Are you one of the many millennials on the hunt for your first house? Don’t wait until you have found your dream home to find out about mortgages or down payments. Put your best foot forward by getting money matters settled well before you start searching for a house.
It’s never too early to save
Start saving for your dream home—even if you haven’t found it yet! In Canada, down payments are usually between 5% and 20% of a home’s sale price. The more you can save, the less you’ll pay later (with interest!) through a mortgage. If you can manage it, a down payment of at least 20% is ideal. That way, you’ll be exempt from the Canadian Mortgage and Housing Corporation’s mortgage default insurance. This expense is scaled according to the amount of your mortgage and your down payment.
You’ll also incur legal and administrative fees during the purchasing process. These closing costs usually represent 1.5%-4% of the property’s selling price. They may include title insurance, lawyer fees, land transfer taxes and home inspection fees. Luckily, if you have an RRSP, the Home Buyer’s Plan allows you to withdraw up to $25,000 from it to put towards a down payment. This limit increases to $50,000 if you’re a couple. You must build or buy a house, however, your withdrawal is tax-free if you repay it within 15 years.
Assess your financial footing
It’s important to know where you stand financially before you even begin browsing through real estate listings. It’s hard to know what sort of house you can afford without first evaluating your financial situation. A good place to start is by checking your credit score. This tells lenders how trustworthy of a borrower you are based on your credit history. If your credit score is low, paying your credit card bill on time and in full can help boost it. It’s also important to avoid exceeding your credit limit. In fact, it’s best to refrain from using more than 35% of your available credit. Remember, if you use your credit wisely, your score will improve the longer you have a credit account open.
Do your mortgage homework
Securing pre-approval for a mortgage can really propel your housing search. This process will pinpoint how much you can borrow and the accompanying interest rate. Once you know the amount that would be available, you can estimate your mortgage payments. You may also be able to get a guaranteed interest rate for a limited time. Though pre-approval is a sensible step towards closing a real estate deal, it’s not a guarantee of financing. You’ll still have to get your mortgage officially approved, but at least you’ll have an idea of your budget as you hunt for your ideal home.
Second, decide what type of mortgage best suits your financial needs. Do you need the flexibility of an open mortgage? (This allows you to adjust your repayment schedule – albeit, at the cost of higher interest rates.) Or do you have the stability to benefit from the lower interest rates of a closed mortgage? (With this type, your repayment schedule is fixed.) Similarly, a mortgage can have a fixed or variable interest rate. Repayment schedules are typically spread out over anywhere from 5 to 30 years.
Lastly, no matter your budget, it’s worth hiring a real estate agent. Though not required, they can offer professional advice to guide you through this complicated process. This will bring you one step closer to turning the key in the door of your dream home, saving you many headaches along the way.