First Time Homebuyer? Here Are 5 Tips To Get You Going!

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It’s almost the middle of 2019, the stress test is still affecting many of the younger generation who haven’t bought a home before, and affordability is decreasing by the month in major Canadian cities; but everything is still doable if you do it right!

Start accepting help from the family, or outside.

In Ontario, housing costs are at an all time high with the average home being around $600,000. Veteran real estate agents claim the issue is that housing costs have skyrocketed while the average income has increased at a much slower rate. This makes it particularly hard for young people to break into the housing market and many are turning to their parents to help. 80% young homebuyers are depending on their parents to help them make their first purchase. Buying a house is an investment in your future so don’t shy away from help if it is available to you.

2. Figure out your budget!

The last thing you want is to be “house poor”. This happens to people who buy a house that they can afford on paper but haven’t taken into consideration extra costs like property taxes, legal fees, moving costs and house insurance. So, it is imperative you have a budget that takes into account all the costs associated with buying and maintaining the home. It is also important to include other living expenses that don’t factor in to your GDS or TDS in your budget like food and entertainment. The more accurate you can be with financial forecasting for your new home, the better. Consider setting aside $5,000 to $10,000 for extras so you don’t end up with unforeseen costs that you can’t afford.

3. Wait, what are the GDS and TDS?

Make sure you know and understand those two terms. Your Gross Debt Service (GDS) ratio and your Total Debt Service (TDS) ratio are the two numbers that lenders will use to qualify you for a mortgage.

The GDS ratio is the % of your income needed to pay all your monthly housing costs, including principal, interest, taxes and heat. 50% of condo fees are also included if applicable. Typically, your GDS ratio needs to be bellow 39% in order to secure a mortgage for a new home. Are you safe?

The TDS ratio is the % of your income needed to cover all your debts. This includes car payments, credit cards, loans and alimony. Most lenders will consider you for a mortgage if your TDS ratio is 44% or lower.

Because the GDS and TDS are so important to secure a mortgage, having a good idea of your financial situation before you go to a bank or private lender is ideal. Pay off debts and make sure your credit is in good shape to improve your chances of qualifying for the mortgage you need.

4. Mortgage default insurance?

As already know, the down payment needed to buy a house in Ontario is 20%. If you are trying to buy a $400,000 house, then the DP would be $80,000. It may not sound like too much, but it’s a challenge for even the most fiscally responsible! If this is not feasible, however, you have the option of putting down as little as 5% of the cost of the house ONLY IF you insure the other 15%.

The CMHC does sell insurance products that will allow you to insure the portion of the down payment that you don’t have ready to go. Generally, the premium will be around 3.5%. Some say it is better to wait until you can afford the entire down payment before you buy to eliminate the premium and interest payments that can add up over the years. That being said, if you wait to buy a house it is likely that you will be paying more in the long run anyway as housing prices tend to go up. As a general rule it is better to become a home owner sooner to help grow your net worth and improve your financial security into the future.

5. Can you afford? Then buy!

The long-term future should be on your mind when purchasing your first home. As mentioned earlier, you don’t want to become “house poor” but ensuring that the house you buy will continue to fit your needs down the road will ensure that you don’t have to go through the home-buying process too soon again. Buying and selling a house with the help of a real estate agent, legal fees and other moving costs is good, but very expensive. It makes a lot more sense to buy a home that you can grow into rather than one that you will have to flip because it wasn’t good enough.

Buying a house is a great investment and one that will contribute to your financial security as you age. It has been shown that people that get into the housing market early typically retire more comfortably than those who wait until later in life. Make sure you surround yourself with the proper experts (real estate agent, financial advisor, mortgage broker etc.) to make sure you are well equipped to journey into the world of home ownership.