When it comes to life goals, it’s no surprise that buying a home is at the top of the list for most Canadians. Owning a home can be incredibly rewarding, but it’s also a lot of responsibility. The process of buying a home involves a lot more steps than simply applying for a mortgage and paying the asking price of the home. Since buying a home will likely be one of the biggest financial transactions in your lifetime, you’ll want to be as informed and prepared as possible before you embark on this adventure.
How Much House Can You Afford?
Homeownership can be very exciting, but it’s not always the best option for everyone. Before you decide to purchase a home, it’s wise to carefully consider all the costs you’ll encounter and what will be required of you as you move through the home buying process. If you’re unsure of where to begin, a good starting point is to ensure that your monthly housing costs (mortgage and utilities) are no more than 35% of your gross monthly income. Also, your entire monthly debt load should not be more than 42% of your gross monthly income. This includes your mortgage payments and all of your other debts (credit cards, loans etc.).
You’ll want to compare how much money you currently spend on expenses and debt payments with the amount you have saved or invested. Ask yourself how much you can afford to spend on housing each month without risking your financial health and how much you’ll need to save upfront before that’s possible.
Saving Up For Your Home
One of the first steps to owning your own home is saving up enough money for a down payment. In Canada, home buyers are required to put down at least 5% of the home purchase price as a down payment. If you put down less than 20%, you’re required to purchase mortgage default insurance.
To reach your savings goals, you may want to consider setting up automatic transfers to your savings account with each pay cheque that’s deposited. You can use a TFSA (Tax-Free Savings Account) to save up your lump sum without worrying about being charged tax on the funds. You can save using a RRSP (Registered Retirement Savings Plan) and if you’re a first-time home buyer, you can even use the Home Buyer’s Plan (HBP) to withdraw up to $35,000 from your RRSP tax-free to put toward the purchase of your first home.
Costs Associated With Buying A House
Knowing and sticking to your budget is a big part of being prepared to buy a home. Take the time to work out a realistic budget and ensure you’ve taken into account every cost you’ll likely encounter when you buy a home, so as not to fixate solely on the purchase price. You’ll want to consider the following costs in your budget and expect to spend between 3% – 5% of the home’s purchase price on these additional items:
– Legal fees
– Home insurance
– Land registration
– Adjustment costs
– New build goods and services (GST)/harmonized sales tax (HST) fees
– Title insurance
– Home inspection
– Land transfer tax
Choosing The Right Home Loan For You
When it comes to financing your home, you’ll have a few different options for loans depending on your lender and if you meet the pre-qualifications. It’s always advisable to research your options in advance so you can make the best possible decision for your personal financial situation. The type of mortgage and amortization period you choose will have a big impact on your financing options and how they fit into your budget. The last thing you want to do when you’re applying for a mortgage, is jump at the lowest rate thinking it’s the best deal, without realizing that’s not always the case.
One of the first choices you’ll face when you apply for a mortgage is choosing between a variable or fixed rate. With a variable rate mortgage, the rate changes with the prime rate +/- a specific amount. Though the rate here may fluctuate, the relationship to the prime rate stays the same for the course of your term. A fixed-rate mortgage means the payment you make each month and the mortgage rate itself stays the same for the term of your mortgage. While variable rates tend to be slightly lower than fixed rates at any given time due to the fact that they are inherently less risky for lenders, that isn’t always a guarantee so it’s important to do your homework before making the choice that’s best for you.
Choosing A Lender/Broker
When it comes to choosing a lender/broker to help you navigate your home buying journey, it’s wise to do your research and ensure you understand the pros and cons of each mortgage product you’re considering before making any final decisions. Consider looking at the following with a critical eye as you weigh your options:
There are lots of additional costs that can significantly increase the price of your mortgage, and if you’re too busy being distracted by low overall interest rates, you could miss them. Whether it’s underwriting, application fees, appraisals, broker fees or settlement costs, you’ll want to be aware of what other costs you should consider when comparing lenders.
As lenders are legally required to provide detailed estimates, borrowers are also legally entitled to negotiate for better terms, especially if they have a high credit score or intend to make a significant down payment. If you have the upper hand as a responsible borrower, you can ask for better interest rates or even a reduction of fees. Being a part of your current financial institution may entitle you to better rates.
Once you find terms you’re happy with, request a written rate lock as a legally binding agreement that includes the time period of the loan and the agreed-upon rate. You’ll want to know in advance if the lender charges an additional fee for rate locks so you’re prepared to factor that into your overall forecasted costs.
Picking The Best Rate/Promotions On Certain Loan Products
As a borrower, you can do your own research online to see what rates each lender offers, what type of products they provide and how these products compare to those found elsewhere. Do keep in mind that interest rates can fluctuate often and promotions can come and go frequently, so make sure your comparables are current and accurate.
The process of applying for a loan will involve a LOT of paperwork and gathering of information so it’s important that you choose a lender who will make that process run smoother and who you get along well with. Someone reliable who is happy to answer all your questions can go a long way toward making the process smoother.
Want to get access to the best rates possible? You should consider approaching your current financial institution (bank or credit union) where you conduct your personal banking as sometimes special rates or promotions are reserved for clients when it comes to loan products. If you’re not dead set on a face-to-face relationship, you’ll also have the option to choose an online lender. These lenders typically have a lot less overhead and as a result, can offer customers lower rates and fees. Keep in mind that if you tend to do better having a lender that walks you through every step of the process and can sit down with you to go over concerns/questions, an online lender may not be for you.
Getting Your Mortgage Preapproval
Applying for a mortgage requires a lot of paperwork so you’ll want to be ready in advance before you approach this step to get preapproved. Take the time to ensure you have the following documents ready before moving forward:
- Current employment information like a T4, pay stub or letter from your employer
- Other sources of income like investments or business income
- Savings and investment statements for the past 90 days
- If you are planning to use the Home Buyer’s Plan, proof of withdrawal from your RRSP
- If you are using a financial gift from a family member, you’ll need a letter stating the gift is not a loan
- A void cheque
- An inventory of all other debts and assets in your name like cars and car loans
Despite how daunting it may seem, taking the steps to get preapproved for a mortgage is always a wise decision when you’re starting to think about looking for a new home. Obtaining mortgage preapproval means the lender has committed to lending you a specific amount of money to purchase a home (subject to conditions like a property valuation). While this is never a guarantee that you’ll receive a specific rate or mortgage from that lender, it can help you better navigate the market with a more clear understanding of what you can afford.
Your final approved mortgage amount will depend on the value of the property and the amount of your down payment. The lender will want to make sure you can afford to pay for all the costs associated with the loan and the home purchase before they offer you any money so it’s always wise to be prepared and ensure you give yourself the best chance for success.
Shopping For A Home
Naturally, this is the fun part of the process! But it’s a lot more fun (and significantly less stressful) if you’re prepared in advance before you start looking through page after page of real estate listings or driving around your favourite neighbourhoods to scope out options.
There are a lot of things you’ll want to consider before you begin shopping for a new home. Taking the time to work through these considerations in advance will make your search a lot more efficient:
– Figure out what features you’re looking for in a home. How many bedrooms and bathrooms is ideal? Are you looking for a garage? Is a pool on your wish list? Take the time to look for comparable homes in the neighbourhoods you love to make sure that your wish list is achievable on your budget.
– Consider your potential commute to/from work and family/friends so you can determine which areas are in your best interest. You may also want to consider amenities like school districts, proximity to shopping, access to transit etc.
– Do your research when it comes to property taxes so you’re well aware of what those costs will look like should you decide to buy in specific neighbourhoods.
– Be prepared to move quickly as Canada’s current housing market is very competitive. The more prepared and organized you are, the better chance you’ll have of scoring your dream home.
Making An Offer
Once you’ve found a home you love, things can move very quickly, but there’s no need to panic! Your REALTOR®’s job is to draw up the paperwork and recommend a price along with any conditions. It’s important to note that Canada’s current competitive housing market suggests that you may not win the first home you bid on, but don’t give up! Once your offer is accepted, you’ll pay a deposit to the buyer (which is applied against the purchase price of the home), arrange to finalize your mortgage financing through your mortgage broker and arrange for a home inspection (if applicable).
There’s a chance that you may need to revise your offer based on the findings of the home inspection, if you choose to include one. Once everything is good to go, you’ll secure your financing, and with the help of a real estate lawyer, pay your down payment and transfer title to the home into your name. This entire process can take about 30 – 60 days, depending on the terms of the offer to purchase.
Home Closing Process
While it may seem a little confusing, the closing process is a big part of the home buying experience. For this reason, being prepared for closing day is vital to ensure everything goes smoothly for both you and the seller. At closing you can expect to review and sign some legal/financial documents including the agreement between you and the seller transferring ownership of the property and the agreement between you and your lender regarding the terms and conditions of the mortgage.
The final document review and signing will usually take place at your lawyer’s or notary’s office, sometimes a few days before the official close date. On closing day, your lawyer/notary or closing agent will handle arranging the delivery of closing funds to the seller’s lawyer, registering the transfer and mortgage and releasing keys to you for your new property.
You’ll want to bring a cashier’s check or proof of wire transfer for the amount of your closing balance (the buyer’s statement of adjustments), two forms of ID and proof of property insurance. Your real estate agent will help you review all documents thoroughly and make sure your personal information is correct on all forms.
Buying a home in Canada doesn’t have to be a daunting or stressful process. Being prepared and understanding what to expect from each step will make your experience a lot more pleasant. If you’re thinking about looking for a home, our team can help! Connect with us to learn more about mortgages, preapprovals and how to navigate the home buying process like a professional.