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What You Need To Know Before Buying Your First Home

What You Need To Know Before Buying Your First Home

happy couple buying their first home buyers

So, you’ve decided to take that first big step into adulting and buy your first home. It’s a very exciting time but a little bit scary as well. Luckily, there are expert advisors and government programs that can make your first steps successful in the tough Ontario real estate market. As always, it’s best to be prepared so in this article I’ve compiled the most important information and advice that will help you make smart decisions as you navigate through the process.

Let’s Be Real – It’s A Tough Market For First Home Buyers

One of the toughest hurdles for first-time homebuyers is jumping into a market where housing supply is extremely low. It’s very likely that the type of home you’re eyeing might not be available, or you could find yourself competing against multiple buyers in intense bidding wars.

It’s important to acknowledge the tightness of the market before diving in. Don’t expect to snag the first, second, or even third home you fall in love with. Anticipating these potential setbacks can help soften the blow and keep you focused.

This is why it’s best to seek guidance from local real estate experts who know the market and can help you get a jump on the competition. A real estate agent and mortgage broker, who specialize in your desired area, can give you insight into how competitive the local market is and prepare you for the price you are likely to pay while also letting you know about new opportunities as soon as they hit the market.

Buying Your First Home Requires A Down Payment

To buy a house you need to put a deposit down upfront which is referred to as the down payment. The more you put down, the less you’ll pay in fees and interest later on in your mortgage payments. The minimum down payment required depends on the value of the home you want to buy. As a guideline, for properties that are $500,000 or less, the minimum down payment is 5%; while houses between $500,000 – $999,999, 5% is required on the first $500,000 and 10% on the rest. Properties over $1 million require a payment of at least 20% so saving as much as possible is crucial when it comes to getting approved for the mortgage you want.

You don’t have to do it all yourself though, there are several government programs that will help you save for a down payment, including the First Home Savings Account (FHSA) and The Home Buyers’ Plan (HBP). Taking advantage of these programs partnered with wise budgeting will set you on the path to buying your very first home in no time.

Setting The Budget For Your First Home

Once you’ve figured out how much you can afford for a down payment, you can start figuring out your home buying budget. Using a mortgage calculator can help you estimate your monthly payment, while a maximum mortgage calculator can give you an idea of how much house you can afford. These tools are especially handy in the early stages of home buying. If you realize that your debt and income don’t give you as much buying power as you thought, it’s a chance to adjust how you handle your finances.

Another way to set your budget is to get pre-approved for a mortgage. During pre-approval, a lender, or mortgage broker, looks at your finances and tells you how much they’re willing to lend you. It’s important to note though that pre-approval doesn’t guarantee a mortgage. It shows you and any property sellers that your mortgage application is likely to be approved for a certain amount so that you know what price range to shop in.

When making an offer on your first house, you also need to remember to consider more than just mortgage costs and down payment requirements. Specifically, you’ll need to account for home management expenses like basic upkeep, utilities, property taxes, and more. If you want to know what those numbers might look like refer to the calculators on my website that will help you anticipate those costs. For a quick number though, experts recommend budgeting anywhere from 2% to 5% of your home’s value for annual maintenance costs. So, if the home you want to buy is $500,000; 2% is $10,000 while 5% is $25,000.

Keep An Eye On Your Credit Score

Your credit score serves as a trustworthy gauge of your financial well-being. When considering your mortgage application, lenders examine your credit score to determine your eligibility and the interest rates you qualify for. Understanding your score allows you to assess whether it’s wise to delay buying a home and focus on improving your score beforehand or if you’re well positioned to buy now. It’s worth noting that to qualify for mortgage default insurance from the Canada Mortgage and Housing Corporation, at least one borrower applying for a mortgage must have a minimum credit score of 680. If you’re not quite sure how to check your credit score or how to read them, give me a call, and let’s talk it out.

Know That You Have To Pass A Test To Buy Your First Home

In Canada, everyone wanting a first mortgage must pass a test called the “mortgage stress test.” It started in 2018 to make sure people can still pay their mortgages if interest rates go up. No matter how much you pay as a down payment, you have to prove you can handle mortgage payments based on your interest rate plus 2%, or 5.25%, whichever is more. For example, if the bank gives you a 4% rate, you need to show you can still pay the mortgage even if rates go up to 6%.

What Kind Of Mortgage Should A First Time Buyer Have?

When it’s time to pick a mortgage type, do your homework. Think about whether you want a fixed or variable interest rate, and if you prefer a closed mortgage (where you would pay penalties for early repayment) or an open one (with flexibility to make prepayments or to put down lump sum payments over and above your regular payments). You’ll want to ask yourself “Do you want a long or short term mortgage and how long do you want to amortize?”. 

Choosing where to get your mortgage is important, too. Compare different lenders for qualification requirements, loan options, interest rates, and fees. A mortgage broker like myself can help you with this by giving you access to various lenders and guiding you to find a mortgage that suits your needs and budget. As a mortgage specialist, I actually have more options than the banks do. Often my clients think because they have been with a bank for years they would offer the best rate but that’s not likely.

How The Government Helps First Time Home Buyers

There are several government programs offered to people buying their first home. To qualify, you must have never owned a home or investment property as an individual or a corporation, though there are some exceptions. These are a few of the current incentives in 2024:

  • RRSP Home Buyers’ Plan: First-time buyers can withdraw up to $35,000 tax-free from their RRSP for a home purchase. The funds must be repaid within 15 years, and they must have been in your account for at least 90 days. You must buy or build your home by October 1st of the following year.
  • Home Buyers’ Tax Credit: This offers a non-refundable credit of up to $10,000 for first-time buyers, resulting in a $1,500 tax rebate, making the first year of homeownership more affordable.
  • First Home Savings Account: This allows tax-free saving for your down payment. You can deposit up to $8,000 annually, up to a total limit of $40,000. Deposits are tax-deductible, and earnings are tax-free.
  • First-Time Home Buyer Incentive: Qualifying buyers can borrow either 5% or 10% of a home’s purchase price from the government for a down payment. Repayment is the original loan amount plus a percentage of your home’s appreciation equal to the initial borrowed percentage. Repayment can be made at any time, but it must occur after 25 years or upon selling the property.
  • Provincial Land Transfer Tax Refund: First-time buyers won’t pay any tax if their home is worth less than $368,000 while buyers of homes with a higher value can receive refunds up to $4,000. Buyers must be at least 18 years old, a Canadian citizen or permanent resident, and live in the home as their principal residence within nine months of registering.
  • Simcoe County’s Homeownership Program provides a loan of up to 10% of the purchase price for your down payment. The loan is completely forgiven if you live in the home for 20 years, but you’ll have to repay the loan in full plus a percentage of the capital gains if you sell earlier.

Are You Ready To Buy Your First Home? Call Me.

Now that you’ve learned a bit more about buying your first home, it’s time to get started! If you’ve already saved a down payment and figured out your budget using my mortgage calculators, I can help you decide which kind of mortgage is right for you and get you pre-approved so you’re ready to start house hunting.

With many years of experience as a mortgage broker in the Barrie area, I am the expert you need to find you the right options and the best mortgage rates. Schedule a consultation with me at this link or give me a call directly at 705-315-0516 and let’s get you started on your home buying adventure!

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