ARE YOU READY?
Written By: Alex McFadyen, Joe Pratap & Kevin Parton
If you are considering becoming a home owner and you think you might be ready, the information below may help you feel more comfortable and prepared to make these very important decisions.
What can you afford/What is your price range?
What you can afford is determined primarily by a couple of key points:
Your income and the current percentage of it that is being used to pay other debt will determine the amount of money a lender is willing to give you to purchase a house.
Assets & Liabilities
Assets are items such as vehicles, large pieces of equipment or even your house which can be sold easily for large sums of money. Liabilities are items such as auto loans, credit card payments or any other on going monthly payments. These items will used to determine how much of your income can be used towards your mortgage payment.
It is always a good idea to know your credit rating at any time, especially when considering qualifying for a mortgage. If you do not know your credit rating, try visiting www.transunion.ca or www.equifax.ca to receive a credit report. When trying to improve your credit rating, you should focus on paying every bill on time 100% of the time, no matter how small. Also you should keep your balances at 75% or less of your limit and try to limit the number of times your credit is accessed.
In Canada, a down payment may come from multiple sources including but not exclusive to; personal savings, a gift, and RRSPs.
How much money do you need?
In Canada 5% is the minimum amount required as a down payment. For example a $200,000 house requires a minimum down payment of $10,000. This would mean insuring your mortgage with CMHC, for a premium which is usually added to the mortgage (see below). If you can save 20% for a down payment the mortgage insurance can be avoided. Starting to save can make owning a home seem far away, fortunately there are multiple sources in which you can obtain a down payment. These include:
Savings: You can withdraw the money from your personal savings account to make a down payment. Your lender may wish to see proof of funds being in your account for a minimum of 3 months or 90 days.
Gift: If you have an immediate relative who is interested in giving you a gift* to cover the down payment, this is an acceptable form of down payment.
*Normally, the minimum down payment comes from your own resources. However, a gift of a down payment from an immediate relative is acceptable for dwellings of 1 to 4 units. - CMHC
RRSP: You can with draw up to $25,000 from your RRSP with a promise to repay.
Generally, you have to repay all withdrawals to your RRSPs within a period of no more than 15 years. You will have to repay an amount to your RRSPs each year until your HBP balance is zero. If you do not repay the amount due for a year, it will have to be included in your income for that year. - CRA Canada
Any mortgage that exceeds 80% of the value of the home is considered a high ratio mortgage and requires additional default insurance. In the case of a $200,000 home you would be required to make a minimum down payment of 20% or $40,000 to avoid paying for additional default insuance. A conventional mortgage on the other hand is one in which the mortgage is equal to 80% or less of the homes value.
The lower the down payment the more expensive the default insurance. Default insurance is a one time lump sum payment and is usually added to your overall mortgage cost.
How much can you spend?
Before you even begin the home search, it is a great idea to get pre-qualified by a certified mortgage broker to help you find a price range. Once you are pre-qualified you will know how much you will need to save for your down payment. If you already have a down payment and are ready to start looking you will want to get pre-approved. This will provide you with assurance, help you find out what you can truly borrow, as well as give you the option to hold a rate for up to 120 days.
How much should you spend?
A good criteria to remember is "just because you can buy a house doesn't mean you can afford it". The planning starts now to prepare you for an increased cost of living as well as saving up for a down payment and move in budget. To learn more about saving it is suggested to enlist the free services of a financial advisor.
In the next article of this series you will learn about creating a current budget, a future budget and learn how to save the difference. This allows you to become familiar with your potential future budget well in advance.