Five Financial Considerations Before Buying a Home

Transitioning from renter to homeowner is one of the most important decisions you’ll make in your life. This decision will impact your future greatly, creating obligations and also opportunities. Since mortgage rates are at an all-time low, many of us are considering jumping onto the home ownership bandwagon. Does this transition make sense for you? This blog discusses five financial considerations that you should take into account before making this life-altering decision.

1. Improve your credit score: The first consideration is your credit score. It is one of the most important factors when it comes to securing a mortgage. Lenders need to know if you are able to consistently pay your bills and debts. You can improve your credit. Learn more from this  Bromwich+Smith blog How to Improve Your Credit.
    
2. Know about your financial health: Secondly, you need to understand how much you can afford to spend on a monthly basis without affecting your financial health. In other words, what is your maximum monthly budget? A good exercise would be to compare your monthly expenses against your income, savings and investments. Then add your potential homeownership expenses into the mix and gauge whether you are able to afford the home. Our mortgage professionals can go over your financial statements and advise you on the best price range. This gives you a very good idea on the types of homes you should be looking at.
    
3. Have enough savings and investments: Next, you need to make sure you have enough savings and investments available to cover, most importantly, the down payment (up to 20% of the home’s cost, minimum 5% for first-time homebuyers). The down payment represents the amount you pay in cash towards the home purchase. The remainder will be financed by a mortgage. The more your down payment, the lower your monthly mortgage payments will be. This means you will be paying less interest over time to the lender, and building more equity in your home. Therefore, if you are planning to buy a home in the near future make sure to keep your savings fluid and flexible so that you can access your money whenever you need it. Short-term savings and investment options, including savings accounts, short-term GICs (guaranteed investment certificates), low-risk mutual funds, or stocks purchased for the short-term, are the best options. Avoid longer-term commitments especially multi-year GICs and mutual funds or other investments that impose penalties when you withdraw your money or simply do not allow you to withdraw until the maturity date.

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4. Consider the closing costs: In addition, you need to be able to afford all the other upfront and closing costs:

Home Inspection and Home Appraisal

When you like a place and put an offer on it, it’s common to include a condition on home inspection in the offer. That means you want to buy the house provided no major issues are found by a qualified home inspector. An inspector provides a comprehensive visual inspection of the house’s overall structure, electrical and plumbing, foundation and roof, and more. Home inspection fees vary but are usually a few hundred dollars. Home appraisals also cost a few hundred dollars and may sometimes, not always, be covered by the lender.

Home Insurance

This is an important requirement when buying a house, as you won’t qualify for a mortgage unless you have home insurance in place. You need to arrange that before closing so that your house is covered in case of theft, loss, or damage to the building structure or contents.

Land Registration and Land Transfer Tax

Your property’s title must be registered under your name prior to the sale closing. Usually your lawyer will submit this on your behalf, but you are required to pay the land transfer tax. The cost is a percentage of your home’s purchase price and your lawyer can advise on the amount. 

Legal Costs

Lawyers are an essential part of real estate transactions in order to protect your legal interests as a homebuyer. They check to ensure that the home you are buying has no liens against it. A lien is a legal claim over another person’s property that someone files to ensure a prior debt gets paid.

Your lawyer will also review the purchase contract to ensure that everything is in order, handle all the details of the financial transaction on closing, and provide a final ledger. Legal fees can vary so ask your lawyer for an estimate in advance of closing so you are prepared. 

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Adjustments

The seller of the home you are buying may be entitled to a rebate for something they already paid that carries past the purchase date. For example, they might have paid property taxes and utility bills that cover the balance of the year. In that case, your lawyer will adjust the ledger accordingly and ‘rebate’ the seller through an adjustment upon closing.

These costs usually amount to 1-4% of the purchase price of the home. They are quite substantial and cannot be overlooked. In addition, you would need to take into account moving costs (packers, movers, furniture and/or furniture assembly etc.) and GST/HST/QST on a newly built house and/or mortgage loan insurance.

5. Consider unforeseen and emergency repairs: Last but not least, when you rent a home you don’t need to worry about maintenance or repairs, as opposed to buying a home, which is a huge responsibility requiring time, effort and most importantly money. You need to keep aside some cash for unforeseen and emergency repairs or renovations.

The global COVID-19 pandemic has put more emphasis on personal space and mental health during lockdowns and travel bans. Since many of us are in a constant state of instability, many city condo renters, especially in Ontario, are planning to move to communities where they can have more space to relax. This has created a seller’s market, which has in turn inflated home prices in some areas. This means that you may have to consider a wider variety of options in terms of location and type of home to be able to afford it.

Although homeownership can seem daunting and overwhelming, following these steps and consulting with a professional Mortgage Broker will ensure you are well set. Ultimately home ownership is an investment: your mortgage payments build equity in your home, which will typically appreciate in value over time. When you pay rent you do not see that money ever again; it is gone forever.

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_{By Shane Ferrao, Mortgage Broker at Your Mortgage, Your Way
Shane Ferrao is a licensed mortgage broker in Toronto who started in the mortgage industry working with CIBC shortly after graduating from York University with a major in Mathematics for Commerce. Shane has built a strong expertise in the mortgage industry over 15 years, and has received multiple awards for his level of service. Shane is committed to building strong and long lasting relationships with his clients, providing a proven track of world class services while focusing on creating the best mortgage strategy for his clients that helps them achieve their dreams.
As a mortgage broker, Shane can offer you specific mortgage products that are best suited for your individual needs, as well as access to over 30 lenders.
Mortgage Broker Shane Ferrao provides you with customized mortgage services across the Greater Toronto Area (GTA) and Canada!}