While home ownership can bring a tremendous sense of pride and achievement, before buying a home it’s important to take into consideration everything from its physical upkeep to paying for the mortgage, home insurance and property taxes. Here are some of the key factors you need to consider:
1. Determine how much you can afford
Before buying a home, you need to determine exactly how much you can afford to spend each month. Take into account:
- Your household income
- Home-related expenses such as hydro, cable and taxes
- Your current spending habits
2. Get a pre-approved mortgage
Once you have an idea of what you think you can afford, it’s a good idea to get a pre-approved mortgage from a financial institution. Doing so will ensure you know exactly how much you can afford to offer on a home, and what your monthly mortgage payments will be. Most financial institutions will also guarantee an interest rate for a period of time, usually 90 days. It’s also smart to shop around, not only for the best interest rate, but also for the most flexible repayment terms. A mortgage broker, whose services are generally free, can help you find a lender and mortgage that are appropriate for you.
3. Calculate your down payment
While you can put down less, an excellent financial rule of thumb is to make a down payment of 25% of the purchase price. Your down payment may come from a number of sources:
- Personal savings
- Funds borrowed from relatives
- A withdrawal from your RRSP through the Home Buyers’ Plan (subject to Canada Revenue Agency and plan rules)
- Borrowing against existing assets
4. Factor in initial costs
The down payment is not the only initial expense related to buying a house. To avoid surprises, it’s a good idea to think about the other immediate expenses you may face, including:
- Real estate commissions. These will apply if you are selling your current home through a real-estate agent as well as purchasing another.
- Land transfer tax. This is generally payable to the provincial government by the purchaser of a property, and is expressed as a percentage of the purchase price.
- Home inspection fees. Before finalizing your offer to purchase, you'll want to have an inspection performed by a professional home inspector. This will help identify any areas needing attention or repair and will confirm the overall condition of the home.
- Appraisal fee. Your mortgage lender will appraise the property you’re buying to ensure it’s worth more than you are borrowing. Generally, as the purchaser, you are responsible for the cost of the appraisal.
- Closing costs and legal fees. You’ll need to hire a lawyer to assist with the legal aspects of the transaction.
- Moving costs. This expense will vary depending on whether you’re moving yourself with a rented truck or hiring a mover.
- New-home costs. If you’re buying a brand-new home, you’ll likely have additional expenses early on, such as major appliances, paint, window coverings, fencing, air conditioning or light fixtures. It's a good idea to prioritize these items in terms of when you think you'll need them.
5. Consider ongoing expenses
Besides the one-time costs you could face as a new homeowner, there are other financial obligations to consider:
- Mortgage payments. Generally, this will be your heaviest expense.
- Property taxes. These must be paid periodically to your municipality, either directly or in combination with your mortgage payments.
- Utilities. These include heating, electricity, water, telephone, Internet and cable.
- Home insurance premiums. Make sure you have adequate insurance coverage against fire, theft and liability.
- Condominium fees. These apply to condominium units or townhouses. Some costs may be included in condo fees, such as utilities or cable TV, but they vary, so make sure you know what your fees include.
- General maintenance. Keep in mind that if you live in a house you’ll have to cover the costs of general maintenance, snow removal and lawn care. Proper maintenance helps to preserve and even add to your property’s market value.
Knowing you’ve carefully assessed all of the up-front costs and ongoing expenses can help you create a financial plan that will protect your investment for years to come.