Advice for First Time Homebuyers – Part Two
An important step in the home-buying process is calculating your estimated monthly budget prior to purchasing the property. Keep in mind that the mortgage amount the bank approves you for is not always the amount you can afford—it may not take other living expenses into consideration (i.e. car repairs or medical expenses). To help ensure you can afford your mortgage as well as additional expenses, we recommend amortizing your mortgage over 30 years. This option is available to purchasers who pay more than 20 per cent down, and we recommend it for two key reasons: lower monthly payments and a higher pre-approval amount. Make sure there is an option to make lump-sum payments to help pay down the mortgage sooner if you have the means to.
Your Down Payment
Here’s where it can get slightly tricky for those entering the real estate market for the first time. Should you opt for the minimum five per cent down payment or save up for a 20 per cent down payment? This is where your mortgage specialist will be able to run through the numbers and compare the different financial scenarios to determine the best choice for you.
If you’re opting to make a down payment of less than 20 per cent, consider that you’ll need to pay relatively costly CMHC insurance fees. RateHub provides a CMHC insurance calculator, which can be a valuable resource to determine what this payment will be. The insurance payment can be financed into the mortgage; however, the eight per cent PST on the CMHC insurance must be paid up front, which will add to your closing costs.
We recommend making a larger down payment to decrease/eliminate your CMHC insurance costs. Having a down payment of at least 20 per cent does not require CMHC insurance, and the mortgage can be amortized over 30 years (the maximum amortization for CMHC mortgages is 25 years).
There are many factors that go into home buying, and no two buyers are the same. Everyone has different preferences in terms of location, municipality, house size and the type of home they wish to purchase. Prepare a checklist beforehand to help you determine what you’re looking for. This checklist can include items such as:
- Location (i.e. proximity to a bus or train station)
- Finishes (i.e. granite countertops, hardwood floor)
- School rankings
- Resale vs. pre-construction
Creating a checklist will give you a better understanding of what you’re looking for. It’s typical to face tradeoffs during the home-buying process, such as finding a home in the right location that doesn’t include your desired interior finishes. In situations like this, we highly recommend making location a priority item on your checklist. Other items on your list, particularly cosmetic ones like finishes, can always be updated to suit your preferences after closing.
The Bottom Line
Before delving into buying a home, have a budget, know what you’re looking for and be prepared to make tradeoffs—it’s rare that a home will meet every criterion on your checklist. Keep your budget in mind while shopping for a house. Take advantage of the resources available to you, and do plenty of research before determining which area you’d like to purchase a home in.
Are you looking for sound legal advice for your organization, business or corporation? Contact KGPC LLP today.
For more read: Important Advice for Purchasing a Business – Part One