Agent Ally: Getting Your Finances Ready To Buy Your First Home!
by Real Estate Sales Representative Ally VanderHarst
At some point in a young adult’s life, they start to consider leaving their rental and making their first home purchase. The idea of putting equity into a home that you own instead of kissing away rent-cheques each month can be a tempting scenario. But for some first-time homebuyers, the idea of making this big purchase can be scary!
I wanted to get the lowdown on what it’s like securing financing for a first home from a local mortgage broker. After all, they’re the experts in the whole process! So I talked to Alan Dunlop, Mortgage Agent with Crescent Mortgage Corp. – Grand Mortgages in Brantford. Here’s what he had to say:
The pre-approval/approval process for first time home buyers is the same as everyone else. Everyone has to qualify under the guidelines of the new Canadian mortgage stress test. Lenders want to know that whether this is your first home, or your tenth home, you can actually afford your monthly mortgage payments. You need to prove that you qualify at the “benchmark mortgage rate”, or 2% above the actual rate being offered — whichever is higher. Insured deals are qualified at the benchmark rate, uninsurable deals are qualified at greater of benchmark or contract +2%. This shows the lender that you would still be able to make your payments should the mortgage rate go up.
Another thing to consider is the down payment on a home. There is no option of 100% financing on a home — you need to be able to put at least 5% down on the first $500K of a house, and 10% on any amount above that up to a million dollar home. For example, on a $700,000 house:
5% minimum down payment on the first $500,000 = $25,000
10% minimum down payment on the remaining $200,000 = $20,000
This means your total minimum down payment on this $700,000 home would be $45,000.
So that gives you an idea of what type of down payment you need to save for. And unless you have 20% to put down, your pre-approval is very much conditional on many factors (approval from CMHC, Genworth or Canada Guaranty). The amount you put down on the house also determines if you’ll need mortgage insurance. So the larger the down payment you can put down, the better.
But there’s good news for first time homebuyers! You have the option of using your RRSP’s (up to $25,000) on your first purchase. Not all of that money has to be used for a down payment either; it can be used for renos, appliances, closing costs or anything for your home. So that may be an option for some buyers. Remember though: these funds need to be repaid back into the RRSP’s over the course of the next 15 years. A great resource for more information on this program is here at THIS WEBSITE.
Last but not least, understand that your decision shouldn’t only be based on the mortgage rate you’re being offered. Consider the down payment options. What are the penalties if you break the mortgage early? Is the mortgage portable to another house? Under what conditions? A good mortgage broker should be able to explain all the different options available to you and help you determine what is going to work best for your situation. Even when you’re pre-approved for a mortgage, it’s very important to keep your financial institution or broker updated on what you are looking at buying. A pre-approval or approval can change drastically by something as simple as property taxes or condo fees being higher then anticipated.
So there you have it — some things to consider when you’re getting ready to purchase your first home! I encourage all buyers looking for their first mortgage to compile all their questions for their mortgage advisor so they can be certain what their budget is and get pre-qualified before starting the buying process. Happy House Hunting!