Most people begin thinking about their first home long before they can afford to buy it. Many have a clear idea of the type of home they want, what features it will have, and where it will be located. But if you’re not sure what you want or need in a home, here are some things to think about before you buy.
Make a list of needs that your house must fulfill, and put them in order of priority (number of bedrooms, proximity to schools or transit, accessibility for disabled, etc). Now add to the bottom of that list those things that would be nice to have (finished basement, renovated kitchen, or central air, for example). A real estate professional can help you refine the list around your budget and what’s available on the market.
It really is the most important factor, because where you live affects everything else in your life. Do you prefer the city or the country? Do you need space for a garden or storage for a motorbike? An espresso bar down the street, or a lake down the lane? Where and how you work should also play a role in your decision – are you willing to commute, or have you always wanted to walk to work? Will you need a home office? All of these factors will affect which homes and neighbourhoods you look at.
Think seriously about how much home maintenance you are willing and able to do. A new home can be built and styled to your specifications, without you lifting a finger except to sign the deed. An older home might have more character, large trees, and an established neighbourhood. A condominium apartment is perfect for those who don’t have the time or inclination to do outdoor maintenance. If you have children, think about proximity to schools and recreation.
“Dream Home” is a subjective thing. Everyone has an idea of what their dream home will look like, whether it’s contemporary, Victorian, ranch-style or something in between. But be sure to carefully consider a home’s features before ruling it out based purely on taste. Decide whether you really want to pass up a home that fulfills your every need simply because it’s a bungalow instead of a two-story, or modern instead of Craftsman. Keeping an open mind regarding style and turning a blind eye to decor could be key to finding the ideal home for you.
Affording and financing your first home
When looking for a home, probably the first thing you will do is establish a price range. After all, what’s the point of looking at houses that cost $400,000 if you can only afford to pay half that? Setting a price range is easier said than done, however, and a number of factors come into play. The two main things to consider are how much of a down payment you can afford to make, and how much of a mortgage you can afford to carry.
A mortgage covers the difference between the purchase price and your down payment. The larger the down payment, the less you have to borrow, the smaller your monthly mortgage payment, and the lower your cost of interest over the term of the mortgage. If you can afford to put down 20 percent of the purchase price, the Canada Mortgage and Housing Corporation (CMHC) will not require you to take out mortgage insurance against your mortgage, further reducing the cost of your home over time.
You should also have a cash reserve for unexpected expenses and post-purchase expenses such as land transfer tax, legal fees, mortgage arrangements, moving expenses, new furnishings, and appliances.
The other cost to consider is the amount you can afford to pay monthly towards your mortgage. Financial institutions do this by calculating your debt-service ratio. To calculate your debt-service ratio, list all your loans (car, personal loans, monthly credit card balances). The sum of these loan payments and your mortgage payment (including principal, interest, and taxes) should not exceed approximately 40 percent of your gross income. The mortgage payment and taxes should not exceed approximately 30 percent of your gross income.
The size of the mortgage you can arrange, based on payments you can afford, depends on interest rates. The lower the rates, the larger the possible mortgage and the more affordable housing becomes. Also, consider how open the mortgage is – can you choose a variable rate and then lock it in when rates begin to rise? Would prepayment be allowed? Is the mortgage portable should you need to move before the term is up?
The usual source of mortgage funds is a lending institution such as a bank or trust company – and it is the particular policy of the lending institution that determines the maximum loan allowed. But there are other sources of funding, too. A real estate professional can help you navigate the field and choose the best lender at the best rate and terms.