Buying your first home is exciting, but it can feel overwhelming at times. There are many things to think about when you’re considering buying your first home. It is one of the largest financial decisions you will ever make, which makes it one of the most stressful times, too. If you are considering homeownership but aren’t sure you’re ready to take the plunge, here’s our guide to determining if your homeowner-ready.
Buying your first home: Learn the lingo
Before you make an appointment with your bank or mortgage broker, it’s a good idea to know some of the vocabulary you will hear during your meeting. Here’s a quick glossary of home-buying terms you should be familiar with:
Mortgage: A mortgage is a loan secured by real estate/property that you pay off over time. You’ll be paying back the money you borrowed, plus interest, and eventually you’ll be mortgage-free. For a more detailed look at the types of mortgages available out there, click here. (next article link here)
Down payment: A down payment is the amount of money you put towards the price of a home. Whatever you don’t put down is the amount you are borrowing. The amount that you have saved for your down payment will affect the type of mortgage you can qualify for:
- If you’re putting down 20% or more, that’s a conventional mortgage.
- If you’re putting down less than 20%, that’s a high ratio mortgage.
Amortization period: The amortization period is the length of time it takes to pay off a mortgage, in full. The amortization is an estimate based on the interest rate for your current term. If your down payment is less than 20% of the price of your home, the longest amortization you’re allowed is 25 years. Most first-time home buyers typically pick the longest amortization period available.
Mortgage term: This is the length of time you’re committed to a mortgage rate, lender and associated conditions. A mortgage can typically be as long as 30 years and as short as 10 years. Short-term mortgages are considered mortgages with terms of 10 or 15 years, while long-term mortgages usually last 30 years.
Save your down payment
The biggest hurdle for first-time home buyers is saving up for a down payment. This is why a savings plan is essential. It will help you set a target down payment goal. This is important because a larger down payment will decrease the amount you need to borrow for the home. Once you’ve figured out the down payment amount you can afford, you will need a mortgage payment calculator to estimate what your monthly payment will be.
A mortgage calculator uses your input and a standard formula to calculate your monthly payment. The key factors that determine the monthly payment and interest payment are the mortgage amount, the length of the mortgage term and the interest rate. Online mortgage calculators are accurate, however, you’ll get a more personalized result by talking to your mortgage lender and getting pre-approval based on your specific income and credit.
Did you know that your minimum down payment is determined by your home’s purchase price? The absolute minimum down payment in Canada is 5% for homes that cost $500,000 or less.
Buying your first home: Pre-approval
Once you’ve saved up enough for your target down payment amount, the first thing you should do is get a mortgage pre-approval. Pre-approval gives you an idea of how much mortgage you may get. Call your mortgage broker or your bank’s mortgage specialist first before a realtor.
While there are some online mortgage calculators that can provide you with a rough estimate of your mortgage range, it provides only part of the bigger picture. A true mortgage pre-approval is actually a sophisticated process that will depend on your credit score, a thorough analysis of your income and the nature of your down payment, among other factors.
While you may be approved to buy, the house you want to buy may not? Your mortgage lender should have a detailed look at your numbers because if they don’t feel the property you want is worth the price you’re willing to pay, they may decline to advance the funds you need.
Before buying your first home, find out how much you can afford
First-time home buyers are the most likely to have small down payments. Although the idea of extra costs make homeownership sound unreachable, a home inspection is a step that you should not skip.
Buying a house without having it properly appraised is never a good idea. If you are struggling to put together a down payment, how will you be able to afford problems that come to light after buying? A home inspection will catch any current problems and pinpoint any repairs to be addressed in your future. Houses also develop problems over time, so you need to have savings to handle unforeseen leaks, breaks and unavoidable maintenance. Those resources might be in the form of additional savings that you’ve set aside (instead of using them as part of your down payment), or you might create wiggle room by earmarking part of your monthly income to handle both routine and unexpected extra costs, from property taxes to maintenance and repairs.
Set realistic home goals
While you may dream of buying a home, you also need to be realistic about what kind of properties you can actually afford. Your household income, personal monthly expenses, and home costs like property taxes, condo fees, and heating & electricity bills all factor into the total amount you can borrow.
It’s important to assess where you’re going to be comfortable today, and for the next five years without underestimating what the next few years may bring:
- Marriage: Future engagement and wedding costs may be on your horizon.
- Starting a family: Paying for daycare or staying at home to raise your kids.
- Career: Possible change in positions or careers, starting a business.
First-time home buyer programs
First-Time Home Buyer Incentive
Buying your first home isn’t something you need to enter into on your own. The Canadian Mortgage and Housing Corporation (CMHC) offers the First-Time Home Buyer Incentive. This helps qualified first-time homebuyers reduce their monthly mortgage payments without adding to their financial burdens.
The First-Time Home Buyer Incentive is a shared-equity mortgage with the Government of Canada. It offers:
- 5% or 10% for a first-time buyer’s purchase of a newly constructed home
- Up to 5% for a first-time buyer’s purchase of a resale (existing) home
- 5% for a first-time buyer’s purchase of a new or resale mobile/manufactured home
Government programs: Credits and rebates
As a first-time home buyer, you’ll also want to be familiar with various programs that apply to your situation. Whether it’s a rebate you may qualify for or a tax-efficient way of funding your down payment, there are a number of government programs listed below that can help you potentially save some money:
- The Home Buyers’ Tax Credit currently works out to a rebate of $750 for all eligible first-time home buyers.
- The Canadian government’s Home Buyers’ Plan (HBP) allows first-time home buyers to borrow up to $35,000 from your RRSP for a down payment, tax-free.
- If you qualify, land transfer tax rebates are available to first-time home buyers in the provinces of Ontario, British Columbia and Prince Edward Island. There is also a land transfer tax rebate available for first-time home buyers in the city of Toronto.
- If you buy your home before it’s built or if you substantially renovate an existing home, you could qualify for a rebate for a portion of the sales tax. The GST/HST new housing rebate amount you can qualify for depends on the purchase price of the home, and can only be claimed if the net purchase price is $450,000 or less.
Buying your first home is one of the greatest accomplishments a person can achieve. It is the reward of careful planning and smart money care. If you are thinking about homeownership, go over your expectations and understand your limitations before signing on the dotted line. When you are ready to take the plunge, talk to one of our isure representatives about home insurance options that will suit your needs.