There’s a reason property shows are the biggest thing going on lifestyle TV. Buying your first home remains one of the biggie’s on the life list. (Usually right after meeting the man of your dreams and right before he gets dethroned by the little man – or darling – of your dreams.)
But back to that lust over the first home....as many an open-house crawling girl knows, buying a first home is a massive financial decision, made more complicated by the fact that prices just seem to keep going up! While emotions can often get in the way (we know the feeling, you just have to have the home that is $50K over budget), you need to try to keep a sense of levelheadedness so that you embark on home ownership on the right, perfectly mani’d financial foot. Here are some tips.
Be cost savvy
A smart and savvy first time home buyer keeps her cool. Make sure you assess all your costs:
- Monthly housing costs, including your mortgage principal payments plus interest, taxes, heating expenses and condominium fees (if applicable) should be no more than 32 per cent of your household's gross monthly income.
- Monthly debt load, which includes your monthly housing costs plus all other loans or required monthly payments for your car, credit cards and so on, should not exceed 40 per cent.
- Remember also that extra expenses like HST and other applicable provincial taxes, appraisal fees, property tax, survey fees, property insurance, land transfer tax, legal fees, service charges, inspection fees, mortgage loan insurance premium and application fee, moving costs and any immediate renovation or repair expenses (phew...that was a mouthful!) can add significantly to the base cost of your new home.
Be mortgage savvy
- The term of the mortgage, the interest rate, the amortization period and payment frequency all have a direct impact on the size of your monthly payment. It is usually more financially beneficial to choose a shorter amortization period, along with the flexibility to increase your overall payment frequency (from monthly to bi-weekly) or to make yearly lump sum payments without penalty.
- The down payment requirement to avoid added insurance costs is 20 per cent of the cost of your home. Work to meet this minimum or (gulp) exceed it. The larger your down payment, the lower your monthly mortgage payment will be, and the greater the savings on total interest paid.
Be financing options savvy
- If you are buying for the first time, you can take advantage of the Home Buyers Plan (HBP) which allows you to withdraw up to $25,000 from your RRSP without immediate tax, to use as a down payment or for other home expenses. If there are joint applicants, each can withdraw $25,000 - but each withdrawal must be repaid in annual installments within 15 years to avoid tax on their full amount (and you'll lose all the tax-deferred, compound growth potential on your withdrawals, which could put a significant dent in your retirement income).
- Alternatively, you could help to fund your purchase with a Tax-Free Savings Plan (TFSA) withdrawal. There are no 'first-time homebuyer' restrictions, no dollar limits, no tax issues, and your RRSP stays intact. As well, you can re-contribute amounts withdrawn from the TFSA starting in the year following the year of withdrawal.
Be tax credit savvy
- Either you and your spouse/common law partner can claim (or share) the Home Buyers' Tax Credit of $750 for first time home buyers of a qualifying home without affecting your eligibility for an existing RRSP Home Buyers' Plan.
The final savvy say
It's good to save money and you'll likely want to pay off your mortgage as quickly as possible. One caveat: don't do so at the risk of other priorities...like building retirement savings and maintaining your family's financial stability.
Talk to your professional advisor for a little perspective on the overall plan. You want to keep every aspect of your true 'home' and financial house in balance.
With careful planning and consideration, you'll soon be able to rest your tired feet, take in your new surroundings, and relish checking this big item off your life list. Home sweet home never rings as true as this first time around.
This article is published by Millie Gormely, CFP, EPC, Financial Consultant with I.G. Insurance Services Inc. as a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Millie Gormely is solely responsible for its content.