Thinking about buying a home? Here are a few cold, hard facts to chew on
You want to be the king or queen of your own castle. But how do you conquer this daunting feat, given that in big cities, so-called starter castles can cost more than $1-million? To help you navigate one of the largest purchases you’ll ever make in your life, here are some answers to commonly asked questions for first-time home buyers.
How do I know if I’m money-ready to be a home owner?
Look at your lifestyle and ask yourself, “Am I ready to commit?” Do you have stable income and can you plant roots for a few years?
“With the transactional costs of real estate, you have to stay put for five years to make up your money,” says 31-year-old Sean Cooper, who paid off his $450,000 mortgage in three years and authored the upcoming book, Burn Your Mortgage.
Next, crunch some numbers to determine if you can afford the home you want. The Canada Mortgage and Housing Corporation says your monthly housing costs (mortgage payments, taxes, heating, condo fees, etc.) shouldn’t be more than 32 per cent of your gross monthly income. Use mortgage payment calculators. Ask other homeowners how much owning their homes cost. And don’t forget to add in the closing costs.
“A lot of people assume that renting costs the same amount monthly as owning a house but that’s not true,” Cooper says. “Home ownership costs come with a lot more expenses such as home insurance, repairs and maintenance. A good rule of thumb is to budget 1 to 3 per cent of the purchase price of per year to repair and maintenance.”
How the heck do I amass a down payment?
“Beg your mom and dad,” says James Laird, president of Broker of Record. “We’re seeing that family members are willing to help.”
Millennials were 47 per cent more likely than generation Xers to have received help from family for a down payment on their first home, according to a recent RateHub report.
For those who don’t have that option, it’s going to take sacrifice and hustling. See if your parents will allow you to move home temporarily — almost 40 per cent of Millennials have moved back home at some point, a TD survey says — or if you can downgrade your living expenses, for example, by finding a roommate. Do what you can to boost your income and your savings, whether that’s reducing spending or negotiating for a raise or working that side hustle.
Also, under the home buyers’ plan, first-time home buyers can take $25,000 out of their registered retirement savings plan and pay it back over the next 15 years without incurring any penalty. For a couple that means $50,000.
Should I wait and save up 20 per cent or just put down the minimum 5 per cent?
Buyers who put down less than 20 per cent must purchase mortgage default insurance; they also may also qualify to borrow less. So, if you’re in an affordable housing market, aim for 20 per cent. (For the average Canadian home, which costed $474,590 in December, that’s a $94,918 downpayment.)
“If you’re waiting for a 20 per cent downpayment in a big city and you don’t have parental help, you’re going to be waiting a long time,” says Kerri-Lynn McAllister of RateHub. You then run the risk of being priced out of the market if prices continue to rise. “If you’re looking at [waiting] years, then it may not make sense,” McAllister adds. “[The insurance] is not a cost that you often feel because it’s rolled into your mortgage.”
What are my borrowing options?
“Do your research and compare your rates online,” McAllister says. “Even doing that research ahead of time and bringing that number to your bank and asking if they can match it, is also very prudent. You don’t want to take the first offer.”
Shopping can be complicated so consider getting a mortgage broker — an intermediary who is connected to multiple lenders and who shops around for the best deal for you (they are paid a finders fee from the lender), she says.
Vancouver-based online lender Mogo recently unveiled a mortgage platform geared to Millennials; the digital dashboard walks users through the process and allows them to apply for a mortgage online. “The application takes four minutes,” says Chantel Chapman, a credit expert and financial fitness coach with Mogo. “It’s all about the experience with a mortgage specialist and the convenience of doing it online.”
When you’re shopping for a mortgage, don’t just look at rates. Look at the penalties if you end up breaking your mortgage and check out pre-payment privileges such as being able to make lump sum payments, increase your payments and double up on payments.
The house that I want is out of my reach. Now what?
“People have to manage their expectations,” McAllister says. “The dream of home ownership doesn’t have to be equated with a detached house because that can be a stretch in cities like Toronto or Vancouver. People should start looking at different types of homes to fulfill like that dream; town houses and family-friendly condos are good alternatives.” Consider other options such as buying outside of the core or buying with family or friends. [Source: Financial Post]