As a Broker my goal is to make sure my clients are as prepared as possible for the buying process. Therefore I thought I would create a simplified first time home buyers guide.
How much can you afford to spend on your new home?
Gross Debt Service: This ratio examines your proposed new housing costs such as: mortgage payments, taxes, heating/electricity costs and condo fees (if applicable). The general rule is that this amount should be no more than 32% of your gross monthly income. For example if you makes $4,000/month your GDS would be 4,000*32% = $1,280
Total Debt Service: TDS gauges all of your debt obligations such as housing costs, loans, credit card bills and car payments. Your TDS should be no more than 42% of your gross monthly income. For example if you make $4,000/month your TDS should no be anymore than $4,000*.42 = $1,680
Use these two debt service ratio’s to determine what you will likely be able to afford.
Assemble a team of professionals that will make sure you are getting the best deal possible:
Contact a TRUSTWORTHY:
- Real Estate Agent – Real Estate Agents are licensed to negotiate on price and arrange the sale of a home. They will help you with the paperwork and make sure that your home purchase goes smoothly. Make sure they are an expert in the area you are looking to buy a home.
- Mortgage Broker – Brokers have access to over 40 different lenders including most major banks. Brokers will make sure that you are in the perfect mortgage that fits your needs and aware of all of your options.
- Real Estate Lawyer – Real Estate Lawyers are needed when it comes to your closing costs of your new home. They will ensure that all of the related documentation is complete and delivered on time. You will likely meet with a Lawyer one to two days before the closing date.
- Home Inspector – A Home Inspector will point out any noticeable defects that will likely arise in the future. Makes sure they are confident in all areas of home inspection including frame construction, electrical/plumbing systems, heating and cooling systems
- Financial Planner – A Financial Planner makes sure that buying a home is in your best interest. Usually the want comes before the need and there is nothing worse than buying a home only to find out you cannot afford your mortgage payments. A knowledgeable financial planner will help you create a budget and set you up for financial success.
Which type of property is right for you?
City Condo
Ideal for people wanting to be close to shopping and entertainment centers. Condo’s will have minimal maintenance costs compared to detached homes. Unfortunately there are some associated costs that make living in the city unappealing. Watch out for parking fees and the time and gas cost it takes to get out of the city when travelling to the suburbs.
Single Family Home
The advantages to a single family home is privacy and the ability to have the freedom to design your home and landscape to your liking. If your buying an older house be prepared for maintenance costs for repairs and updates to the home.
Freehold Townhouse
Owning a Freehold townhouse gives you complete freedom to do as you please. Unfortunately, your neighbour has the same rights and who knows what their plans are for their home.
Should First Time Home Owners buy New unit or a Resale?
With so many new units being built throughout the lower mainland it’s a tough decision to know what’s right for you. If you are going to buy a new home usually you are able to take part in the customization of the home building. Also there will be fewer things to fix because everything is new and covered by the builders warranty.Remember that homes costs have switched from HST to GST. Watch out for added costs for personalization of your home. Hardwood floors, granite counter tops and double glazed windows add up fairly quickly. Be prepared to wait for the completion date. Like any building construction there are always going to be delays.
If you are looking to buy a resale home be prepared for renovation costs. Furnaces need to be replaced, fences need to be touched up, roofs re-shingled and a new coat of paint on the walls might need to be done too. Older homes are also less energy efficient than newer homes. The benefits of buying a resale home is that you will not have to pay GST unless the home has been substantially renovated. Also older homes have more character and are usually located in established areas near schools, malls and grocery stores.
Terms you should know when securing your mortgage
Open Mortgage: A mortgage that can be paid off, penalty free, prior to the expiry term of the mortgage. The interest rate of open mortgages are usually higher than closed mortgage rates.
Closed Mortgage: A mortgage which cannot be fully paid out before expiry of its term.
High-Ratio Mortgage: A High-Ratio Mortgage requires mortgage insurance (1%-2.5% of mortgage) because the down payment is less than 20% of the home price.
Conventional Mortgage: Does not require Mortgage Insurance because more than 20% or the home price is used for the down payment.
Variable-rate Mortgage: Variable rates differ from conventional mortgages in that the rate of interest payable may be adjusted periodically throughout the contractual term of the mortgage. Sometimes a variable rate mortgage is called a floating rate mortgage.
Fixed-rate Mortgage: The interest rate is fixed/locked for the specific period of the loan.
First Time Home Buyer: You have not owned a home as the principal resident before.
Every First time home buyers biggest fear: Affording the down payment needed to buy
So lets make it clear – you will need at least 5% of the purchase price for a down payment. Therefore, if the home is $500,000 you will need (500,000*.05) to put $25,000 down. Usually down payments range from 5%-20%. It is important to know that if you put less than 20% down you will need Mortgage Insurance which is anywhere from 1%-2.5% of the mortgage amount.
Home Buyers Tax Credit
You are eligible to claim $5,000 for the Home Buyers Tax Credit. This includes up to $750 in federal tax relief. You will qualify for this credit if you have not previously owned a home and you acquire a qualifying home. For more information view www.cmhc-schl.gc.ca
Home Buyers Plan
You can withdraw up to $25,000 tax free from your RRSP to purchase or build a qualifying home. There is a catch though, you must put all the money back into your RRSP account within 15 years.
If you have any questions feel free to contact me at [email protected] or download my First Time Home Buyers Guide.