Genworth Series: HomeBuying Basics

What’s Involved?

Before embarking on your house hunting journey, you should first determine what you can afford.  A common rule of thumb is that your total expenses and debt payments should not add up to more than 40% of your household income before taxes.

Next, you’ll have to decide on the type and size of mortgage that best suits your needs.  The two basic options are a conventional mortgage, which requires at least a 20% down payment; and a high ratio mortgage, which is designed for people who do not have the 20% down payment. If you purchase a home with a lower down payment, you will pay mortgage default insurance, which transfers the risk of default from the lender to the mortgage insurer (see understanding mortgage insurance link for more details).

Other decisions about a mortgage involves the choice between a variable rate, which involves a fluctuating interest rate; and a fixed-rate mortgage, which, as the name implies, means you pay a fixed interest rate for a set term such as three, five or 10 years. If you choose a variable rate mortgage, it’s important to understand that your monthly payments may increase if interest rates rise. By selecting a mortgage with prepayment privileges, such as lump sum, accelerated bi-weekly or monthly payment options, you can reduce your amortization period and save thousands of dollars in interest in the long run.

To help you understand your choices, ensure you’re financially prepared. Many websites including homeownership.ca offer a wealth of financial information for homebuyers. Speaking to a mortgage professional will help you work through your specific needs.

 

How Much Can You Afford?

The first thing you need to do is to figure out your net worth. Your net worth is the amount left over once you’ve subtracted your total debts from your total assets. This can work as a guide to show you how much you can afford as a down payment. 

Prepare a budget. Detail all of your current monthly expenses and debt payments. Be as accurate as possible. Add everything up and then subtract this amount from your monthly take home amount. This will then give you a clear idea of how much you can truly afford for a mortgage payment each month.

Consider the monthly payments. Just like when you rent, as a new homeowner, you will have a monthly payment to make on your mortgage. The size of your mortgage payments will depend on your down payment, the amortization period (20, 25 or 30 years), the term (3, 5, 10 years), the rate type (fixed or variable), and your payment schedule (bi-weekly, bi-weekly accelerated or monthly).

Consider the down payment. A down payment is a partial payment on the home made at the time of purchase. The higher the initial down payment on the home, the more you can lower your monthly mortgage costs. In Canada, the minimum down payment is five per cent; if you are putting down less than 20 per cent of the total, you may also need to purchase mortgage default insurance.

Arrange for a pre-approval. It is also a good idea to arrange for a pre-approved mortgage, which confirms your ability to secure a mortgage with a lender. The lender will look at your finances and determine the amount of mortgage they are willing to lend you. The maximum amount you can qualify for depends on a number of factors but the most important are your household income, your down payment and the mortgage interest rate.

Quite often you will qualify for more than you expected. This is where preparing your budget beforehand is so important. Remember, your goal is to not over-extend yourself financially. Let your budget be your guide in determining how much mortgage to take on.

Determine Your Needs

Know what you want before you shop by taking the time to write down and assess what’s important to you. Finding a home that truly reflects your personal needs is as simple as creating a list of “must haves” and “nice to haves.” This list will help focus your efforts and the efforts of your real estate agent before you even begin your search.

Deciding on the location, or locations, where you will focus your search should be your first priority. To determine potential locations, consider the using the Neighborhood worksheet to help you with your options.

Neighborhood worksheet

Next, consider what style of home you would prefer: a single-family dwelling, a townhouse, or a condo. Some neighbourhoods offer a good mix of each style other others are more focused on just one type of home.

Take some time to decide what is important to you when it comes to the exterior of your home. Using the Exterior Worksheet will help list your criteria.

Exterior worksheet

Once you’ve decided on your exteriors needs you can turn your sights to the interior. Do you want a master bedroom with an ensuite? A main floor den? Would you be most comfortable with a house that is in move-in condition, or would you be willing to do a little bit of work on a fixer upper for a reduced price?

It’s important to make a list of everything you could possibly want, and then determine how important each item is. Use the Interior Worksheet to help capture your wish list.

Interior worksheet

Mortgage Payments and Other Costs

As a homeowner, you will have a monthly payment to make on your mortgage. Quite often you will qualify for more than you expected. This is where preparing your budget beforehand is important. Remember, your goal is to not over-extend yourself financially. Let your budget be your guide in determining how much mortgage to take on.

You know how much you have to spend, but not all of it can go towards the purchase price of your new home. Some of it will be used to cover costs associated with buying and moving into a home.

Other upfront costs to consider:

Deposit: up to 5% of the purchase price, made when you make an offer to purchase

Home Inspection Fee: generally $500.

Prepaid Property Taxes and/or Utility Bills: to reimburse the vendor for prepaid costs such as property taxes, filling the oil tank, etc.