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Get the facts first before buying a home

Get the facts first before buying a home

By Carla Hindman, Director of Financial Education, Visa Canada

When I purchased my first home and took on a mortgage, I had to keep convincing myself that I was doing the right thing. Renting was safe, but buying a home was a major commitment with many big risks. I had long weighed the pros and cons of buying a home and ultimately decided to take the plunge.

But home ownership is not always right for everyone or at every stage of life. Today's real estate market is much more complicated than it was 10 years ago. With fluctuating prices and concerns of a housing bubble, people are wondering whether now is the right time to buy. For those who are financially ready to make the move into home ownership, remember that it's a long-term commitment filled with expenses (both expected and unexpected) and responsibilities.

That said, the upside to owning a home – not to mention the tax advantages – are why over two-thirds of Canadians are homeowners. It can be one of the best long-term investments you can make for your financial future.

Here are a few of the many things to keep in mind:

Planning. If you eventually want to own a home, start planning now. It may take years to save enough for a down payment and closing costs. You'll also need to calculate how much you can afford to pay for a monthly mortgage, homeowner's insurance, property taxes, renovations, furnishings and maintenance or repairs.

Qualifying for a loan. Even if you've saved enough, if your credit rating is poor, you may either not qualify for a loan or have to pay a higher interest rate. Work on repairing your credit at the same time you launch a savings plan.

Down payment. The rules surrounding loans and down payments have changed recently, and require much more from home owners in a shorter span of time. The maximum amortization period for government-insured homes is now 25 years. This means you have to pay more per month than before. Those who can muster enough money to make a 20 per cent down payment do not require mortgage default insurance. However, for everyone else who can't afford that 20 per cent, they can expect to see a higher mortgage rate over the life of their mortgage. Depending on the value of the house, that higher interest rate could mean you are paying tens to hundreds of thousands more on the value of your home. Before you decide on how much you want to spend on a home, speak to a bank's mortgage specialist or a reputable mortgage broker who can walk you through scenarios that fit your situation.

Mortgages. A mortgage, which can be either fixed or variable, has three basic parts: a down payment (discussed above), monthly payments and fees. The monthly payment is the amount needed to pay off the mortgage over the amortization period and includes a payment on the principal of the loan as well as interest. The fees are all the costs you have to pay up front to get the loan. For more information about the different types of mortgages available, check out the Canadian Mortgage and Housing Corporation (CMHC) (www.cmhc.ca).

Financing options. Recently, the government of Canada introduced the Home Buyer's Plan (HBP) to help first-time buyers finance their properties. HBP is a program that allows individuals to withdraw up to $25,000 tax free in a calendar year from their registered retirement savings plans (RRSPs) to buy or build a home. Generally, any RRSP contributions must remain in the RRSP for at least 90 days before they can be withdrawn and funds used would have to be repaid back into your RRSP within 15 years. For more information on Canada's HBP, please refer to Canada Revenue Agency ( www.cra-arc.gc.ca).

Another good resource is Practical Money Skills Canada, a free personal financial management site sponsored by Visa Canada ( www.practicalmoneyskills.ca/personalfinance/lifeevents/home/). It contains a guide to home ownership, including preparations you should take to qualify for financing and an overview of mortgages available for homebuyers. It also offers interactive calculators, such as the Mortgage Payment calculator and How Much House Can You Afford? to help you along the way.

Home ownership is not without its share of headaches, but in the long run, it's a strong investment in your future – and besides, it's nice to be your own landlord.




This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.

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