The road to buying your first home and current mortgage rates can feel overwhelming. With many things to consider throughout the process and lots of decisions to make, it’s sometimes hard to know where to start. This guide will help you understand the steps and things to consider as a first-time home buyer.
Navigating the complex process of owning your first home can be challenging and a time-consuming process with no prior experience. Mainstreet advisors are here to provide you with up-to-date information and step-by-step help to get you on your path to home ownership.
- How much can you afford?
- Down Payment
- Closing Costs
- Pre Approval / Pre-Qualified
- House Hunting and Approval
How much can you afford?
One of the first things to understand when buying a home is how much you’re able to afford. Having this information not only helps you plan and save, but it will help you when you begin the search for your home. The amount you can afford is determined by several factors including your household income, current debts, fixed and variable expenses and the amount of down payment you have. These factors are used to create a Gross Debt Service Ratio (GDS) and a Total Debt Service Ratio (TDS) that help lenders determine the amount of mortgage you can qualify for without overextending yourself.
Although it can sound complicated, it doesn’t have to be! You can reach out to one of our Mainstreet Advisors who can help you get a full picture of where you are currently, what your goals are and can help create a plan to help you achieve your goals of home ownership. At your appointment you will review your financial background, and credit history. This will determine the best price range for your income and budget. We will also discuss what current mortgage rates are available to help you understand which mortgage product is right for you.
Alternatively, you can use our Mortgage Affordability Calculator to give you a sense of the price range you are in. This will help give you a starting point as you begin your planning.
Down Payment
The down payment is a key part of the home buying process. In Canada, your down payment must be at least 5% of the home’s total purchase price. If a house is more than $500,000 a 5% down payment is required for the first $500,000 then a 10% deposit is required for the remaining portion. Any down-payment under 20% is a high-ratio mortgage and is subject to mortgage protection insurance. Premiums are based on both the size of the down payment and the value of the mortgage. You can use the Mainstreet mortgage calculator to understand how your down payment could affect your payments.
There are several ways to effectively save for a down payment and help you achieve your goals sooner. Let’s explore those below.
First Home Savings Accounts (FHSA)
This new account is great for a first-time home buyer. Canadian citizens 18 years and older can now save up for their first home with the new FHSA. Like a Registered Retirement Savings Plan (RRSP) contributions are tax deductible, while like a Tax-Free Savings Account (TFSA) any income made on an FHSA is tax-free. Learn more about our FHSA here.
The Home Buyers Plan (HBP)
The Home Buyers Plan (HBP) allows you to access funds from your Registered Retirement Savings Plan (RRSP) to put towards the purchase of your first home. Each person can withdraw up to $60,000 interest free from their own RRSP account to contribute towards the down payment of the home. Funds withdrawn from your RRSP are tax free provided they are paid back within 15 years of the home purchase and repayments must start no more than five years from the withdrawal date.
High Interest Savings Account (HISA)
Another great way to save for your down payment is within a High Interest Savings account. You can open a savings account online in a couple of minutes and start on your journey towards home ownership. Automating deposits is a great, hands-off way to save for your down payment. Here you will earn a set interest rate with no risk to your funds. This account allows you to jointly save with your partner or spouse and is a great solution for those who have saved the maximum amount in their FHSA.
Cash Gifts
If you are lucky enough to have a down payment as a gift or inheritance from family. It is important to show how those funds we acquired. As part of the process, your advisor will review these documents and ensure that the appropriate information has been collected.
Closing Costs
Closing costs are not a factor that initially comes to mind as a first-time home buyer. These costs are expenses that are required as part of finalizing the purchase of a property. These include legal fees paid to your lawyer, title insurance, land transfer taxes, home inspections, and appraisals. Typically closing costs are between 2%-4% of the price of your home so don’t forget to include this in your savings plan.
Pre-Approval / Pre-Qualified
When you are ready to begin looking for your home, booking an appointment with a Mainstreet Advisor is a great way to prepare. At this final milestone, you can work with your advisor to gather all the relevant paperwork and cover the last details to ensure you are ready to make the offer when you find that dream home. A Mainstreet advisor will review your supporting documents, review current mortgage rates and can pre-qualify you to make sure that when you find “the one”, the process moves quickly and goes smoothly.
House Hunting and Approval
After your pre-approval appointment, happy house hunting! Your Mainstreet advisor is here to assist the entire way. Once you have an offer accepted on your dream home, send us the paperwork and we will take care of the rest!