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Not sure if you should buy or keep renting? Here are the three golden questions that every first timer should be asking themselves before committing to homeownership.
1. Are you ready to stay put?
Because of the way equity payments are structured in most mortgages and the transaction costs of buying and selling a home, homeownership only becomes financially advantageous after 3-4 years of holding onto an investment. If this is your first purchase and you’re considering relocating within the next 4 years, it probably isn’t the right time to consider home-ownership. The exception is if you plan to rent it out while you’re away, in which case you should aim to buy a property that’s conveniently situated near the downtown core and, ideally, one which allows for positive cash flow.
2. How’s your credit looking?
The first thing a money lender looks at when you apply for a loan is your credit score. Part of your decision making process should include contacting Equifax Canada or TransUnion Canada and requesting a credit report, which summarizes your credit history, employment history and personal financial information. Lenders want to see your history of borrowing and repaying debt from a variety of sources, and a credit history of at least one year. They look at your credit score to determine your“debt-to-income” ratio: how much you earn, how much you owe, and the chances you’ll default on your payment.
If your score isn’t great, here’s what you should do: Lenders are looking for regular payments made to at least two sources of debt. If you want to build your score, applying for a credit card, using it for small amounts and then paying the bill off in full is a great way to start. Some borrowers use two cards that have different due dates and always pay the bill in full each time. Doing this can accelerate your credit history quickly.
3. Are you earning enough?
To avoid shopping outside your means, start off by getting a good understanding of the up front purchase costs involved in buying a home, including inspection fees, location costs, appraisal fees, legal fees and deposits. Then, determine how much you can afford to spend. As a general rule of thumb, your total monthly housing costs (including mortgage payments, property taxes and heating expenses) should amount to no more than 32% of your gross household monthly income. In addition, your total monthly debt load (meaning your housing costs plus any car loans, credit card payments, personal loans, line of credit payments or other debts) shouldn’t exceed 40% of your monthly income.
Don’t forget to take into consideration the size of your down payment and the duration of your mortgage plan. Your mortgage terms will determine what your monthly mortgage rate will be. If your down payment is less than 20% of the value of the home you want to buy, you will also need to budget for Mortgage Loan Insurance. This is an insurance which helps Canadians buy a home with a minimum of 5% down. Another financial aid option for first time buyers is the Home Buyer’s Plan, which allows you to tap into your RRSPs to help finance your downpayment.