Buying a New Home: 5 Things You Need to Know

house poorPurchasing a new home can be an extremely exciting moment in your life. Not only is it the place where you will relax and enjoy life, it’s also potentially the largest investment you’ll ever make financially. With any investment comes a certain degree of risk and a home is no different. Life is always going to throw curve balls but there are things we can do to mitigate the risk. Below are some items to consider in order to avoid being hit by a pitch!

1)      Affordability

Before you run out and start looking for a house the best thing you can, and should do, is crunch some numbers to see what you can afford. Not only does this help you financially, it also narrows down your search by eliminating houses outside your budget. In my previous post Is a House a Wise Investment? I posted a link to a great calculator that helps determine a comfortable budget for a house given your situation.

What really chaps my ass is most home purchases are based on “how much can you afford?” rather than “how much do you need?”. The typical pattern is buy a starter home, then buy a bigger house, and then buy your dream home. This is all predicated on the thought that because we have increased earning power, we should buy bigger and better. Make sure when considering your budget you keep in mind your needs.

2)      Mortgage

Odds are you won’t be able to pay for your house in full like the good ol’ days – so you’re going to need a loan, known as a mortgage. Not all mortgages are alike and there’s a lot to be considered when choosing the right mortgage to meet your specific financial needs. I used a mortgage broker when I purchased my place and was very happy with the results. A broker negotiates rates with different financial institutions and typically earns a commission on your mortgage. I wasn’t feeling up to shopping around and haggling with banks so this worked well for me and I received a much better rate than I saw advertised. The prime rate (the going rate for preferred customers and benchmark for most lending) in Canada right now is near rock bottom at 3%. Odds are it won’t stay this low. To give a bit of prospective this rate was over 20% in the early 1980’s!

prime rate graphSource: www.ratehub.ca

That means if you had a 25 year, $200,000 mortgage in 1982 you would have paid over $40,000 in interest and a couple hundred bucks in principle. Simply put, if that were the case today I’d still be happily living with my parents.

The max term you can get on a mortgage in Canada is 25 years. This is slightly misleading because mortgages are refinanced over time, so often you’ll hear of individuals in their 60’s and 70’s that are still carrying mortgages. The longer the term of a mortgage, the more interest that is paid.

Mortgages can be fixed OR variable. A fixed rate is an interest that is implicitly stated and typically fixed for 5 years. After the 5 year period this rate is reviewed and adjusted based on any changes on the prime interest rate or bank policy. A variable rate floats with the prime interest typically plus or less a couple percentage points. (i.e. prime + 1% today would be 3% + 1% = 4%) The risk with variable is rates may jack up, which would cause an increase in your regular mortgage payment, whereas with a fixed rate your mortgage payment is set in stone for the five year term. If you’re already cutting it close to the edge in terms of your budget with your mortgage a fixed rate is preferable given a small hike in interest rates could put you over that edge.

3)      Real Estate Agents

There are lots of ‘em! Typically both the selling and buying agents each receive 2%-3% on the sale of a house with the commission being paid by the seller of the home. Real estate agents are governed by the Canadian Real Estate Association and are supposed to act in the best interest of their clients. As with all service professions, there are good agents and not so good agents.

I used an agent when buying my first place (mainly because it was essentially free!) and I was very happy I did. She set up all my appointments and I really felt she was on my side with my best interests at heart. I set out looking to quickly buy a house, but the process took over a few months and she patiently showed me close to 30 homes before I eventually pulled the trigger.

4)      Closing Costs

I had heard stories that I would be encountering closing costs at 2%-3% of the home purchase price when I bought my first house and it came in right around the 3% mark. The main costs were legal fees, followed by property taxes (the seller had prepaid them for the year). There is also a land transfer tax of 1%-2% of the home value that is assessed, but if it’s your first time buying a home most of this tax can be waived before you pay via the .

First time home buyers can also use a tax free RSP withdrawal via the First Time Home Buyers Withdrawal, however, this must repaid back to the RSP over a 15 time period.

5)      Home Inspections

Please get one! This can cost a couple hundred bucks but given that you’ve just spent a couple hundred thousand on a house this is peanuts in the long run. If a seller denies you the ability to have a house inspection before you take possession (this is known as a condition) I would get out immediately. When dealing with this amount of money it’s not worth the risk. Home inspectors can help you uncover problems with the home before you finalize the purchase. They also provide you with ammo to negotiate a better price.

I used a home inspector that came recommended by my real estate agent who was an ex-firefighter. I was with him when he inspected the home and I was really impressed by how thorough he was. After he was done he drafted up a report and I actually used his findings to knock the price down a couple grand so he easily paid for himself 10 times over.

 

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15 comments

  1. I hear a lot of different views on whether it is a good idea to use the first time home buyers. It definitely slows down ones retirement savings pool with the trade-off being (hopeful) home appreciation. An argument can definitely be made that if suitable rental options are available, one is better off plowing all excess cash into retirement savings (especially if they believe the sentiment of many pundits callings for declining or at least flat home prices for the next prolonged period) .

    Further, an even stronger case can be made for for a young professional looking to buy the condo downtown but only for a few years before he/she moves out to the suburbs to raise a family as they will lose out on 10% or so of the appreciation through all the sale closing costs.

    Many people just like the idea of owing their home…most of which has to do with a prestige thing (i.e. nothing to do with straight dollars and cents). A shiny new condo to show off and call your own is a lot sexier then a fat number on an RRSP statement no one but you sees…it definitely doesn’t help pick up as well at the bar…I’ve tried. Maybe it’s time people started getting over this. In fact, I’ll calling a one night stand with the next women I run into at Branthouse with $50K plus in the old TFSA (and the broker statement to prove it)!

    • Jonny

      Haha, whoa all this TFSA talk has gotten me all hot’n’bothered!
      Society tends to be geared towards home ownership. Our parents all pushed to buy homes which was a sign that you’ve made it. With the cost of housing now and the difference in lifestyles I think that perception is starting to change a bit.

  2. Great article Jonny,

    me and sr we’re just having a conversation about this in the shed not to long ago. I want to ideally purchase something by the end of next summer in Toronto. Tired of paying high rent. You’ve given me some great insight to consider. Thank you sir.

    • Jonny

      Rent and housing in TO is crazy expensive, especially when you compare the overall cost of living to areas outside the GTA. Typically salaries aren’t proportionately higher in the city to cover these costs. That being said, having a roommate or rental unit can be a huge bonus that helps balance out the budget. If you make the jump and get that place we’ll celebrate proper!

  3. My house inspector used a thermal viewer to find potential problems with insulated walls and ceilings. I highly recommend others to hire those with that tool. Not every house inspector has one.

    • Jonny

      Yes, good call. I think some new first time buyers may be quick to discern the step of a home inspection with the excitement of getting into the new place. A experienced home inspector is so important to spot potential costly issues.

  4. Number 6: Best spot to install an X-bow.

  5. This is a great post about what to know before you buy your house. My husband and I were totally clueless when we first met with a realtor. Thankfully we got a fantastic recommendation and our realtor explained the entire process to us in terms that were easy to understand.

  6. Thank you for sharing. It’s very useful. Hope to hear more from you.
    Nathalie Belanger recently posted…Meilleurs Taux Hypothécaires, C’est Quoi ?My Profile

  7. Hi Buddy,

    I agree with your points. And it’s necessary to conduct home inspection of your house in order to detect the faults and dangerous chemicals.

    Getting a home inspection is a great tip for selling a home quickly. You have some good advice for preparing for an inspection, like checking under the sinks. As a home inspector, I regularly see people skip the home inspection to save a few hundred dollars. Only to find out that the defects that they weren’t aware of will cost them thousands to fix now that they own the home.

  8. Soon i am going to buy a new home.And the information published above is incredible.I will definitely use a home inspector and hire a real estate agent.Also i will visit regularly to this site.Thanks!
    Alice recently posted…Where’s Daddy Pig?My Profile

  9. I will follow! :) Especially, Real Estate Agents is an important point before buying a me for the first time. By the way, thank you so much for these impressive tips. Have a good day!

  10. Hey,

    Thanx for the informative share.

    I want to invest in real estate. I am looking for a real estate agent for investment.

    Surely I will keep in mind these guidelines while hiring any real estate agent. Becuase a good agent service is definitely a key factor in an investment process.

    Thank you so much and keep sharing!!!

    Warm Regards,
    Johnson Pattrick
    Johnson Pattrick recently posted…Just Move Into Your New Toronto Apartment? Reward YourselfMy Profile

  11. Hey,

    You shared an informative post. From many days we were thinking about real estate investment, in your post you shared what type of guidelines we should keep in mind while looking for apartment or home.

    I hope all these suggestions will surely help me when I will purchase a house.

    Thanks and keep sharing.

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