To want a home is human. Home means safety. It’s a comfy sanctuary in our hustle and bustle world, a retreat, a place to be ourselves, live, laugh, and love. For many of us, the first place we call our own is a bedroom in our parents’ home. It’s our space, our first private domain within four walls.
As we grow older, it’s natural to want a home of our own. Plenty of us rent before we buy; however, in the end, many of us will buy a home of our own to live in, raise a family, and make memories.
Buying your first home is exciting, thrilling, exhilarating, and so much more. It is a new beginning. A step forward. An opening to opportunities, big and small. Everything from the freedom of designing your own living spaces, to entertaining friends to, well, almost anything. And while the joys of owning your first home are wonderous, it’s also essential to understand and be prepared for first-time homeownership's responsibilities.
This First-Time Homebuyer’s Guide outlines some key financial responsibilities first-time home purchasers need to know. Our goal is to help. When your purchase is completed and you are enjoying your new home, we want you to be confident your financial house is in good order too - pardon the pun!
This is a lot to think about. Proceed one step at a time. Use this guide to help you. Buying your first home is exciting. Enjoy the journey!
While financial planning and budgeting are not generally the most exciting household topics, they are so important in ensuring you feel confident and comfortable when taking the exciting step of purchasing your first home. Begin to ask yourself some important questions about how your situation will change, monetarily speaking, as you begin to contemplate your home purchase. Take notes in your phone, keep a diary. More than anything, recognize that asking yourself some key questions can help start this process of right!
Here are a few questions to help get your started:
Here’s where the fun starts! It’s time to brush the dust of your calculator or use the one on your smart phone and start preparing a spreadsheet to review your income and expenses. What expenses will you no longer have when you buy a home? Take rent for example. What new costs will you take on? One is a mortgage.
Next, make a list of the upfront and other costs of buying a new home. Some items to include on your list: Legal costs, home insurance, land registration, adjustment costs, GST/HST, interest adjustments, certificate of location costs, township or municipal levies, home inspection and home appraisal costs, moving costs, mortgage default insurance, provincial sales tax on mortgage default insurance premiums, utilities costs, and condo or other fees, if applicable. (Some of these costs may not apply, depending on the home you purchase.)
Don’t worry if you cannot place actual amounts beside each of these items quite yet. There is more information on these topics below. The professionals you work with in the home-buying process, some examples of which include real estate agents, real estate lawyers, mortgage brokers, insurance brokers and other professionals, will help you determine the costs that apply to you. As a general guideline, The Financial Consumer Agency of Canada (FCAC) suggests these costs – sometimes called closing costs – will amount to 1.5% to 4 % of your home’s purchase price. As an example, if you were to buy your home for the price of $500,000, FCAC suggests you may expect closing costs to be $7,500 to $20,000. Our recommendation is that you budget for the costs to be on the higher side, just in case.
Another important consideration is your credit score. Your credit score is a snapshot of your financial wellbeing. It provides lenders with details on your financial history and how consistently you pay off your debts and bills. Your credit score is important to determine your approval for a mortgage. Several Canadian companies provide credit scores, and, for a fee, they will give you a copy of your credit report. Equifax and TransUnion are two companies many mortgage lenders lean on to assess your credit stability or risk.
It is also worth knowing that there are some great free options available as well to help you determine your credit score, Credit Karma, as an example. Additionally, most of Canada’s top five banks offer their customers the ability to check their scores and reports for free. Some credit card companies do as well. This is available on their mobile apps, or the desktop version of their banking websites.
At this point, maybe you have your credit score in front of you but you’re asking yourself: What score do I need to have to qualify for a mortgage? While there is no hard-and-fast rule, a score of 680 would often be the benchmark you’re looking for to qualify for a mortgage at the best rates available. Read more on this subject by clicking here.
Another thing to consider is tax credits. The federal government offers two types of incentives: The Home Buyers Plan and the GST/HST Housing Rebate may be helpful to you. Also, ask your mortgage broker or lender if you qualify for any provincial home-buying incentives.
The Canada Mortgage and Housing Corporation recommends that monthly housing costs, including mortgage payments and utilities, should not be greater than 35% of your gross monthly income. It also notes that your monthly debts – including your mortgage and all other debts – should not be greater than 42% of your gross monthly income.
One of the first steps toward homeownership is determining if you qualify for a mortgage, given your income and expenses. Mortgage lenders and mortgage brokers loan money for real estate purchases. They can help you determine the mortgage you can afford.
Mortgage lenders and brokers can also help you get pre-approved for a mortgage. Note that a pre-approval is not the final approval for a mortgage. Preapproval is the first step to determine how much you can spend on a home. For the purposes of illustration, a mortgage broker may say “you are pre-approved to purchase a home up to $350,000.” While you would be welcome - and financially conscious - to spend less than that pre-approved, spending more would not be advised as you have not qualified to spend more than $350,000.
We would also highly suggest that you shop around when looking for a mortgage. Interest rates and conditions for mortgages can differ. Contact a mortgage lender or broker who will meet with you and discuss your financial situation and possibilities. The Financial Consumer Agency website features key mortgage features including an explanation of open and closed mortgages, fixed and variable interest rates, what to do if interest rates increase, title insurance, terms and more.
The Financial Consumer Agency of Canada (FCAC) provides some handy tools that we would also encourage you to explore, however, we do insist that these be treated as estimates only.
Speaking with a professional mortgage broker is what will help you confirm your mortgage payments, and the purchase price you qualify for with certainty.
Online research and suggestions from family and friends may help you decide which mortgage lender or mortgage broker to choose for assistance with a mortgage. You can also find a local certified mortgage broker online through Mortgage Professionals Canada.
First-time homebuyers also need to pass a mortgage stress test to qualify for a mortgage loan. Passing a stress test ensures homebuyers don’t take on too much debt and can meet payments at qualifying interest rates. Don’t be worried, you do not need to work through this process alone. A mortgage broker will walk you through it. And to ensure the mortgage broker has what they need when you meet with them, the Canada Mortgage and Housing Corporation recommends you bring several documents to a meeting with a mortgage lender.
If you don’t qualify for a mortgage, options are available to you. These include improving your financial situation with help from a credit counsellor, paying off debts, saving for a larger down payment, buying a less expensive home and/or trying to increase your savings and lower your expenses.
To buy a new home, you will need to make a down payment toward the home’s purchase price. The minimum amount for a down payment depends on the price of the house you want to purchase. For homes priced at $500,000 or less, the minimum down payment is 5% of the purchase price. For homes priced from $500,000 to under $1 million, the minimum is 5% for the first $500,000 and 10% for the remainder to $999,999.
If you want to make a down payment that is less than 20%, you will need mortgage loan insurance, which protects lenders against mortgage default. This insurance, also known as mortgage default insurance, does not protect you if you cannot make your mortgage payments. Canada Mortgage and Housing Corporation provides an online table to help you determine mortgage loan insurance costs. For first-time homebuyers that have the means, it is oftentimes advisable to make a down payment of 20% or more. A larger down payment reduces your mortgage and can save you money in interest payments. A larger down payment also means you will pay a lower mortgage loan insurance premium. In fact, in most cases, when a buyer’s down payment is higher than 20%, no loan insurance premium needs to be paid at all. That said, for buyers that have less than a 20% down payment, do not let the loan insurance premium deter you from purchasing today! In fact, we’d encourage you read the subheading section When To Consider a Down Payment of Less than 20% from this article (4th heading).
Here’s some good news for first-time homebuyers. The Government of Canada offers a homebuyer’s incentive to help with the purchase of a first home. Qualifying first-time homebuyers can receive 5% toward purchasing an existing home and 5 to 10% toward purchasing a newly built home. The incentive needs to be paid back, and there are several ways to do this. It can be paid back at any time without penalty, after 25 years, or when the homebuyer sells the property. The property's fair market value determines the repayment amount at the time of repayment. The incentive is part of the federal government’s National Housing Strategy.
First-time homebuyers can also withdraw up to $35,000 from their Registered Retirement Savings Plans (RRSP) to assist with the purchase of a home. The withdrawal is not taxable as long as you repay it within a 15-year period.
If you have a tax-free savings account (TFSA), this money can be used to help with the down payment.
So now you’ve completed a budget, you understand the expenses associated with buying your first home, and you qualify for a mortgage (because you’ve been pre-approved, right?!). Now the real fun can begin. Finding the home that is right for you!
Take time to think about where you want to live, what type of house you like, and what features, both inside and outside, are important to you. Also, think about what kind of home you want and need now and into the future, say 5 to 10 years from now. Making a list of these features can be handy. You can refer to it when looking at homes you are interested in.
There are several types of home ownership, including freehold, where you own the home and land, and condominium ownership, where you own your unit and share common elements such as gyms, lobbies, and hallways. Other ownership types include leasehold, where you own the building and lease or rent the land, and co-operatives, where you purchase a share in a building and live in one of the building's units. Consider what kind of home you prefer, and additionally, begin thinking of your answers to the below:
Yes. We know! It is a lot to think about. But arming yourself with the answers to these questions now will be extremely beneficial when you do begin the process of “getting out there” and shopping for your first home! Speaking of which, don’t forget about the importance of working with an exceptional real estate agent.
Working with a real estate agent, home inspector, real estate lawyer, and home insurance broker can help make your home buying process stress-free. Outlined below are some things to consider when talking to a professional.
Doing some research online and asking family and friends for suggestions can help you find a real estate agent who is right for you. Work with an agent who is friendly, helpful and has expertise in the areas and home type you are looking to buy. Select a real estate agent who will happily and clearly explain the first-time homebuyer process, someone who listens and with whom you are comfortable.
Meet with them to explain the type of home you want to purchase. The agent will look for homes that meet your expectations and send you listings of homes for sale directly to your email, which you can review. It can also help to drive through neighborhoods you like and write down the addresses of homes for sale. Your agent can get you information on these homes too. When you have listing information for homes you are interested in, read the details. You can learn a lot from the listing information. The listings for homes include the following details and more:
When you see a home you like, you may want to drive by it, if possible. If you are interested in learning more, your real estate agent can make an appointment for you to view the home. In most cases, you can expect to visit several homes before you buy one. In-person visits are essential. In-home viewings enable you to learn a lot about the house. Take your time during a walk-through. Look around. Ask the real estate agent any questions you may have. If the real estate can’t answer your questions right away, they will get back to you. You may find that you want to see a home for a second time before you make an offer to purchase. Sometimes you will see things you didn’t notice during the first viewing.
You may want to hire a home inspector, a home appraiser, or a contractor along the home-buying journey. Are you concerned about the foundation of the home? Are there cracks in the basement? Has the brickwork been well maintained? Is the wiring old? What is the estimated value of the house? Do you want to make changes to the home and determine if these are possible before you buy? These professionals can help you to answer these kinds of questions, and address concerns. Your real estate agent, family, friends, and online research can help you find and hire these types of professionals, if needed.
You may also want to gather details on recent house sales in the neighborhood to learn about the features of other homes recently sold and their selling price. This information can help you determine the value of the home you are buying and how much your offer should be.
Remember to be patient. It takes time to find your perfect home. Many first-time homebuyers view several homes before finding a place they want to make an offer to buy. Also, be prepared that you may not get the first home you offer to purchase. Purchasing a home can be competitive. Several people may make offers on the same house. Your purchase offer may be too low and not accepted by the seller. The good news is other houses are always coming on the market.
When you are shopping for a new home, you will also need the help of a real estate lawyer.
Purchasing a home is one of the most significant financial commitments many of us will ever make and hiring a great real estate lawyer is essential. A real estate lawyer will safeguard your legal rights and interests.
A real estate lawyer will review legal documents, including agreements of purchase and agreements of sale. A lawyer will also make sure no claims (or liens) are listed against the property, taxes are paid up to date, search the property title and calculate the cost of land transfer tax. Hiring a real estate lawyer is money well spent. The Financial Consumer Agency of Canada advises that you should generally expect to pay between $400 to $2,500 in legal costs.
Home insurance can financially protect you, your home, and your belongings in case of damages or losses, such as a fire, injury to others while at your home, theft, water damage and more.
Home insurance is a contract between you and an insurance company where you pay a premium and the company agrees to pay for losses caused by perils specified in the home insurance policy. When you consider how much money you have invested in your home, insurance is a must, and the annual premium is money well spent. Think of it this way: Without home insurance, if something unexpected happens, such as a fire, you will have to pay for repairs entirely on your own.
When you contact an insurance broker, they will ask for details on the home you are purchasing and discuss what type of insurance and coverages you want. Your insurance broker will provide you with guidance and get you several competitive first-time homebuyers insurance quotes. The insurance broker will review the quotes and prices with you, and you can choose the insurance policy you want.
Online research and reviews can help you find an insurance broker who is right for you. Select an insurance broker with a fantastic reputation. Also, select an insurance broker who will happily explain first-time homeowners insurance to you.
It’s essential to select an insurance broker who will provide personal service throughout the policy term. Suppose you decide to renovate and want to know if your insurance will provide protection during renovations. Or maybe you plan to upgrade the wiring in your home or install a monitored alarm system. It’s good to share these details with your insurance broker. Some changes may even help to reduce your premium. Select a broker who will provide personal service with a smile.
Between backyard BBQs, at-home movie nights, cooking your favorite meals and the thousands of other things you will enjoy in your new home, keep up with regular maintenance. Some items that require maintenance include the roof, the furnace and air conditioning equipment. Other items also require care and attention, such as fencing, landscaping, painting, replacing plumbing fixtures and more. Regular maintenance of your home can maintain and increase the value of your investment. You can do so many things to boost your enjoyment of your home and enhance your investment. Something as small as fixing a leaky faucet can save you money on water bills and bring relief from an annoying dripping noise. Fixing the small leak may also prevent bigger problems in the future. Suppose your backyard fence is falling. Fixing the fence before it collapses may save you from replacing the whole thing later at a more significant cost.
Another way to make sure you maintain you investment is creating a home inventory list. This is a document that will list all of the valuable possessions you have in your home so you can prove what you had if they are ever destroyed or stolen. This is a great time to start the list as you will be unpacking all your items when you first move in, which will make the documenting process a lot easier.
Regular maintenance can enhance your enjoyment of the home, save you from higher maintenance costs in the future and protect your investment in your property.
Know your expenses, track them, and save money for a rainy day.
We hope this guide has been helpful. There is so much to think about and do when buying your first home. It's a journey.
May your journey be enjoyable, and your destination be everything you want it to be.
This content is written by our Morison Insurance team. It is provided for general information only. Insurance needs differ from person to person, and this article is therefore not a substitute for professional advice about your individual insurance needs which can be obtained by speaking to one of our brokers.