Learn Before You Leap
Purchasing your first home is exciting, but it’s important to understand what’s involved.
How much can you afford?
The first thing you need to do is calculate your net worth. Your net worth is the amount left over once you’ve subtracted your total debts from your total assets. This can work as a guide to show you how much you can afford as a down payment.
Prepare a budget
Next, prepare a budget. Detail all of your current monthly expenses and debt payments. Be as accurate as possible. Add everything up and then subtract this amount from your monthly take home amount. This will then give you a clear idea of how much you can truly afford for a mortgage payment each month.
Monthly mortgage payments
Just like when you rent, as a new homeowner, you will have a monthly payment to make on your mortgage. The size of your mortgage payments will depend on your down payment, the amortization period (25, 30 or 35 years), the term (fixed rate, variable rate) and your payment schedule (bi-weekly, bi-weekly accelerated or monthly). Other options such as cash backs and how they affect your mortgage are also things to consider before you commit.
The down payment
In order to buy a home, the first thing you will need is a down payment. The more money you put down, the less interest you will pay over the life of your mortgage. The minimum mortgage down payment amount that is typically required in Canada is 5%. In order to put less than 20% down, mortgage default insurance is required. Mortgage insurance premiums are paid once, but can be added to the principle of the mortgage. First-time homebuyers have a variety of options for funding their down payment:
- Accumulated savings
- Money gifted from an immediate family member
- Money from your RRSP
Using your RRSP for your down payment
With the Home Buyers Plan provided by the Canadian government, you can withdraw up to $25,000
from your Registered Retirement Savings Plan (RRSP) and use the money for a down payment. If two applicants are on the mortgage, each person can withdraw up to $25,000 each. To find
out more visit www.servicecanada.gc.ca
How much can you borrow?
Before you start looking at homes, visit your lender for a pre-approved mortgage. The lender will look at your finances and determine the amount of mortgage they are willing to give you. The maximum amount you can qualify for depends on a number of factors but the most important are your household income, your down payment and the mortgage interest rate. These are all placed into formulas used to calculate your borrowing limit. Your credit history will contribute to how much a lender will be willing to lend to you. Make sure your credit report is in order to avoid any problems.
Remember your budget
Quite often you will qualify for more than you expected. This is where preparing your budget beforehand is so important. Remember, your goal is to not over-extend yourself financially. Let your budget be your guide in determining how much mortgage to take on. You now know how much you have to spend, but not all of it can go towards the purchase price of your new home. Some of it will have to be used to cover costs associated with buying a home.