Buying a home isn’t necessarily an intuitive process – there are a lot of variables that can make the process understandably daunting. At Westoba Credit Union, we are here to help guide you through the process of buying a home so that your decision to make a long-term financial commitment is made with the confidence in knowing that you’re getting what you want and on your own terms. Keep reading for our guide to buying your first home.
So, you’ve decided that it’s time to invest in a home, but you’re not entirely sure where to start. That’s okay! Buying a home is about more than browsing flooring and paint colour choices. There are a few key considerations to get you started on the process.
Determine your budget
Before you run out to visit open houses, you first need to determine what you can afford to give yourself a frame of reference when it comes to where to begin your search. This means that having a monthly budget is a good place to start. What are you able to put aside for a down payment? What are you able to afford on a monthly basis to cover your mortgage, property tax, and heating payments?
Westoba’s Virtual Financial Consultant Ashish Rai advises millennial home buyers to “have any high balance debt brought down to a lower amount or paid off before you get a home, as this is relatively tied to your approval in terms of affordability.” To help give you a sense of the price range that suits your financial situation the best, calculate your mortgage payment using an online mortgage calculator to get a ballpark idea of a purchase price that works for you.
Determine your down payment
Your down payment will determine your monthly mortgage payment, so needless to say, the more you can put down upfront, the better. The minimum down payment is 5% of the purchase price plus approximately 2% for closing costs. For example, if your new home’s purchase price is $300,000, your 5% down payment would be $15,000, and closing costs would be $6,000. However, it’s important to know that a down payment of less than 20% will require mortgage default insurance. Ashish notes, “Mortgages with 5% down would be considered high ratio and insurance premiums via Canada Mortgage and Housing Corporation (CMHC) or Sagen are added on to allow you to borrow funds at a lower down payment.” If you put 20% or more of the purchase price down, you can eliminate the use of insurance premiums and save those extra costs.
There’s no doubt that real estate prices can be daunting – “for us millennials, house prices are nowhere near what they were ten or even five years ago,” says Ashish. However, “if affordability is an issue, it’s best to have a co-borrower such as a family member, as it eases the upfront cost for your down payment and would also help with your monthly payments on your mortgage, property tax, and heating.” Make saving for your down payment easier by implementing an auto-transfer to your savings account bi-weekly, monthly, or on paydays. Read more here for tips on saving for your down payment.
Make use of RRSPs or the Home Buyers’ Plan
One option that is helpful for first-time home buyers is to use your RRSP to make your down payment. Because withdrawals from an RRSP account are taxable – whereas a savings account allows you to move funds in and out easily – you might find it easier to keep those funds in the account and thus grow your savings, rather than being tempted to spend it.
You might also consider making use of the Home Buyers’ Plan. This program allows you to withdraw funds from your RRSP for a down payment for your first home, paying it back over 15 years, with the first payment due two years after your first withdrawal. Ashish explains that to start repaying the funds, “you must make a contribution to your RRSP in the year the repayment is due or in the first 60 days of the following year.” Spreading your minimum annual payments over 15 years lightens the load on first-time home buyers. However, if you are unable to make your full payment, the difference is considered taxable income.
Determine your needs
Once you’ve determined your price range, next, you’ll want to think about the type of home you want. Whether that’s a single-detached home, a condo, or a side-by-side, assess your lifestyle needs and goals. Think as well about the neighbourhoods that work best for you – do you want to be close to work? Schools? Bike trails? Make a list of your wants and must-haves in order to clarify the type of home to start searching for.
Apply for a mortgage
Beyond having an income that can cover any debts, a monthly mortgage payment, property taxes, and heating, applying for a mortgage also involves an assessment of your credit score and history. Your credit score is essentially your financial report card – it provides a general overview of how well you’ve been managing your credit and helps lenders determine how you’ll manage it in the future, which is one of the considerations for determining the mortgage and interest rate you’re ultimately approved for. Ashish explains that “your credit score ties directly to your repayment history.” So, one way to improve your credit is to make your payments on time. If payments are missed or aren’t made regularly, your credit score will suffer.
You should also consider varying the types of credit you’re using (like credit cards and car loans) and limiting the number of times you check your credit report, because “if you are consistently looking for credit, this can hurt your score and approvals for any future lending,” Ashish says. You can read more here about how to improve your credit score.
Connect with a financial expert
The best way to ensure that your first home-buying experience goes smoothly – and that you get what you want – is to make an appointment with a financial expert who can help guide you and answer your questions. Our team of experienced Financial Advisors are here to help you create a financial plan so that you can reach your goals faster and with more confidence. Contact us today and make your first home a reality.
