Here are six rules that you need to keep in mind before you look at properties or discuss mortgage amounts, rates or terms.
1. Borrowing capacity: Thou shalt be realistic
Setting a realistic amount is easier said than done. Many people find using a - This link will open in a new window.simulator helpful for calculating their maximum borrowing capacity.
Our simulator looks at:
- Your household's gross income and financial commitments1
- Your down payment
- Approximate fixed costs of your future home
- Property and school taxes
- Condo fees, etc.
Of course, there are other aspects to take into consideration, such as:
- Do you plan on having children?
- Do you expect to have any new debts to pay off soon?
- Is a raise on the horizon for you?
We recommend choosing a home that costs less than your maximum borrowing capacity. That way you'll have a little financial flexibility if something unexpected comes up.
2. Down payment: The bigger it is, the less interest thou shalt pay
No matter what you may have heard, you always need to make a down payment. In general, it should be 20% of the price of the property. Remember: a bigger down payment results in a smaller loan, which means you'll pay less interest.
If your down payment is between 5% and 20% of the property price, you'll have to take out mortgage insurance from Canada Mortgage and Housing Corporation (CMHC) or Genworth Canada. The premium ranges from 0.6% to 4.5% of the mortgage amount, depending on your down payment. This amount must be paid in full when the purchase is made, but it can be added to your mortgage loan.
3. Home start-up costs: Thou shalt make a list
All future homeowners should expect to spend at least 3% of the value of their home on basic start-up costs. These include all kinds of expenses related to buying the property and getting settled in, such as:
- Notary fees
- Home inspection fees
- Land transfer tax (in Quebec only). In Quebec, the land transfer tax on a $300,000 house comes to $2,989
- Moving, renovation and decorating costs
- Hook-up costs (electricity, cable, telephone)
- Home and yard maintenance equipment and products
- Home insurance
4. RRSPs: Thou shalt make good use of them
Do you have RRSPs? Great! The Home Buyers' Plan (HBP) lets you withdraw up to $35,000 ($70,000 per couple) to finance the purchase of your first home.
RRSP withdrawals are usually taxable, but not under the HBP, as it's a government program designed specifically to encourage home ownership.
You have 15 years to pay back the money you took out from your RRSPs. You can even - This link will open in a new window.take out an RRSP loan so that you can make the most of the HBP.
Talk to your mortgage advisor to find out if this strategy makes sense for you.
5. Mortgage pre-approval: Thou shalt seek it
Mortgage pre-approval, which confirms your borrowing capacity and credit history, is valid for six months. Since getting a pre-approved mortgage can help you determine what properties are in your price range, it goes a long way in reducing the stress that comes with making an offer on a house.
6. Advance preparation: Thou shalt reap its rewards
The - This link will open in a new window.Buying a home page on our website or Homebuyer's Guide for - This link will open in a new window.Ontario and - This link will open in a new window.Quebec are excellent sources of information on:
- Creating a budget
- Figuring out what you can afford
- Finding ways to save
- Choosing the property type that's right for you
- Preparing to take out a mortgage
For more on this topic, see our - This link will open in a new window.guides, simulators and calculators.
Summary: 6 strategies for buying your first home
2. Build a down payment
3. Set aside 3% of the value of your house for start-up costs
4. Talk to experts and ask them questions
5. Apply for mortgage pre-approval
6. Get started early and make sure you're well-informed
1 Excluding your current rent payments.