By Jordan Lavin for Ratehub.ca
So long, landlord!
The leaky faucet that never got fixed. The old, energy guzzling fridge that never got replaced. The awkward noises from the unit next door. Wouldn’t it be great to say goodbye to all of them, pack up your stuff and move to a home that’s truly yours?
But transitioning from renting to buying is easier said than done. If you’re thinking of making the leap, there’s lots to think about. Here’s what you need to know.
Maintenance and repairs will cost more than you think
When you’re a renter, it’s easy. Broken sink? Call the landlord. Power’s off? Call the landlord. The fridge is working but making a weird buzzing sound and you’re worried it’s going to blast off into space? Call the landlord.
When you’re a homeowner, all that’s on you. And it doesn’t stop with the little things like sinks and fridges. A leaky roof (or basement), broken furnace, and foggy windows will all become your problem at some point. Rules of thumb suggest you should plan to spend 1% of the value of your home on repairs every year. That means a $500,000 home is going to cost you at least $5,000 in upkeep on an annual basis.
Oh, and when thing’s don’t get fixed, there’s no lazy landlord to complain about. It’s just you.
Buying a home is expensive
Yeah, houses are expensive – that’s common sense. But the cost is a lot higher than first and last months’ rent. You’ll need to come up with closing costs totalling a minimum of 6.5% of the purchase price including:
Down payment: The minimum is 5%, but only for properties under $500,000. You’ll need 10% of the portion of the purchase price over $500,000. If you’re spending over $1-million (or you wish to avoid paying for mortgage insurance), you need at least a 20% down payment.
Legal expenses: Fees for a purchase can go up to about $1,500 including necessary extras like title insurance.
Adjustments: Property taxes, heating fuel, and other bills prepaid by the sellers will need to be reimbursed. Technically you’re only paying for what you use, but paying for these items all at once can be expensive.
There are strict rules about qualifying for a mortgage
The great recession of 2008-09 was caused by risky mortgage lending, and the run-up in house prices in Canada puts us at risk of it happening again. So, governments have spent the last decade making it progressively more challenging to get a mortgage.
Answering the question how much mortgage can I afford depends mostly on your income. Under the current rules, you need to be able to show that your entire cost of living (mortgage, property taxes and heating) plus all your other debts will total no more than 44% of your income. And even if you can get a great mortgage rate, you’ll have to show you can meet that maximum based on a mortgage rate that’s far higher than you’ll actually pay.
First-time homebuyers get a break
There are some programs for Canadians that are aimed at making it easier to buy a first home. These first-time homebuyer programs include:
The Home Buyers’ Plan (HBP): A program that allows you to withdraw up to $35,000 from your RRSP tax-free to buy a home;
The Home Buyer’s Amount: A non-refundable tax credit of $750 in the year you buy your first home; and
Land transfer tax rebates: Regional programs that reduce some or all of the land transfer tax owed by first-time homebuyers.
You won’t get a deal at your bank for being a long-time chequing customer
A mortgage is worth far more to a bank than a loyal chequing customer, and banks will compete for your mortgage business. Chances are you will find a better deal on a mortgage by shopping around than you will by heading to your local branch and showing you’re a loyal soldier.
To get a better deal on your mortgage, consider using a mortgage broker. Brokers have access to the mortgage products and rates from many different lenders, and they can negotiate on your behalf to get you the best mortgage for your needs. A mortgage broker will save you time and effort, and you’re far more likely to get one of the best mortgage rates in Canada from a broker than from a mortgage salesperson at your bank.
There are still rules you have to follow
When you’re no longer beholden to your landlord, the bank will take over. Making your payments on time every month is a must. The lender will also require you to keep the home in good repair, maintain adequate insurance coverage, and stay up to date on your property taxes. The difference is it’s your own investment – and you’ll want all of this for yourself, too.