Purchasing 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!
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.
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!
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.