Shopping for a first home can be fun and exciting, but it can also feel like a daunting discovery process, with crucial issues and important steps cropping up around each new corner.
For obvious reasons, most first-time buyers are inexperienced, unlikely to know much about or entirely understand the important details that go into a successful property purchase.
To help educate those who haven’t had much exposure to the home-buying process, here are a few tips and ideas that are sure to benefit first-time buyers.
Start by surveying your financial well-being
Chances are you’ve never bought anything before that costs as much as a home. This is one of the biggest investments you’re ever going to make, so it’s important to be sure you’re starting from a secure financial position before you start scouring listings.
Begin with your savings. Have you been able to stash away an emergency fund equivalent to three or even six months’ worth of salary? Do you have enough left over to put towards a down payment (generally between five to 10 percent of the average property cost in your area)?
Second, take a look at your spending. Build a detailed budget that includes your income, all your monthly costs, and any debts you may have, such as car payments or other loans. The goal is to find out how much you can reasonably put towards a mortgage each month, as well as other house-related costs such as utility bills, property taxes, and insurance. Once you know the precise state of your financial well-being, it is time to figure out how much house you can afford.
You’ll also want to check your credit score, as this will affect the interest rate you’ll be able to get from mortgage lenders. If your credit score is low as a result of outstanding credit issues, it’s best to deal with these before house-hunting; the impact of a lower interest rate on your mortgage will lead to significant savings in the long term.
Consider borrowing from your RRSP
Depending on the state of your finances and the urgency of your housing needs, you may choose to borrow from your retirement savings to put towards a down payment. The Home Buyers’ Plan lets first-time buyers withdraw up to $35,000 from their RRSP to contribute to the purchase or construction of a home. There’s no tax penalty on the money you withdraw, and you’re required to pay it back to yourself within 15 years, starting two years after the withdrawal.
If both you and your spouse qualify as first-time buyers, you can each make a withdrawal and contribute a maximum of $70,000 from your RRSPs towards a home build or purchase.
Bear in mind, however, that by taking money out of your retirement savings, even if you’re going to pay it back, you could reduce the value of your portfolio by thousands or even tens of thousands of dollars over decades of investing, potentially reducing your income and security in retirement.
Look for a lender
Unless you’re a super saver who’s sitting on a small fortune, you’re going to need to borrow some money to finance your home purchase. Shop around between different financial institutions and mortgage brokers in your area to see who can offer you the best interest rate.
Remember: just because a lender is willing to give you a mortgage for a certain amount, you don’t have to say yes. Resist the temptation to borrow it all and stick to your budget.
In a previous blog, we wrote about the difference between the two main types of mortgages: fixed-rate and variable-rate. Fixed-rate mortgages provide certainty, because neither the interest rate nor the size of your payment will change for the entirety of the term, usually five years. With variable-rate mortgages, your rate and payment might grow or shrink based on external factors beyond your control. Variable-rate mortgages tend to be lower than fixed-rate mortgages but come with potential risks.
Ideally, you’ll find a lender who pre-approves you before you go house hunting. Basically, this means you agree to the terms of a mortgage before finding a property to use it on. Sellers prefer buyers who are pre-approved because it reduces the risk of a deal falling apart.
Ask where you see yourself in 5-10 years, and how you’re going to get there
Moving is time consuming and costly so the less of it you have to do, the better off you’ll be. Before you purchase a property, think about how well it fits your lifestyle now, and how it fits the life you envision in the years ahead. Will the daily commute become a problem? Are you starting or expanding your family, and expecting a need for a kid’s bedroom, or bedrooms? How will child care costs affect your ability to pay the mortgage?
If you’re buying a fixer-upper, or perhaps a place where the kitchen or bathrooms need modernizing, do you have a plan to save for the cost of a renovation? How happy will you be living in the existing home until you can afford to upgrade it?
Better understand home mortgages and what makes Moya Financial different.
To get a first hand explanation of how Moya approaches lending overall and first time home mortgages specifically, we sat down with Paula-Jean Lyn, Director of Credit with Moya Financial.
With three decades of experience helping people realize their dreams and move into their first home, Paula-Jean talks about what makes our approach different, and provides great tips for first time home buyers.