Buying your first home is a very exciting time and there are a lot of unknowns. Naturally, the most important question on any homebuyer’s mind is “How much of a mortgage can I/we afford?” and understandable so. The answer to this question is the beginning of the homebuying process. Knowing how much house you can afford allows you to look at houses within your budget, and decide if you will opt for a smaller home in an expensive metropolis or a more roomy home in the suburbs. After all, it’s inefficient to look at houses without knowing whether or not it is within your budget. But there are other and arguably more important factors to consider at the very beginning of the purchasing process. With these questions in mind, first time home buyers are at a greater advantage and will have a much smoother home buying experience.
Before we dive in, it is important to consider that a first-time homebuyer doesn’t just apply to your first home ever purchased. From the Government of Canada’s perspective, if you have not been living in a home with your name on the title for at least 5 years, you are considered a first-time homebuyer.
Do I really need to put down a 20% downpayment?
It is commonly believed that homebuyers will need to put down 20% of the purchase price to obtain a mortgage, but this is a myth. Although there are benefits to putting down 20%, such as having a 30-year amortization (which incurs lower monthly payments), depending on the purchase price of the property homebuyers may only need to put down 5% to obtain a mortgage loan. There are many factors to consider when deciding how much of a downpayment to pay, such as having your mortgage insured, insurable or uninsurable. It is best to talk with a qualified mortgage agent to find the right downpayment amount based on all factors of consideration.
What costs are involved in buying a home, besides the mortgage loan?
Those who are unfamiliar with the process of purchasing a home are often caught off-guard when the additional costs of the purchase start adding up. The closing costs of purchasing a home can be overwhelming when a first-time homebuyer has just spent all of their savings on their downpayment.
Here are costs to consider heading into the homebuying process:
Your real estate lawyer plays an important role in managing and disbursing your downpayment, performing important searches on the title, such as property tax searches, or building, zoning and planning searches and ensuring that there are no liens or unregistered agreements against the property. These are vital processes to a successful purchase and your lawyer’s fees should be budgeted for in advance.
Land Transfer Tax
All provinces have a Land Transfer Tax payable at the time of closing which is calculated as a percentage of the purchase price. If purchasing a home in Toronto, you will also be subject to a Municipal Land Transfer Tax. This is also something to be aware of as it will need to be paid before finalizing your ownership of the property.
This is purchased through your lawyer as many lenders require title insurance which protects you against losses in the event of an ownership dispute, such as fraudulent liens against the home.
After all the planning, preparation, and paperwork of the purchase process, it is easy to forget about the additional costs on moving day. Whether doing it yourself or hiring help, be sure to set aside the necessary funds to help your big day go smoothly.
Do I need to worry about my student loan (or other debts)?
An important factor in the mortgage approval process is considering your debt-to-income ratio which is calculated by dividing your recurring monthly debt by your monthly gross income. Having a low debt-to-income ratio helps convince lenders that you will be able to pay your monthly mortgage payments and not be overwhelmed with other monthly expenses. Speak to your mortgage agent to assess your debt-to-income ratio and find out if any debts will need to be paid down before submitting your mortgage application to the lender.
Are there any government programs that can help with my first home purchase?
Absolutely. The Government of Canada usually has programs in place that help first-time homebuyers get a leg up on their big purchase. Currently (Sept. 2020), we have:
First Time Homebuyers Incentive
This is a shared-equity mortgage with the GoC that offers 5%-10% of a first-time homebuyer’s purchase price in exchange for shared investment in the home. When repaying the monies to the government, it will be at the market value current to the time of repayment. You will need to repay these monies at the time of sale or 25 years after purchase (whichever comes first). You also have the option to pay it back earlier without penalty.
Home Buyers Plan
This allows you to withdraw up to $35,000, tax-free, from your Registered Retirement Savings Plan (RRSP) to buy or build a qualifying home. With this program, it is important to remember to repay the withdrawn amounts within the 15 years following withdrawal, and consider how this withdrawal can affect your retirement plan.
What tax rebates are available when you purchase a home?
The federal government, as well as some provincial and municipal governments, have tax credits and rebates in place to help first-time homebuyers offset the closing costs of their first home.
First-Time Homebuyers’ Tax Credit (Federal)
First-Time Homebuyers may be eligible for a $5,000 non-refundable income tax credit when purchasing a qualifying home that results in up to $750 in federal tax relief.
Land Transfer Tax Refund/Rebate (Provincial and Municipal)
The Province of Ontario offers a Land Transfer Tax Refund of up to $4,000 for first-time homebuyers on purchasing qualifying homes (the provincial definition of a first time homebuyer differs in that only those who have never owned a home anywhere in the world qualify). The City of Toronto has a similar program for the municipal land transfer tax, which is up to $4,475 in addition to the provincial rebate.
Those who have purchased a home know what to expect when facing their next purchase. First-time homebuyers are at a disadvantage when trying to keep track of all the moving parts of the homebuying process. A successful venture starts with a successful team – an experienced real estate agent, a knowledgeable mortgage agent and a meticulous lawyer will make all the difference during a somewhat stressful life event.
Kevin Sankar of Next Financial Need is more than just a knowledgeable mortgage agent. Kevin takes a holistic approach to the most expensive investment of one’s life and puts the extra effort to consider his client’s full financial situation and needs, resulting in long term benefits beyond the purchase and sale of real estate. If you have any questions or curiosities about anything in this article, please call Kevin – conversations are always free and honest.