It’s important to avoid these to prepare you for your new journey of home ownership.
Buying your first home can come with a lot of excitement. But oftentimes, we overlook the amount of work that goes into preparing for the home-buying process. And if you’re rushing into your purchase before considering some key factors, you could be living with regret (and debt) for a long period of time. There are some crucial mistakes first-time home buyers make and it’s important to avoid these to prepare you for your new journey of home ownership.
What to avoid when it comes to affordability
1. Making too small of a down payment
It’s possible to get your first home for as little as 5% down. However many first-time home buyers can get caught up in borrowing potential, higher interest rates, and try to purchase something they ultimately can’t afford in the long run. Many people think the minimum downpayment in Canada needs to be 20%, but this isn’t true (unless you’re buying a home that costs $1 million or more). A larger down payment does allow you to have smaller monthly payments, get a better mortgage rate and gain more equity, but if you can’t afford it, anywhere between 10% to 20% is a good range to start. The most important part of a down payment is finding an amount that leaves you with a monthly payment you’re comfortable making for a long period of time.
But, don’t forget that if you’re making less than 20% off a down payment, you are required to also purchase mortgage loan insurance.
2. Not getting pre-approved for a mortgage early on
Getting pre-approved for a mortgage is as simple as filling out a quick and easy online application. Many potential homebuyers like to scope out the market first before applying for pre-approval. Though this may seem like a logical first step, there’s nothing worse than finding your dream home and realizing you won’t have the financing for it. Your pre-approval will also help you with budgeting to better understand what you can afford during your search.
3. Not finding the best rate for you
When it comes to finding the mortgage that’s right for you, it’s not just about finding the best rate: it’s about finding the best lender, too. When you start your home buying journey, it’s important to find a lender that works with your terms. Not only will they have your best interests in mind, they’ll work with you to find the best rates, amortization payment period, payment structure, all while hoping to work around your schedule or even giving you the option to do it all online.
4. Looking into first-time home buyer programs
First-time home buyers don’t always realize how many incentive programs exist that give them deductions towards their first home purchase. In Canada, there are a few different programs that exist in order to optimize your savings and increase your home equity:
- Canadian Home Buyers Plan (FTB): This program allows you to borrow up to $35,000 from your Registered retirement savings to use towards a down payment
- CMHC First-time home buyers incentive program (FTHBI): This program lets you borrow between 5% to 10% from the CMHC to put towards your down payment.
- First-time home buyers tax credit: This tax-credit on your first-home purchase from the Canadian government helps to offset the high costs that come with closing. You could receive a non-refundable income tax credit of $10,000 which results in about $1,500 of federal tax relief.
- Land Transfer Tax Refunds: Some provinces like Ontario offer first-time home buyers an incentive to reduce closing costs, specifically land transfer tax. As a first-time buyer, you could get a refund of up to $4,000. Plus, certain municipalities like Toronto offer an additional rebate of their Municipal Land Transfer Tax, which maxes out at $4,475.
5. Emptying your savings account
Buying your first home will inevitably be one of the most expensive purchases you make. But this doesn’t mean you should put every last penny into your home. Draining all your savings for a down payment could put you in a difficult position for any future financial emergencies, including medical emergencies or suddenly losing your job. Taking time to save beyond the bare minimum and creating an emergency cushion will have your mind and finances at ease in case of any unexpected situations.
6. Being oblivious to closing costs
The costs of purchasing a home is more than just your down payment and mortgage payments. Many buyers neglect to set aside money for the closing costs of the home which can range from 1.5% to 4% of the purchase price of your home. Here are some of the costs you need to account for:
- Land Transfer Tax: A mandatory tax on the purchase of a home that varies by province and city
- Utility & Property Tax: Your hydro bills or maintenance fees that will occur monthly in addition to the levied annual tax by the government on your property
- Home Insurance: A mandatory insurance purchase to protect your home in case of major damages
- Legal Fees: Notary fees charged by a lawyer to prepare and supervise the signature on important documents as well as title search and registration
What to avoid when it comes to the home you want to buy
7. Brushing off the importance of neighbourhood research
One of the biggest mistakes you can make on your first home purchase is seeing only within the boundaries of your house’s four walls. Your house or condo will become your home and there are several factors that can make or break it having that “home sweet home” feeling, including the neighbourhood. During the pandemic, an influx of Canadians moved out of big cities like Toronto. But what many didn’t factor in was the effects of their new neighbourhoods and how it shifted their lifestyles. From local restaurants and coffee shops, schools in the area, there’s an important list of things to evaluate in your potential new neighbourhood that will help you choose the right space for you.
8. Looking outside your price range
Aiming high is an admirable quality except for when it’s paying for something out of your price range. Not taking the time to sit down and calculate what you really can afford can end up costing you a lot of time in your search, including looking at homes out of your qualifying range. You can use a mortgage calculator to help you determine what’s within your reach. Remember, your goal is to have achievable monthly payments that you can sustain for a long period, not something you’ll be paying off your whole life.
9. Forgoing a home inspection, if you’re buying a house
Many homebuyers often skip out on a home inspection and pay the costs down the line for repairs and maintenance. The inspection process involves a professional examining your home for any structural, internal or cosmetic damages and usually can take up to three hours depending on the size of your home. It may seem like an additional cost in the process, but getting a professional to assess that your house is structurally sound, with all major systems working, is a well-worth investment to avoid costly future problems.
10. Making an emotional decision
More often than not, most people might tell you not to make huge decision while emotionally charged. It’s kind of the same way when it comes to buying a home. There can be so much excitement when walking into showings, imagining your future, and how your life will fit perfectly into the space. But don’t base a multi-year commitment of a mortgage on the euphoria of your emotions vs. the actual logistics. Yes, it’s important to find a home that you can imagine yourself happy in–this is the biggest purchase of your life, after all–but take the time to make a pros vs. cons list and evaluate the important needs of the home vs. your actual wants, to understand where you can compromise and what makes the most sense.
The process is a marathon, not a sprint.
Rushing into a home purchase is something that many first-time buyers might regret. That’s why it’s important to evaluate your finances, decide what you can afford and make informed decisions when pulling the trigger on your purchase. While an expensive jacket is something that can be returned, purchasing a home doesn’t come with a similar return policy. When you’re ready, don’t forget one of the most important steps in the home-buying process: getting pre-approved for your mortgage.
One of Pine’s mortgage advisors would be happy to speak with you to help you kick-off your home ownership journey.