Are You Financially Ready to Become a Home Buyer?
You’ve scrolled through hundreds of home listings and feel ready to become a Home Buyer. But wait! Have you done your homework to figure out what you can afford, where your down payment will come from, and if you can get a mortgage for the rest? There’s a lot to know and do before becoming a Home Buyer, especially when it comes to the financial elements, so let’s help you get started.
- Understanding down payments
- Saving for down payments
- Other home buying costs
- Shopping for a mortgage
- Other things to know about mortgages
- Getting a mortgage pre-approval
- Determining how much you can borrow
- Repeat home buyers
- Buying your current home before selling
- Carrying two mortgages
Understanding down payments
Buyers must put down a minimum of 5% of the home’s purchase price, but that doesn’t mean they should stop there, says Sheldon Craig, a financial planner with Alaphia Financial Wellness in Osoyoos, British Columbia.
“It’s so important to have a healthy down payment because it’s the equity you have in your home,” explains Craig.
In Canada, buyers who put down anything less than 20% of the price of the home must also pay for mortgage insurance, notes Steven Levine, a certified mortgage broker with Team Levine in Montreal, Quebec.
“That insurance premium will be added onto your mortgage and paid through the lifetime of the mortgage,” says Levine, adding that increasing your down payment will reduce the amount of mortgage insurance you must pay.
“When you put 10% down, the premium is 3.1% of the mortgage amount. If you’re putting 15% down, it’s 2.8%. or if you can swing 20%, you’re saving that insurance premium and not paying interest on it through the life of the mortgage.”
Of course, if you want to become a homeowner and can only afford to put down 5%, it’s perfectly acceptable to do so. It allows you to get into the market and achieve your goals of homeownership sooner.
What’s the best way to save for a down payment as a first time Home Buyer?
In addition to cutting down on expenses, following a budget and paying off your debt, first-time home buyers can gather money for a down payment by tapping into government programs and incentives.
The federal government recently introduced a new registered plan, the Tax-Free First Home Savings Account (FHSA), which is slated to launch later in 2023. This program will enable a first-time Home Buyer to save up to $8,000 per year tax-free, up to a maximum of $40,000. Like a Registered Retirement Savings Plan (RRSP), contributions will be tax-deductible and withdrawals to purchase a first home will be non-taxable, same as a Tax-Free Savings Account (TFSA).
The First-Time Home Buyers Tax Credit allows a Home Buyer to claim a non-refundable tax credit of up to $1,500. You can also put away up to $6,500 each year tax-free through your TFSA, which you can then withdraw from to buy a home.
“There’s also the Home Buyers’ Plan (HBP) where each buyer can take up to $35,000 of your RRSP, and you have 15 years to pay that back, otherwise there are….
