The dream of owning a home is a significant milestone. Still, it’s a substantial commitment and investment, and it should be a decision made when you’re genuinely ready, both financially and emotionally. While history has shown that property ownership can lead to considerable appreciation over time, you want to ensure that homeownership is a joy and not a burden. Here are some key factors to consider before taking the plunge.
1 – Run the Numbers
Determining how much you can afford to spend monthly on housing without jeopardizing your financial health requires a thorough review of your current financial situation. Start by evaluating your monthly income and then list all your expenses, including debt payments, utilities, groceries, transportation, and other essential costs. This helps you understand how much of your income is already committed and how much remains for housing.
It’s recommended that you should spend no more than 39% of your monthly gross income on housing costs (known as the Gross Debt Service (GDS) ratio) and no more than 44% on your total debt, including your mortgage payments, credit cards, and other debts (known as the Total Debt Service (TDS) ratio). Additionally, consider setting aside funds for home maintenance and unexpected repairs, which can be significant expenses that impact your overall budget.
2 – Steady Income and Income Verification
As you would expect, stable and sufficient income are important. Your lender will require proof of income to ensure you can afford the mortgage payments. This often means providing recent pay stubs, tax returns, and a letter from your employer. Consistent income helps you qualify for a mortgage and ensures you can handle the ongoing costs of homeownership. Often, it’s important to be past your probationary period at work. If you are self-employed and work to keep your income low for tax purposes, options are available, but it may take longer to gather your income proof, and your rate may be higher.
3 – Your Downpayment: Your Biggest Upfront Expense
Achieving your downpayment is often the biggest hurdle for most first-time buyers. A minimum downpayment of 5% is required for homes priced up to $500,000. For homes between $500,000 and $999,999, you’ll need 5% on the first $500,000 and 10% on the portion above $500,000. Homes priced at $1 million or more require a minimum downpayment of 20%. Additionally, if your downpayment is less than 20%, mortgage default insurance is mandatory, protecting the lender in case of default. Saving for a larger downpayment can reduce your monthly mortgage payments and help you avoid additional insurance costs. However, you must consider if time out of the market will work against you.
4 – Closing Costs
In addition to the downpayment, first-time homebuyers should be prepared for closing costs, ranging from 1.5% to 4% of the purchase price. These costs include legal fees, land transfer tax, home inspection, and title insurance. Budgeting for these expenses avoids surprises during the final stages of your home purchase. Properly accounting for closing costs ensures a smoother transition to homeownership and helps you manage your finances effectively.
5 – Home Maintenance and Repairs
When budgeting for your new home, remember that your monthly mortgage payment is just one part of the financial picture. Homeownership comes with additional costs such as property taxes, homeowner’s insurance, utilities, and regular maintenance. Major repairs, like a new roof or HVAC system, can be significant expenses. Being aware of these potential unexpected costs to avoid financial strain.
6 – A Strong Credit Score and Manageable Debt
Well before looking at homes, consider your credit score and manage your debt effectively. Your credit score is a major part of the mortgage approval process. A higher score can secure better mortgage rates, while a low score can hinder your chances of approval. If your score needs improving, you should address these issues now. Reducing debt enhances your Total Debt Service (TDS) ratio, increasing your purchasing power. Paying off debt will also free up more of your monthly income for savings and home expenses.
7 – Buy When You’re Ready, Not Because of Peer Pressure
The pressure to buy a home can come from various sources, including seeing friends and family purchasing homes. However, it’s important to remember that you don’t need to buy a house to “be an adult” or to keep up with others. Homeownership should be a personal decision based on your readiness and life circumstances, not on societal expectations or the actions of your peers.
The Bank of Canada rate cut on June 5th has led some to predict a rush of buyers entering the market, potentially driving prices up. While this hasn’t happened yet, it’s a likely scenario as rates drop further. Don’t feel pressured—always look to avoid uncomfortable financial situations. However, balance your financial comfort with the possibility of waiting too long and missing out on potential price appreciation.
8 – First-Time Home Buyer Incentives
Explore Canadian programs like the First Home Savings Account, the RRSP Home Buyers’ Plan (HBP), the Land Transfer Tax Rebate, and the First-Time Home Buyers’ Tax Credit. These programs can provide financial assistance, and the tax benefits make buying a home more affordable.
Other Considerations for First-Time Home Buyers
- Location and Long-Term Plans: Consider whether you are ready to settle in one place for several years. Buying a home is a long-term commitment, and frequent moves can be costly and negate the financial benefits of homeownership.
- Emergency Fund: Ensure you have an emergency fund separate from your down payment and closing costs. This fund should cover 3-6 months of living expenses in case of unexpected financial setbacks.
- Understanding the Market: Take the time to understand the real estate market in your desired area. This includes knowing the average home prices, market trends, and potential for future appreciation. Brampton real estate trends can be found here.
- Emotional Readiness: Finally, assess your emotional readiness. Owning a home is not just a financial investment, but also a significant lifestyle change. Ensure you’re prepared for the responsibilities and potential stress of homeownership.
Get Advice from Brampton’s Best Mortgage Broker Rakhi Madan!
Buying your first home is a milestone to be proud of, but the right time needs to be right for you. Ensuring you have a steady income, a good credit score, and a clear understanding of all the associated costs will help you enjoy the benefits of homeownership without being overly burdened. Remember, it’s your home and your journey—take the time to make the best decision. Even if you are months away, getting advice early from Rakhi Madan, Brampton’s experienced and top-rated Mortgage Broker, is wise. Rakhi will take the time to review your credit score and debt situation and offer improvement tips. She has successfully worked with first-time buyers for years and has accumulated over 400 5-star Google reviews.
