Buying a home is a significant decision in life. People face numerous questions before settling for a home. And selecting the right one is a tedious job that takes days or even months. Are you also one of the first-time homebuyers in Canada? Are you also worried about questions like how to save for the down payment? Is it still ok to buy a house if they do not have all the finances? Is it the right time to buy a house? Has Covid-19 changed the rules and regulations for first-time homebuyers in Canada?
Getting answers to these questions can be stressful, but there is no alternative! But worry not as we have got you covered. This blog will answer all your queries regarding buying a home for the first time in Canada to catalyze the process.
First-time Home Buyers in Canada: Things to Consider
1. Pre-approval is Must
People are too focused on the numbers that they get from online calculators, and their home-hunting experience gets limited because of the same reason. However, a real pre-approval is a much more sophisticated and meticulous process that needs attention from the lender. This approval is based on different factors like credit scores, your income, down payment, etc.
Additionally, you need to ensure that both you and the house are qualified for the purchase. Your lender must be satisfied by the purchase before you process to pay the money with confidence. Hence if you are sure that you have found “The” home, get your lender to process the number and assess if this deal is really worth it. The lender can decline the funds too if they feel that the price you are paying for the home is not right.
2. Be Aware of What You Need to Pay
First-time homebuyers in Canada usually have to pay down payments as mentioned below.
If the price of the house is
The Minimum Down Payment You Need to Pay is
|$500,000 or less||5% of the purchase price|
|$500,000 to $999,999||5% of the first $500,000 of the purchase price|
10% for the portion of the purchase price above $500,000
|$1 million or more||20% of the purchase price,|
However, experts suggest that you should not stretch so much that you have no wiggle room left.
To ensure that your home buying experience is not doomed, you need to have resources that are enough to cover the extra costs that are attached to the ownership of any house. The resources for this can come from your savings, or you might’ve earmarked a part of your salary for unexpected and routine costs for property and repair.
In essence, if you have to pull in all your money to just meet the 5% down payment, keeping the idea of buying a home on the back burner for a while is a good idea. You should at least wait until you have enough resources to support your purchase.
3. Don’t Succumb to FOMO and Buy a House
Fear of missing out is a common factor that pushes people to buy a home. First-time homebuyers in Canada think that if they delay the purchase, they might never get better deals from the market again. However, FOMO or Fear of missing out can not be a driving factor for any kind of purchase. In most cases, it leads to rash decisions that have an adverse effect in the long term.
A tale narrated by the Toronto Bankruptcy expert, Scott Terrio tells about the couple who bought their home in Canada, when the market was at the top during 2016 paid the minimum down payment. However, to make the ends meet, one of the partners took a 2nd job but the hours were limited. Hence, to fulfill the needs, the couple took out loans upon loans and when all the options were exhausted, they resorted to payday loans. In the end, they had to declare bankruptcy.
When you buy a home with a thin margin like this, you need to ensure that you have enough finances to sustain yourself. In the case of the couple, they didn’t think the decision through and ran out of financial backstops to support their needs.
Hence, while buying a house, you should be saving before the thought even occurs in your mind. Since buying a house is an inevitable event for most people, it’s best to start early. You need to recognize every opportunity to save money, as even a down payment amounts to a significant sum.
4. Factor in the Future
The first-time homebuyers in Canada should also think about the future plans and the different changes that happen with respect to the economy and life. That implies an assessment of the 5-year goals and being candid about where you will be 5 years from the time you buy.
If you want to start a family and have kids, will your current finances be able to support your daycare needs or the needs of an additional family member? Will the income of one partner compensate for the loss of income of the other in case they decide to leave the job to take care of the child? Is your job stable enough? This is only the tip of the iceberg that you need to ponder about while buying a home.
Another aspect of the future that you need to consider is, commuting from the home to the office and other places you frequently visit. Do you like the kitchen? Will you need to renovate the home sometime in the future? Do you have the finances ready for the said renovation? Hence, future-proofing means buying a home or taking an action that brings long-term satisfaction and adapts to the changes.
5. First-time Homebuyers in Canada – Never Hesitate to Ask Questions
The prices of housing in Canada are soaring high. And in such cases, people have to resort to loans and borrowing from other family members to fulfill their needs and payments. For a lot of first-time homebuyers in Canada, saving the down payment poses the biggest problem. Even for people who have a good income, saving up for the payments can be quite tedious.
Hence, the buyers turn to families to fulfill their needs. As per a report by CIBC in 2021, Canadian parents gave their children over $10 billion to pay their down payments. The average amount that was gifted amounted to $82,000, which was more by 60% compared to 2015, where the average was $52,000.
This family gift might not be the option for everyone, but the people who are fortunate enough can use this to enter the property market of big cities in Canada.
You should ask relevant questions from financial institutions, lenders, other buyers to envision a future course of action. If there is hesitation in solving your queries, many factors will go unnoticed and pose a threat to your purchase in the future.
Also Read: First Time Home Buyer Programs in Canada
You can also find the answer to many questions on online forums, blogs, and websites. All you need to do is type in your question and a plethora of results will pop up to help you. Hence, if you cannot find the time to conduct meetings due to your schedule, you can always use the internet for answers anytime.
6. Don’t Worry About Meeting the 20% Down Payment Criteria
If you can arrange a down payment of 20% or more, you can avert situations of default insurance that is governed by CMHC (Canada Mortgage and Housing Corporation) or the private insurers Sagen and Canada Guaranty. Houses which cost over $1 million are not eligible for coverage by CMHC.
On the basis of the mortgage cost, 2.80% to 4% is added by the default insurance. For instance, on a mortgage of 4500,000, 4% extra would be added, which means you will be paying $20,000 more.
Hence, if you are taking up a 25-year mortgage, with 2.5% on the installment, you will be adding $90 more to the monthly expenses. Additional costs can be overwhelming for first-time homebuyers in Canada, as they are already saving a hefty sum to buy the house. However, if they take up insured mortgages to lower their burden, they enjoy low-interest rates. Now when you default on the payments, the insurer will be responsible for it.
You can also use the funds of your RRSP (Registered Retirement Savings Plan) via Home Buyers’ Plan if you qualify for all the requirements. If you are a first-time home buyer in Canada, you and your partner can take out up to $35,000 from your respective RRSPs for the down payments. However, these funds should’ve been in your account for at least 90 days before you cash them out.
This 90-day obligation can be an obstacle in the way of first-time buyers who have not planned much in advance. Many times, buyers fail short of keeping their funds in the RRSP account for at least 90 days. The experts recommend prospective buyers start putting money in their RRSP long before they look for houses to avoid any problems in the future.
7. Explore Different Options
Once you have decided to buy the house, all that is left is to take the final steps. This includes assessing the terms of your mortgage, selecting the mortgage which is best for you, and accepting the terms that align with your goals.
In the last stage, it is crucial that you are fully aware of what you are doing. Hence, understanding the fundamentals of mortgages is not a requirement but a necessity. For example, what is the difference between mortgage term and mortgage amortization?
Read: Read: How Can You Transfer RRSP to Your Spouse?
The mortgage term is the time for which the contract of mortgage will be operational. On the other hand, mortgage amortization means the estimated time in which you will be able to fulfill your payment in full. You should also have a strong understanding of how you can open mortgages so you can fulfill extra payments without levying any heavy penalty. While a closed mortgage provides better rates that have different repayment terms.
Fixed vs Variable Mortgage
The biggest decision that you are required to make is selecting between fixed mortgage rate and variable-mortgage rate. The former rate stays the same through the mortgage terms and does not change even when the rates in the broader market fall or rise. On the other hand, the variable mortgage rate is variable through the term. This rate rises or falls in conjunction with the changes in the credit market.
The selection of mortgages is not simple maths. It is dependent on the budget, the mortgage broker, the property you are buying. You have to take time to factor in all the aspects and select the right mortgage option.
Rules to Abide by for First-time Homebuyers in Canada
Buying a home is the biggest purchase in your life and it should not be a rushed one. Since you are dedicating most of your savings and income towards it, it’s crucial to get a return that is equal. Since the rules that govern the purchase are also dynamic, you need to be prepared for any uncertainty.
With the pandemic that struck the market and brought situations that were never perceived by the homeowners, it is the need of the hour for the owners to be more involved in this purchase. The COVID-19 pandemic has affected the economy, income, and prices on a drastic level — and the aftermath is still unfolding itself.
If prospective buyers stick to the aforementioned advice, they can steer clear of any financial problems. Home is a necessity and a place where people forge many memories. Hence, buying it should be done meticulously and through the guidance of experts.
Every piece of advice should be taken up as a holy grail if a person wishes to buy a dream home without going bankrupt, facing intervention from a lender, facing a lack of finances, or getting deceived. Hence, the 7 advice mentioned in this blog will help you navigate through the changing landscape of buying a home smoothly.