Buying your first home can be scary, but it can also be exciting. Sure, you’re signing away your disposable income for the next couple of decades, but you’re also entering a phase of freedom, independence and adulting as a first-time home buyer. So why not make the most of it?
Whether you’re looking to buy your first home now or in the future, here’s what you need to know about the home-buying process in Canada.
Save Your Money
Income and expenses vary, so only you know what you’re truly capable of saving. However, a good rule of thumb is to figure out exactly how much money you can afford to put away every pay cheque and set up automatic payments from your chequings to a savings account. If you don’t have to think about saving the money and automatically deduct it like a bill, you’ll save a lot more.
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Why save so much? Because, as everyone knows, buying a home isn’t cheap, and you need to put down a reasonable down payment to secure a mortgage. The minimum down payment you need depends on how expensive the home in question is. In Canada, homes that are $500,000 or less require a 5 per cent down payment. Homes that are $500,000 to $1.5 million require a 5 per cent down payment for the first $500,000 of the purchase price and 10 per cent for the portion above that. And homes that go for $1.5 million or more require 20 per cent of the purchase price as a down payment.
Typically, you want to aim for a 20 per cent down payment anyway because then you may not need to buy mortgage loan insurance (also called mortgage default insurance). Remember that if you’re self-employed or have a poor credit history, you may need to buy that insurance anyway.
Set a Plan
On top of saving what you can, now is the time to build credit and eliminate debt. Student loans, car payments and credit card balances all count as debt, and they affect how much you can take out for a mortgage. It’s also important to pay your bills on time, as that will affect your overall credit score.
As you do these things, begin thinking about where you want to live and why. Be realistic about what you can afford, and remember that your monthly housing costs should never be more than 39 per cent of your monthly income (before deductions). Include property taxes and heating costs in that estimate.
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If saving is important to you, you may want to spend even less on your housing costs. Research affordable neighbourhoods and cities, and weigh the pros and cons of condo versus freehold living.
Find Your Team
It’s never a great idea to buy a home without the help of a professional, and when you’re buying, there are no big downsides to working with a realtor. The sellers will pay them, so there’s no cost to you, and a good realtor will have the expertise and negotiating skills to get you the best price.
A realtor isn’t the only team member you’ll want to add. Work with a mortgage broker or specialist on a pre-approval so that you know exactly how much you can afford. Do this before you even begin to look at homes so that you stay within your price range. Buying a home can be a lot of stress, and you don’t want to get your hopes up on something that isn’t realistic for you.
Take Advantage of Programs
There are plenty of government programs aimed at helping you purchase your first home, including the Home Buyers’ Plan, which allows you to withdraw up to $60,000 from your registered retirement savings plan, tax-free, to purchase your first home.
There is also something called the First Home Savings Account, which has an annual contribution limit of $8,000 and allows you to save up to $40,000 tax-free for your first home. Then there’s the Home Buyers’ Amount, which is a non-refundable tax credit of up to $1,500.
Work with a financial planner or an accountant to figure out how, where and when to save money to maximize your returns and minimize the amount of tax you’ll have to pay by the next tax deadline. It may not seem like a lot when you’re starting out, but these little savings add up and can help get you into your home a little easier.
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Set Aside Closing Costs
When you purchase a home, you need to remember that there are other costs, aside from the mortgage, that you are responsible for paying. These include legal fees (you will need a property lawyer during the purchasing process), property tax adjustments, title insurance, home inspection and other related adjustments. It’s a good idea to set aside at least 4 per cent of the home’s purchase price to pay for these costs.
Don’t forget that you’ll also need to put down a deposit, an Estoppel certificate fee if you’re purchasing a condo in Canada (excluding Quebec), a land registration fee, survey costs and property insurance.
It may seem like a lot and sure, the process can be a little overwhelming, but it can also be worth it. Arming yourself with knowledge and taking advantage of programs where you can helps, and will get you into that dream home even faster.
