Are you ready to buy a home?
The Gia Team is always happy to meet with you to ensure you have all the tools you need to buy your home with our Buyer Workshop.
Questions to ask yourself before taking the home buying leap. Many people will tell you that the best time to buy a home is always “now” and, on the surface, that looks like pretty good advice. Home price fluctuations have slowed recently and mortgage rates still remain at near-record lows. Plus, any future gains you might make will be tax free.
However, whether you’re really ready to buy a home has less to do with what’s happening in the housing market and much more to do with what’s happening in your personal finance world.
Young adults are the most likely age group to be buying a home but more than half of them think the time isn’t right yet, according to research from the Royal Bank of Canada.
RBC’s annual home ownership poll found that 55 per cent of respondents aged 18 to 34 believe it makes sense to delay a home purchase until at least next year. That’s 10 percentage points more than the national average for all age groups.
There’s really no right or wrong answer, of course. It’s all about the lifestyle you choose to live and what works best for your situation and your budget.
But, before you leap, ask yourself the sobering questions in the following slides.
Would you be better off renting for awhile longer?
It’s tough out there. Young people starting out don’t have very solid incomes and are carrying much more student debt than prior generations. The preponderance of unpaid internships, the scarcity of decent entry jobs, and the fact that many live with their parents after graduating because it takes forever to find work, means that most young people have very little savings. According to RBC, about half of those in the 18 to 34 ranged that have already jumped into home ownership feel their mortgage is eating up too much of their income. Think hard about whether you’re better off stretching to buy or opting for the more carefree rental choice a bit longer.
How often do you plan to move?
Today’s job market is all about flexibility. If you expect to move every few years or so, renting may actually be your best option. Every time you buy a home you have to pay for closing costs, a home inspection, moving costs and perhaps even an appraisal. These costs can quickly add up to thousands of dollars. Then, when you sell your house, you’ll have to factor in real estate commissions of as much five per cent. And there’s nothing to say you’ll sell at a profit. While home prices tend to go up over time, they don’t rise in a straight line. For someone who moves often, buying a house every few years can actually be a risky investment.
Are you sure that you’ll even qualify?
First-time homebuyers need to be aware of recent rule changes that make it more difficult to qualify for a mortgage. Stricter lending rules brought in last year require all homebuyers to qualify for a standard five-year, fixed-rate mortgage. At the same time, the federal government has shortened the maximum amortization period for a mortgage to 30 years from 35, increasing the size of monthly mortgage payments. Regardless of what you think you can afford, lenders will only provide you with a certain amount of money. Banks will allow you to spend up to 32 per cent of your income on your mortgage payment, plus heating and taxes. At the same time, your total debt payments can’t exceed 40 per cent of your total household income.
Do you have enough of a down payment?
In Canada, you usually have to come up with a down payment of at least five per cent (twice that if you’re self employed) to buy a house. If you haven’t been able to put aside a decent amount of money for a down payment without feeling really squeezed, then you’re probably not in a position to afford your own home. Even if you can find someone who is willing to give you a mortgage with nothing down, walk away. You’re simply not ready. What’s the best way to save that foundation money? Build up tax-deductible contributions in your RRSP and then tap it tax-free (at least temporarily)
Can you afford the monthly mortgage payments?
Although gathering enough cash to come up with a down payment is a big hurdle, it’s nothing compared to being able to afford the monthly mortgage payments. And affordability has ratcheted up further since Ottawa, worried about those who may not be able to afford their mortgage payments if interest rates jump, tightened the rules on just who is eligible for an insured mortgage. Although variable mortgages have generally paid off in the past, going this route will likely mean higher payments sooner rather than later. If it looks like you’ll struggle to make even slightly higher payments, you’re going to be in trouble. The issue is not qualifying for a mortgage; it’s being able to actually afford it along with the other costs of home ownership.
Have you factored in those extra costs?
Just because you pay $1,000 a month in rent doesn’t mean that you can handle a $1,000 mortgage payment. The true cost of home ownership is usually anywhere from 30 to 40 per cent of your mortgage payment, notwithstanding any “buy now” enticements offered by developers. This includes closing costs that will only affect you once – like land transfer taxes, commissions, and moving costs – during the purchase of your home, as well as the ongoing commitments that show up every year. When you add on all the extras like property taxes, condo fees, utilities, insurance, as well as everyday maintenance and repairs, that $1,000 is probably going to be more like $1,400. Make sure you keep this in mind as you begin to look for a new home.
Canada MSN Money – Gordon Powers June 2nd, 2011