Transitioning from renter to homeowner is one of the most important decisions you’ll make in your life. This decision will impact your future greatly, creating obligations and also opportunities. Since mortgage rates are at an all time low, many of us are considering jumping onto the home ownership bandwagon. Does this transition make sense for you? This blog proceeds to discuss five financial considerations that you should take into account before you make this life-altering decision.
The first consideration is your credit score. It is one of the most important factors when it comes to securing a mortgage. Lenders need to know if you are able to consistently pay your bills and debts. As outlined in the “Five Ways In Which You Can Improve Your Credit Score” blog, Your Mortgage Your Way mortgage professionals can guide you on how to improve your credit score in order to be approved for a mortgage.
Secondly, you need to understand how much you can afford to spend on a monthly basis without affecting your financial health. In other words, what is your maximum monthly budget? A good exercise would be to compare your monthly expenses against your income, savings and investments. Then add your potential homeownership expenses into the mix and gauge whether you are able to afford buying the home or not. Our mortgage professionals can go over your financials and advise you on the price range within which you can buy. This gives you a very good idea on the types of homes you should be looking at.
Next, you need to make sure you have enough savings and investments on hand, and in liquid form, to cover, most importantly, the down payment (up to 20% and min 5% for first time homebuyers). The down payment represents the amount you pay in cash towards the home purchase. The remainder will be financed by a mortgage. The better your down payment, the less your monthly mortgage payments will be. Which means you will be paying less interest over time to the lender, and the more equity you will build in your home. Therefore, if you are planning to buy a home in the near future make sure to keep your savings fluid and flexible so that you can access your money whenever you need it. Short-term savings and investment options, including savings accounts, short-term GICs (guaranteed investment certificates), low-risk mutual funds, or stocks purchased for the short-term, are the best options. Avoid longer-term commitments especially multi-year GICs and mutual funds or other investments that impose penalties when you withdraw your money or simply do not allow you to withdraw until the maturity date.
Moreover, you need to be able to afford all the other upfront and closing costs: (These are also mentioned in Closing Costs Blog)
Home Inspection and Home Appraisal
When you like a place and put an offer on it, it’s common to include a condition on home inspection in the offer. That means you want to buy the house provided, no major issues are found by a qualified home inspector. An inspector provides a comprehensive visual inspection of the house’s overall structure, electrical and plumbing, foundation and roof, and more. Home inspection fees vary but are usually a few hundred dollars. Home appraisals also cost a few hundred dollars and may sometimes, not always, be covered by the lender.
This is an important requirement when buying a house, as you won’t qualify for a mortgage unless you have home insurance in place. You need to arrange that before closing so that your house is covered in case of theft, loss, or damage to the building structure or contents.
Land Registration and Land Transfer Tax
Your property’s title must be registered under your name prior to the sale closing. Usually your lawyer will submit this on your behalf, but you are required to pay the land transfer tax. The cost is a percentage of your home’s purchase price and your lawyer can advise on the amount.
Lawyers are an essential part of real estate transactions in order to protect your legal interests as a homebuyer. They check to ensure that the home you are buying has no prior legal claim against it. That’s called a lien, which is a legal claim over another person’s property that someone files to ensure a prior debt gets paid. Your lawyer will also review the purchase contract to ensure that everything is in order. They will also handle all the details of the financial transaction on closing and provide a final ledger. Legal fees can vary so ask your lawyer for an estimate in advance of closing so you are prepared.
The seller of the home you are buying may be entitled to a rebate for something they already paid that carries past the purchase date. For example, they might have paid property taxes and utility bills that cover the balance of the year. In that case, your lawyer will adjust the ledger accordingly and ‘rebate’ the seller through an adjustment upon closing.
These costs usually amount to 1-4% of the purchase price of the home. They are quite substantial and cannot be overlooked at all. In addition to that, you would need to take into account moving costs (packers, movers, furniture and/or furniture assembly etc.) and GST/HST/QST on a newly built house and/or mortgage loan insurance.
Last but not least, when you rent a home you don’t need to worry about maintenance or repairs, as that is the homeowner’s responsibility as opposed to buying and maintaining a home, which is a huge responsibility that requires time, effort and most importantly money. You need to keep aside some cash for unforeseen and emergency repairs or renovations if and when they arise.
This pandemic has put an emphasis on having personal space and the importance of mental health during lockdowns and travel bans. Many of us are in a constant state of instability. Especially in Ontario where city condo renters are looking to make a move to communities where they can have more space, It’s a seller’s market. This has in turn inflated home prices depending on the area in which you plan on buying. This does not mean it is impossible to buy, it just means that you may have to consider the options in terms of location and type of home in order to be able to afford it
Although homeownership can seem daunting and overwhelming, ultimately it is an investment and you will be putting money towards a mortgage that will be building equity in your home, that will typically appreciate in value over time, whereas when you rent you do not see that money ever again; it is gone forever.