What You Need to do BEFORE You Buy a Home

Why do you want to buy a home?

• You want to invest in something that you hope will be worth more some day.
• You like the home, its location, size, or neighbourhood.
• You want to own, not rent.

Be a smart investor and do your homework before you buy. You’ll be less likely to end up with something you can’t afford, or that isn’t worth what you pay for it.

Remember: Buying a home is a big move

Most people think buying a home is one of the best things they can do with their savings. Make sure you invest wisely.

What’s the first thing you should do before you buy a new home? If you said go out and look at homes, you’re wrong. First, sit down and work out how you’ll pay for it. If you don’t, you may end up looking at homes you can’t really afford. That makes it a lot harder to stick to your budget.

How much home can I afford?
Follow these steps to find out.

1. Find out how much you can borrow to buy a home
Ask your bank how much they will lend you for your new home. Or, ask your real estate agent to estimate the amount for you. The bank looks at:

• What you make each month and how much you can spend on mortgage payments.
• How much the house is worth and how much you can pay in cash (your down payment).
• What it will cost you to run your home – including taxes, heating, and insurance. If you are buying a condo, there will be a regular monthly charge called a maintenance fee. This pays for your share of common costs, such as snow clearing and building insurance.

Example: Let’s say your household income is $60,000 and you have no debts. Guidelines suggest that you can afford to pay $1,600 per month for your housing costs. That includes your mortgage, taxes and heating. The bank will likely give you a mortgage for up to $200,000. The amount also depends on what you can save as a down payment.

2. Decide how much you will save as a down payment
For many people, saving for a down payment is the hardest part of buying a home. At one time, you needed a down payment of 25% of the price of your home. Nowadays, you can sometimes buy a home without any down payment at all.
Tip: It costs less to borrow if your down payment is at least 25%. If you put less down, you will have what is called a "high-ratio mortgage." This means you will have to buy insurance from the Canada Housing and Mortgage Corporation (CMHC), at an additional cost to you.

Example: If you qualify for a $75,000 mortgage and have saved $25,000, you can buy a $100,000 house. The $25,000 is your down payment, which equals 25% of the purchase price.

Remember: Make sure your home fits your budget
If you spend too much, you’ll have a bigger and more costly mortgage.

Try this mortgage calculator to estimate what you can afford.

Canada Mortgage and Housing Corporation’s CMHC's mortgage calculator

How do I save for a down payment?

A down payment on a home is an investment in your future. In fact, it may be one of the biggest investments you’ll ever make. So what’s the best way to save?

Three tips to save a down payment

1. Keep the money apart from your other savings. That way, you’ll be less likely to spend it.

2. Find a way to grow your money safely. You don’t want to wake up a month before you plan to buy your home and find you have lost money due to a drop in the stock market.

3. If you’re a first-time buyer, you might want to save for a down payment in a Registered Retirement Savings Plan (RRSP). Under the government’s Home Buyer's Plan, you can take up to $25,000 from your RRSP for a down payment on your first home.You won’t pay any tax on the money as long as you pay it back over the next 15 years.

What are some safe places to invest while I save for a down payment?

• High-interest savings account
Every time you get paid, you can put some money into this account. When you’re ready to buy, you can easily get your savings out. For some people, that’s not a plus, however, because it’s a little too easy to take the money out and spend it on something else.

• Guaranteed Investment Certificate (GIC)
As your savings grow, you may want to buy GICs. If you think you’ll be tempted to spend some of your savings, you can lock your money in with a GIC so that you can’t easily get at it.

• Canada Savings Bond (CSB)
The federal government offers CSBs to investors at certain times each year. They pay minimum interest and you can invest as little as $100. One type of CSB is cashable any time. Certain provinces also offer provincial savings bonds.

• Money market fund
A money market fund is a mutual fund that invests in safe, short-term products. The fund is run by a professional investment manager who invests the money for you. You can get your money quickly and easily, usually within 24 hours. However, like other mutual funds, there are fees to pay for having your money in the fund. There may also be fees for taking your money out.

Remember: It takes time to save up a down payment
You can speed up the process if you invest your money so it will grow. Just don’t take more risk than is comfortable for you.

This blog is based on a series of articles from the Globe and Mail.

Please contact me if you are looking to buy or sell real estate - an educated REALTOR is a effective REALTOR.

Happy House Hunting!