Your Home Buying Journey Starts Here
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Our First Time Home Buyer’s Guide
A resource for Canadians buying their very first home
No doubt about it - buying a home is a BIG step. It's certainly up there with life's major milestones. Nerve wracking? Definitely. But we know what you're going through!
Your head must be buzzing with questions ... What kind of mortgage will you qualify for? How on earth do you make an offer? How to move - without losing your mind?
Don't worry. We've got it covered, whether you’re just starting out, on the house hunt, or about to close the deal.
I'm Just Starting Out
You want to take the leap into homeownership, and are learning about your options. Click here to learn more about the basics of getting a mortgage, how to apply (and be approved!), and setting your budget.
Should I Rent or Buy?
So you’re eager to forgo those monthly rent cheques for something you can call your own - not to mention build some real equity. But it’s important to look before you leap - are you truly ready for all that comes with homeownership?
While there are many great aspects to owning your home, it's not for everyone. And if you're not ready, you're not ready (don't sweat it!). Here are the pros and cons of both owning and renting so that you can get a better idea of both sides of the coin.
Pros and Cons: Renting vs. Owning
|Mortgage Pros||Renting Pros|
|Mortgage Cons||Renting Cons|
What Can I Afford?
So you've decided that you're ready to take the next step toward homeownership. Great! But don't make the biggest mistake that first-time home buyers make - buying a home they cannot afford. So... how do you figure out how much you should be budgeting for?
When lenders are determining if you can afford your brand new abode, they generally use two different debt ratios to calculate how much of a mortgage you can handle: Gross Debt Service Ratio (GDS), and Total Debt Service Ratio (TDS).
GDS refers to the percentage of the borrower's income needed to cover all ongoing housing costs. TDS includes GDS costs as well as all other regular payment and consumer debt obligations the borrower may have.
|Your Gross Debt Servicing Ratio Includes:||Your Total Debt Servicing Ratio Includes:|
(All above costs are monthly)
Rule of Thumb: Your TDS should not exceed 44%
* Paying more than 20% down on your mortgage? You have a little more debt wiggle room with a GDS cap of 32% and a TDS cap of 40%.
How much can you afford? Find out with the RateSupermarket.ca Affordability Calculator »
Understanding Mortgages: Terms You Need To Know
The down payment is the difference between the property's purchase price and the amount financed through a mortgage. Most often, the difference is paid in cash. Most people save up for their down payment for years before even beginning the house hunting process.
How much is the average down payment?
The down payment is usually 5-25% of the home's purchase price. By law, it cannot be less than 5%.
For down payments under 20%, your lender will require you to purchase mortgage default insurance, which is available through the Crown corporation CMHC or private insurers Genworth and Canada Guaranty.
Pro tip: Need help saving for your down payment? Try a tax-free savings account! This is a great option for those who want to keep their money easily accessible and tax sheltered. You can even further invest your funds into a low-risk investment like a GIC within your TFSA to give them a boost. Click here to learn more about TFSAs.
The mortgage term is the set amount of time a lender will loan you their money for your mortgage at a specific interest rate. They can last anywhere from 6 months to 25 years - 5-year terms are the most popular.
What happens at the end of my mortgage term?
One of two things happen at the end of your term: either the principal amount is due in full, or (most likely) you'll need to renew your mortgage. Renewing your mortgage is a good time to shop around for a better rate or product.
The Amortization is the amount of time it will take to repay your mortgage in full. The amortization period is based on your monthly payment amount at the current interest rate, and depends on the frequency of payments. In Canada, you can choose mortgage amortization periods up to 25 years for CMHC-backed mortgages, and up to 30 years for conventional mortgages.
Most people think of mortgage payments as "monthly payments". But did you know that you can choose an accelerated payment schedule that will increase the frequency of your payments to every two weeks (biweekly rapid payments), or every week (weekly rapid payments)? Not only will this save you money, but you'll be mortgage free sooner - and more frequent payments mean less interest!
Wonder how much you could save by changing your mortgage payment schedule? Check out our Mortgage Payment Calculator »
Get Expert Advice
There are plenty of professionals on hand to help you with the mortgage process, whether you work with your bank or enlist the services of a mortgage broker. There are pros and cons associated with both - read on for a breakdown.
Bank: Dealing with one lender
The upside of going directly to your bank is you'll only deal with one lender. But keep in mind: their specialists are paid to sell you their products. Why would they point out a better rate offered by another bank across the road? In fact, they'll do whatever it takes to keep you from even thinking about other options... So get that second opinion!
Broker: Your Personal Mortgage Shopper
A mortgage broker, on the other hand, is a freelance agent who works solely for YOU. They are trained professionals that will help you get the best mortgage for your personal situation. They compare products from a number of different banks and specialty lenders, and negotiate the best rate for your needs. (Think of them as a personal financial shopper who finds you the best deal.)
Brokers work for YOU, the customer, and best of all (beside the fact that they can save you thousands of dollars), they don't charge a fee. That's right, they are completely FREE. So, who pays the broker? The lenders foot the bill once they close the mortgage deal - you (the borrower), won't pay a dime.
More Reasons Why Brokers Are Great
- They'll help protect your credit score: Brokers help to protect your credit rating by only pulling one credit report and using it for all lenders.
- Access Expert Information: Mortgage brokers are up to speed on all of the latest mortgage information and know the ins and outs of the mortgage industry.
- Save Money: A good mortgage broker can provide ideas on how to save on interest while keeping your payments affordable.
Types of Mortgages: A Glossary
Closed Mortgage - The Most Popular Option
The main aspect of a closed mortgage? You're locked in. This means they cannot be prepaid, renegotiated or refinanced before maturity - doing so will ding you with a penalty. Most closed mortgages do allow a bit of flexibility by giving you the option to repay the principal through lump sum payments, or by increasing your monthly payment amount by a certain percentage. Why choose a product with these restrictions? Well, lower rates for starters.
Since closed mortgages have significantly lower interest rates than open products, they are more attractive to the average home buyer - as long as no major changes are anticipated in the near future.
Open mortgage terms range from 6 months to 1 year for fixed rates, 3 to 5 years for variable rates, and can be paid off before maturity without penalty. Some open mortgages also allow you to convert to a closed mortgage without any penalty if needed.
An open mortgage might be a good choice for you if you're expecting a large sum of money either through an insurance claim, divorce settlements, inheritances (or winning the lottery!), without any penalties.
A convertible mortgage is a flexible option that lets you change the type of mortgage you have over a certain period of time without incurring a penalty. There are some restrictions with convertible mortgages, so be sure to read the fine print.
With a fixed rate mortgage, your interest rate stays consistent for your entire mortgage term. This ensures that you know exactly what your bi-weekly or monthly payment will be. Fixed rates make it much easier to budget and create a financial plan, but their rates are generally higher because of the comfort and security they provide.
On the other hand, with a variable rate mortgage, your payment amount fluctuates in response to the rise and fall of the prime rate. This is a really good option if you anticipate falling interest rates, you don't want to pay a premium for a fixed rate product, or you don't mind the uncertainty of not knowing what your rate may be in the future.
Blended mortgages allow you to take advantage of both fixed and variable rates. No two blended mortgages are the same. Contact your mortgage broker or bank to get more details.
The Approval Process
It's a smart move to be pre-approved for your mortgage before you start shopping around. Why? It'll give you a price point to keep in mind when searching for your dream home, as the lender/mortgage broker will tell you what you can afford based on your finances. You will receive a certificate or written confirmation from the lender stating that you do indeed qualify. Getting pre-approved is easy - PLUS you can even lock in your rate for up to 120 days. Read on for ways to get pre-approved, and how to lock in a rate (with a rate hold).
How to get pre-approved
|Income and Employment||Assets||Debts|
This includes paystubs and non-regular paycheques. Remember to include all types of income; less common types include alimony and child support.
Are you self employed? You'll need to provide copies of tax returns showing your income for at least the last two years.
|These include other investments, such as RRSPs, GICs, stocks, and any other accounts at your disposal.||This includes your car loan, personal loans, credit cards, student loans, and other mortgages, if applicable.|
What's The Difference Between Pre-Approval and Final Approval?
Don't get confused between the two! Pre-approval means that you simply qualify for a mortgage, while final mortgage approval means you have definitively secured the mortgage (and rate). You are not obligated to stick with the pre-approval rate; it simply helps you to gauge just how much you can afford and will convince the seller that you are a serious buyer.
I'm on the House Hunt
You have a budget in mind and a good grasp on mortgage basics - it’s time to hit those open houses! Click here to learn more about working with real estate pros, finding your dream home, and crunching the costs.
Using a Real Estate Professional
What's your agent's role?
If you choose to work with an agent, understanding their role will help you to select the best possible person to work with. Your real estate professional should:
- Review your list of needs and wants to help determine how much you can afford
- Answer questions about the current market
- Help you compare homes from different neighbourhoods
- Show you a range of possible homes that fit your needs
- Preview properties to prevent wasting your time
- Make appointments to show you potentially interesting homes
- Explain financing options (interest rates and mortgage products)
- Draw up the legally binding contract between you and the seller
- Assist you in successfully completing the transaction
How to Choose an Agent
Not all real estate professionals are created equal. Since you'll be working closely with this person for weeks, even months, you'll want to find a professional whose personality and methods best fit your needs. How do you do this?
- Ask friends and family for the names of professionals they've worked with
- Go to open houses - this is a great way to meet agents on duty
- Drive around interesting neighborhoods and take note of the names on For Sale signs
- Once you've found a professional who seems to fit the bill, ask questions! Pay particular attention to their answers. Were they listening to you? Do they seem like they're genuinely interested in helping you? Go with your instincts. If it feels right, it's probably a good match.
Signing a Buyer Agency Agreement
Once you've chosen a real estate professional, they may ask you to sign a Buyer Agency Agreement. This agreement guarantees that the agent and brokerage you choose will represent your needs exclusively. In exchange, the agent agrees to represent your needs first and to keep information concerning you, the buyer, confidential.
The agent you choose is bound ethically to be honest, legally to not misrepresent, and responsibly to take care when answering questions or providing information. Basically, Buyer Agency binds the professional you choose to always act with your best interests at heart.
What about Private Sales?
Looking for more info on For Sale by Owner? Click here to learn more about Private Home Sales »
The House Hunting Process
Now that you've been pre-approved for your mortgage and you know how much you can spend, it's time to begin the hunt for your new home. This is undoubtedly the most exciting part of the process, but be prepared!
Make a List of Needs and Wants
It may be easy to fall in love with a swimming pool or en-suite bathroom, but it's important to keep your needs (like a third bedroom or proximity to work) separate from those wants (do you REALLY need that fireplace?). Take the time to establish what your needs are, and arm yourself with a list on house hunting trips.
How To Avoid a Bidding War
You've set your sights on your dream home... But is someone else also ogling your abode of choice? Survive a nasty bidding war - and avoid spending more than you mean to. Click here to learn more about bidding wars »
Hidden Costs of Buying a Home
The cost of buying a home amounts to more than the down payment and your mortgage payments. First-time home buyers are often shocked when they see the total amount they pay on closing day. Prepare for those costs now, and you'll avoid unpleasant surprises later. Plus, you can negotiate with your broker or lender to waive some of these fees.
Land Survey: $1,000 - $2,000
Most lenders require a survey of the property that outlines its boundaries so there are no problems with neighboring properties later on. Although they may accept the existing survey, depending on when it was last conducted, it may need to be done again.
Home Inspection: $350 - $600
Most lenders will require a home inspection, but even if they don't, it's worth the peace of mind to get one done. A home inspection can cost several hundreds of dollars.
Insurance: 1.75 - 2.95% of Mortgage Value
If you are applying for a high-ratio mortgage (with a down payment of less than 20% of the purchase price), your lender will require you to purchase mortgage default insurance. While this provides protection for the lender, you may want to consider mortgage life insurance for your own protection. This type of insurance protects you and your family in case, for some reason, you are unable to make your mortgage payments. Finally, most lenders will also require you to protect your home with fire and extended coverage insurance. Quite often, these types of insurance can be calculated right into your monthly mortgage payment.
Life Insurance or Mortgage Life Insurance
It’s also important to ensure you have an adequate life insurance policy in place should the worst happen, and your loved ones are left with paying down the mortgage payments. Many lenders offer a mortgage-specific life product that you can add on to your mortgage, but an individual life plan can be a better fit for many buyers as it offers greater peace of mind and less limitations on how you would use the policy payout. Click here to learn more about life vs. mortgage life insurance »
Legal Fees: $500 - $1,000
Your lawyer will do a title search, register and prepare your mortgage, and draw up the title deed - and you're responsible for the bill for all that paperwork. Lawyer's fees can be quite hefty and do include HST (where applicable).
Land Transfer: 0.5 - 2% of Property Value
Land transfer tax is paid by everyone who purchases property. Rates vary between .5% - 2%.
(Dependent on your province - e.g. 13 % in Ontario) Implemented in July of 2010 in Ontario and British Columbia, HST (Harmonized Sales Tax) is applied to the purchase price of all new homes, but not to resale homes. It has been added to all services, including your lawyer's fees, your real estate professional's commission, the home inspection and the moving costs. HST has not been implemented in all provinces across Canada.
Your lender will only lend you a percentage of either the appraised market value of your home, or the home's purchase price - often, the lesser of the two. Someone on the lender's staff will conduct the appraisal, but the cost of it comes out of your pocket.
Extra Money for First Time Home Buyers
Finally, some good financial news for cash-strapped first-timers: there are government programs and tax credits to help offset some of the cost of your home purchase.
The Home Buyers’ Plan
As a first time home buyer, you're eligible for the Home Buyer's Plan, which will allow you to withdraw up to $25,000 from RRSPs to put toward your down payment. The catch? Any amount you withdraw must be paid back within 15 years, with a set amount required for each year. If you can't pay it back on time, the remaining amount is added to your personal income for that year.
Home Buyer’s Tax Credit (HBTC)
The Home Buyer’s Tax Credit (HBTC) is a newer, non-refundable tax credit for qualifying home buyers. Based on the amount of $5000, the HBTC is calculated by multiplying the lowest personal income tax rate for the year.For example, in 2009 the lowest rate was 15%. $5000 x 0.15 = $750 so the 2009 HBTC was $750.
To qualify for HBTC, you or your spouse have already bought the home, and haven’t owned or lived in a primary residence for at least four years before the date of purchase.
I’m Closing the Deal
So you’ve found the perfect home in your ideal neighbourhood. It’s time to make an offer! From making it yours to paying your mortgage off faster, here’s what you need to know when embarking on homeownership.
Making An Offer
So you've found your perfect home - and the price is right. Whoohoo! Now, it's time to make your claim. If this is your first time, you've probably never laid eyes on an Agreement of Purchase and Sale before. Don't worry - your lawyer or realtor can walk you through the finer points of the process.
Determining The Deposit
When you put an offer in to purchase a home, you are also expected to provide a deposit. This assures the seller that you will indeed go through with the sale when closing day arrives - and they keep the amount if you don't. If you do go through with the sale, the deposit will be credited in full and put towards the purchase of the house. There is no set amount that you need to provide, but generally speaking, a higher deposit says you're a serious buyer. And remember - the deposit and the down payment are not the same thing!
See the Difference Your Deposit Makes!
Use our handy Mortgage Calculator to determine how different deposit values can change your total interest paid.
Trust us - this is one corner you do NOT want to cut. This step can come either before or after you make an offer, but you want to make sure it's done! That way, you can dodge being saddled with potential major issues. If you were to do your own inspection, most likely you'd pick out surface problems - chipped paint, worn out floors, stained carpets - but you may not know enough about the roofing or foundations to do an accurate inspection. Since these flaws can be some of the most costly, you'll want to leave the inspection to the expert, and you should choose a licensed professional.
Making an Offer
Chattels and Fixtures
Some sellers will entice buyers by offering them chattels or fixtures. Chattels are moveable objects that aren't normally considered part of the home. They include items such as microwaves, washers and dryers. Fixtures are permanent improvements made that would normally be included in the sale, such as chandeliers and antique doorknobs. Since it isn't always clear what will stay, make sure to specifically list items that you're unsure of. The last thing you want is an unpleasant surprise on closing day.
At this point, if your offer has been accepted, it's time to close the deal! At closing, both parties must agree that all legal and financial obligations have been met. This includes any and all conditions that were written into the offer. If everyone agrees, ownership and possession will be transferred to you.Congratulations! If you've made it to this point, you are mere steps away from owning your own home.
Preparing for the Big Move
So you've conquered closing day - now it's time for the big move! This is a busy time, and you'll have tons to keep track of - we've put together a handy checklist to keep you organized
- Home Insurance: Make sure your new home is protected
- Phone, Internet and Cable: Contact your provider and arrange a time
- Hydro: Get switched on!
- Change of Address: Call the post office and have your mail transferred
Change Your Address
You'll also want to change your address on your:
- Bank statements
- Credit card bills
- Charge cards
- Driver's license
- Health card (contact doctor's office)
- Library card
- Mail subscriptions
- Income statements from work
Owning your own home is an exciting adventure. Moving your belongings into the home, however, is not as much fun. Moving can be a daunting and costly task, but it doesn't have to be.
The DIY method can save you big, but you do have to be organized. Hiring professional movers, while costly, might be the way to go if you have little time or patience.
Stay sane on moving day with our handy checklist of things to do NOW to get ready for the big day.
Should You Hire a Pro?
Hiring professionals sure takes the pain out of moving, but it'll cost you. It's important to ensure the company you hire is right for your move, so references are a must. Here are some other considerations to make before hiring a professional moving company:
- Will they pack your possessions for you?
- Do they provide insurance?
- How experienced are they?
- Do they charge an hourly or daily rate?
- Is their rate fixed? What does it include?
- Are you liable if they hurt themselves during the move?
- Will your belongings be wrapped and protected?
- How many movers are included?
- Are there reviews of the company online?
Looking to save costs with the DIY method? We've put together a list to help you pack with ease.
Preplan Your New Budget
Now that we've assessed the costs outside the purchase price and those associated with moving in, it's time to develop an ongoing budget. You'll want to sort out your monthly expenses, determine how to pay off your mortgage sooner, and factor in the renewal process. It's time to get organized!
Budgeting for Home Expenses
While the transition from renter to homeowner is filled with rewards, it comes with its own set of responsibilities. Budgeting for home expenses requires organization and some degree of restraint. It's also important to have money set aside for unexpected maintenance costs - just in case. Typical monthly expenses include:
- Property taxes
- Maintenance & upkeep
- Mortgage payments
- Heat / air conditioning
- Condo fees (if applicable)
- Appliance rental (if applicable)
Pay Off Your Mortgage Faster
So you've secured that mortgage... now you can focus on getting rid of it! Wouldn't you like to pay less - and pay it off faster? Of course you would! And it's all possible with our three easy steps!
Find The Best Rate!
Your mortgage is probably the biggest investment you'll ever make - this is not the time to settle for second best. Look beyond the offerings of your lender and see what the market has in store - and for you, that's SAVINGS!
Owning a home is both exciting and rewarding, but the attached price tag can be overwhelming to some. The fastest way to financial freedom is a plan to pay your mortgage off as quickly as possible. Remember - the faster you pay it off, the less you'll be shelling out in interest.
Most of us get paid bi-weekly, so why not pay your mortgage bi-weekly as well? In fact, on average, those who choose accelerated payment plans pay their mortgages off 5 years quicker than those who don't. This plan is another great way to cut back on the interest.
Lump Sum Payments
Depending on the type of mortgage you have, you may be allowed to put lump sums toward it whenever possible. If you choose a closed mortgage, you are restricted to a certain percentage of the mortgage value; however, if you choose an open mortgage you have the luxury of making additional payments whenever you want.
If you're lucky enough to receive a tax rebate or an inheritance of some kind, you could put the money toward your mortgage. If you have additional funds, and you've maxed out your prepayments, you could always set the extra money aside until your mortgage is up for renewal. Come renewal time, you will be able to put the additional funds toward it without penalty.
Renewing Your Mortgage
A few weeks before your mortgage's renewal date, you'll see it - the glossy white envelope from your bank inviting you to auto renew your mortgage. Here's what you need to do: take the envelope, walk over to your recycle bin, and drop it in. Why on earth would we suggest ignoring a seemingly convenient option from your bank? Because there's one very important thing that's NOT in that envelope - and that's the LOWEST RATE.
5 Reasons NOT to Sign Your Mortgage Renewal Letter
What your bank doesn't want you to realize is, renewal time offers an awesome opportunity - to score yourself an even lower rate! It's so imperative that you take advantage and shop around the market. There's money to be saved - pure and simple.
- You can save money
- Even a small difference in rate will create BIG savings over the years
- Over the years, your circumstances change - and so do your mortgage needs!
- You can reassess your relationship with your current lender
- You'll feel better about your choice
Before each renewal, take the time to evaluate the past term. Were your needs being met? Is there a better product or rate out there?
You're a newly-minted mortgage guru! This ends the First-Time Home Buyer's Guide - we hope our series has equipped you with the knowledge to make informed decisions about choosing your home and taking control of your mortgage options. Remember the golden rule - be prepared beforehand, and you'll ride out any unexpected surprises with ease. And above all - enjoy your new home!