Buying Your First Home?

If you’re planning on purchasing your first home in the near future, you may have already asked yourself this question. Do I want to buy a resale home or a brand new one? Whether it’s a resale or a new home, there are some things that you should do to prepare for the big day.

Here are a list of things you might want to do while you plan:

• Decide where you would like to live
• Check out listings for homes in that area, on realtor.com for example, to get an idea of price point
• Check out the mortgage rates at your bank and compare with other banks – your main bank may not have the best rate.
• Determine if you will be doing a 5%, 10%, 15% or 20% down mortgage. Any mortgage that is greater than 20% of the price of the home is considered a “high-risk mortgage” and will attract mortgage loan insurance that you have to pay yourself.
• If you’re getting a “high-risk mortgage” check out the mortgage loan insurance that you will need to pay at CMHC.com to determine how much you would need to pay based on your down payment. There you will also find information on the down payment options.
• Get your mortgage pre-approval from your bank (and another if the interest rate is more attractive), so you know what mortgage your income and expenses can afford.
• Identify your amortization period (the length of time you will be paying the mortgage, e.g.: 25 years, 30 years). The higher the risk, the shorter amortization period financial institution gives. Hence a “high-risk mortgage” is usually 25 years or less.
• Use an online mortgage calculator to determine the monthly mortgage payment you would pay based on your mortgage amount, the interest rate on your mortgage pre-approval, and the amortization period that applies to you. If it will be a “high-risk mortgage,” be sure to add the mortgage loan insurance to your purchase price, then subtract your percentage down payment to get the mortgage amount.
• If you want to pay off your mortgage faster and pay less interest over time, you can make your payment frequency be bi-weekly instead of monthly. Most employers pay every two weeks, so choosing bi-weekly would definitely build the equity in your home faster.
• Budget 3-4% for closing costs (for resale homes) that includes the following:
  • Lawyer fees
  • Land transfer tax (First time home buyers do get a rebate but depending on the price of the home you may still have to come out of pocket)
  • Moving costs

If you’re purchasing a new home, an initial deposit must be paid to the builder based on their deposit payment structure. This will be discussed with you at the sales centre. The amount paid to the builder will be used to adjust your down payment to your financial institution at the time of closing.

However, unlike purchasing a resale home, more closing costs are involved to cover some additional things that wouldn’t be necessary for a resale home such as:

• Planting a tree at your home
• Doing your driveway 
• Installing your water meter
• Mailbox
• Grading the landscape (usually a refundable deposit) etc.

The sales person at the new home presentation centre can usually give a ballpark amount for the additional cost for a new home. But you can always ask your lawyer to give you a ballpark as well.

Some RRSP Benefits When Buying Your First Home

If you’re purchasing your first home, you can take advantage of the Home Buyer Plan (HBP).

The HBP allows you to withdraw $35,000 per individual from your RRSP (Registered Retirement Savings Plan) with no tax withholding. So you and your spouse are able to withdraw $70,000 in total. Each person then has 15 years to repay that money to their RRSP. Failure to do this will result in a tax penalty at the end of the 15 years.

If you haven’t been contributing to your RRSP, this is a good time to start because the benefit will be two folds:

1. You can use tax-deferred money for your downpayment and you have 15 years to repay it.
2. Any money contributed to your RRSP could trigger a tax refund (the greater the contribution, the greater the refund so you can max out your contribution limit up to $35,000).

While it’s okay to put more than $35,000 in your RRSP to attract more tax refund, I don’t advise it since any withdrawal beyond that amount to purchase the home will be subjected to a tax withholding. It’s better to use a TFSA (Tax Free Savings Account) to save additional down payment amounts.

Later Cost to Consider For a New Home

There are some additional cost to consider when purchasing a new home that are normally not necessary for a resale since the previous owner would have likely have these:

1. Blinds for windows and (glass) patio doors (if privacy is important)
2. Covering for front door (for privacy)
3. Drapes/curtains (if that’s important)
4. Garage door opener
5. Plants flowers for landscaping (if that’s important)

A Few Tips For Purchasing a Home

These are not required but will definitely be beneficial:

1. You will get better mortgage rates when your credit score is high. A credit score greater than 660 is considered okay, but scores higher than 750 will definitely give you more negotiating power for better interest rates.
2. Taking the longest amortization period is better since your obligation is less. However, you may make prepayments to reduce your mortgage and build equity faster because all prepayments amount goes straight towards your principal.
3. Get a HELOC (Home Equity Line Of Credit) because once your mortgage is paid down you will get access to your equity through the HELOC. So if you want some funds to start a business or buy an investment property, you could use your HELOC. 
4. If you have a HELOC, there’s no need to seek out other loans which usually attract higher interest (Interest is usually the prime lending rate or prime + 0.5% for a HELOC). You only pay interest if you use it, and the interest is simple interest (interest on principal only), not compound interest (interest calculated on principal plus previous interest)

What was covered here may certainly not have captured everything to consider when purchasing your first home. But these definitely cover a wide range of things to consider that will get you well on your way.

Happy house hunting and congratulations on purchasing your first home when that day comes! 😁