, if the value of your home rises, the government shares in the profit up to a maximum gain of eight per year.
Visit a placetocallhome.ca for more information.
Once you are ready to take the plunge into home ownership, a great place to start is with a mortgage pre-approval by your bank. While being pre-approved does not guarantee final mortgage approval, it lets you know your purchase price budget, the current interest rate, and what your monthly payments would look like.
“Once you find the home you want to buy, the property still has to be evaluated to ensure the price and condition of the home are acceptable to your lender,” according to CMHC.
For more information, visit cmhc-schl.gc.ca and search for “homebuying step by step guide.”