It’s important to consider not only what you can afford now, but what you’ll be able to swing if a baby comes along, your career goes off-track, or the property you buy needs a major repair.
If you’ve been thinking about buying a house, you may be wondering how you’ll know when it’s “the right time.” If you don’t have a 20% down payment saved up, is it still OK to consider buying? If you can’t afford your forever home, should you still jump into ownership now? And does the COVID-19 pandemic change the rules for first-time home buyers?
Smart people who consider those questions—and more—every day respond with these seven pieces of practical advice.
1. Get a real pre-approval
Too many buyers are shopping, armed with only a number from an online calculator that provides a top-level estimate of what you might qualify for, says independent mortgage broker Ron Butler, who services clients in the Greater Toronto Area, Ottawa, Vancouver and Calgary. “But a true pre-approval is actually a sophisticated process, requiring the detailed attention of a potential lender,” he says. And, “that will depend on your credit score, a thorough analysis of your income and the nature of your down payment, among other factors.”
And keep in mind that “while you may be approved to buy, the house you want to buy may not,” he adds. Before advancing the mortgage funds, the lender must OK the deal—an “inescapable” part of the buying process. If you’re serious about making an offer, get a lender to run your numbers in detail, to confirm what you can actually spend with confidence—and understand that the house or condo, too, must pass muster for the deal to work. That is, if the lender doesn’t feel the property you want is worth the price you’re willing to pay, they may decline to advance the funds you need.
2. Know your numbers
First-time buyers are the most likely to have small down payments, notes Butler, and that can often mean they are stretched thin to get into a home. But don’t stretch so much that you’re left with no wiggle room.
That means not skipping out on the house inspection. “If you only have 5% down, and you stretched to pull it together, you can’t afford a house with unknown problems that come to light after you buy”—because you don’t have enough money to fix them. And houses develop problems over time; that’s in their nature. You’re going to have leaks, breaks and unavoidable maintenance and repairs. Condos, for their part, come with maintenance fees “that never go backwards,” he comments, so “a deal that only works if your costs never rise is a deal that’s pretty much doomed to fail.”
In order to make a home-buying situation work, you need to make sure you have resources available to handle the inevitable extra costs that come with home ownership. Those resources might be in the form of additional savings that you’ve set aside (instead of using them as part of your down payment), or you might create wiggle room by earmarking part of your monthly income to handle both routine and unexpected extra costs, from property taxes to maintenance and repairs.
In short: If it takes everything you’ve got to hit the minimum 5% down payment and meet regular mortgage payments, it’s likely that home ownership should probably go on the back burner until you’re able to create more breathing room in your budget.
3. Don’t let FOMO be your main motivation
“It’s very common that I talk to hopeful buyers who say some version of, ‘If I don’t buy now, I’ll be shut out of the market forever.’” But buying decisions can’t only be based on the fear of missing out, or FOMO, says Butler.
Toronto bankruptcy trustee Scott Terrio shares the cautionary tale of a couple who bought “at the top of the market” in 2016 with the minimum down payment. In order to make the finances work, one of the homebuyers took a second job, but then his hours were reduced over time. As a result, he started taking on more and more consumer debt to make ends meet, eventually resorting to payday loans and then, finally, bankruptcy.
“When you get into a home-buying deal with such thin margins, if anything—and I mean anything—goes wrong financially, you’re in trouble,” Terrio notes. “In this case, there was no catastrophic event that led to bankruptcy, just a minor event that snowballed,” with no financial backstop to recover.
4. Future-proof your buying decision
Think seriously about what your plans for the future are, cautioned Toronto mortgage broker Jake Abramowicz. That means assessing where you’re going to be comfortable today, and for the next five years—without underestimating what the next few years will bring.
If you’re thinking about having kids, for example, how will you fit daycare payments in, or the loss of income if one of you decides to stay home? How stable is your income and career, and what would happen if the career trajectory you’re on changes unexpectedly? That was the case for so many people during COVID-19.
Is the commute that seems tolerable when you test it on a Sunday still manageable at 6 a.m. on a Monday in February? If you hate the kitchen and proceed with the deal anyway because “we’ll just renovate it later,” do you have a solid plan for the $20,000 to $30,000 price tag? And what if it costs more for that renovation? Or, can you live with the unrenovated kitchen for the foreseeable future?
“Future-proofing” the deal means getting into a situation you can enjoy not only now, but as your life inevitably changes over time.
5. Don’t be too proud to ask for help as a first-time home buyer
Lots of today’s buyers are relying on help from “the bank of mom and dad,” Abramowicz previously told MoneySense. And with the price of housing in Canada’s largest cities, that isn’t surprising.
For many first-time buyers, the largest single hurdle in buying a home is saving the down payment: Even buyers with strong income and good credit scores can find it difficult to save up a sufficient amount. And, with house prices rising since the start of the pandemic, saving for a down payment in a “secure” setting (like a high-interest savings account or a guaranteed investment certificate) can feel like chasing a moving target.
That’s where many first-time buyers turn to family help to make up the required down payment. “If this is an option for you,” Abramowicz said, “then it might be the way you can make the deal work.”
In October 2021, CIBC reported that Canadian parents gave their children a total of $10 billion for down payments over the past year. The average gift from parents was $82,000, up nearly 60% from 2015, when the average gift was $52,000. While family help won’t always be available, it can be a way to get into the market in Canada’s big cities, at today’s high prices.
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6. Don’t worry about hitting a 20% down payment
If you can come up with a down payment of 20% or more, you may be able to avoid default insurance, provided by the Canada Mortgage and Housing Corporation (CMHC) or the two private insurers providing mortgage default insurance (Canada Guaranty and Sagen, formerly known as Genworth). (Some houses, such as those with a price over $1 million, are not eligible for CMHC coverage no matter the amount of your down payment.)
Depending on the amount of your mortgage, the cost of mortgage default insurance will add another 2.80% to 4% to your mortgage. For a mortgage of $500,000, for example, an additional 4% will add another $20,000 to your mortgage amount.
What does that mean for your cash flow? On a 25-year mortgage with a five-year term at 2.5%, that extra $20,000 adds another $90 to your monthly costs.
When you’re saving up to get into the housing market, contemplating another added cost can feel like it’s setting you back. But insured mortgages often come with better interest rates, noted Abramowicz, meaning you’re saving on the monthly payments. That’s because your risk of default has been passed on to the mortgage insurer, meaning you’re a less-risky bet for the mortgage lender.
Keep in mind, too, that you can use your registered retirement savings plan (RRSP) as a source of down payment savings under the Home Buyers’ Plan, as long as you meet the conditions. If you qualify as a first-time home buyer, both you and a spouse or common-law partner can withdraw up to $35,000 each from your RRSP as a down payment—but the funds need to be in your RRSP for a minimum of 90 days before they’re withdrawn.
This 90-day requirement can pose a hurdle for an eligible buyer who can make the numbers work to purchase a home, but hasn’t planned far enough in advance. “Too many times, first-time home buyers don’t have their deposit in their RRSP long enough to be submitted with the offer,” comments real estate sales representative Jared Gardner. “I lose one deal a year because we found the dream home, but need a 90-day closing to accommodate the HBP requirements—and the seller wants a hard limit of 30 days.” Gardner adds that “putting the money in long before you start looking is a huge assist.”
7. Explore your options
Once you’re in a position to buy, the final step is to make sure you’ve reviewed your mortgage options and picked the mortgage that’s right for you.
This means making sure you understand mortgage fundamentals, like the difference between a mortgage term—the length of time your mortgage contract is in effect—and a mortgage amortization, meaning the estimated length of time it will take to pay off your mortgage in full. You’ll also need to understand how open mortgages, which allow you to make extra payments without penalty, differ from closed mortgages, which usually offer a better interest rate but don’t provide the same prepayment flexibility.
Likely the biggest choice you’ll need to make, however, is between selecting a fixed-rate mortgage, which has the same interest rate throughout the mortgage term even if interest rates rise or fall in the broader market, or a variable-rate mortgage, for which the interest rates will rise and fall with changes in the credit market.
This issue goes beyond “simple math,” notes financial planner and mortgage broker Seun Adeyemi. “Instead, it depends on your budget and your plans for the property, among other factors.” Here, taking the time to ensure you’ve gotten answers to all your questions from a source you trust is critical.
Pulling it all together: The first-time home buyer rules to buy by
All in all, buying a home will be among the largest purchases you’ll make into over your lifetime, agree our experts. And the rules governing borrowing for home-buying change over time, too.
The COVID-19 pandemic has added new uncertainties for today’s prospective homebuyers. The price of housing, the stability of income and the overall health of the Canadian economy have all been impacted by the pandemic—and the effects are still unfolding. However, these six pieces of practical advice can provide a GPS for first-time home buyers through a changing landscape.
A version of this article was originally published in June 2020.