Becoming a homeowner is a momentous event, one that brings with it great challenges, responsibilities and rewards. Taking that step into home ownership can be a daunting one. Are you ready to undertake all the financial commitments that come with owning and maintaining a home? Do you have money for a down payment? Are you ready to settle down into one place? Familiarize yourself with the process, the people, and the costs involved, to help you make the right decisions.
Renting vs buying
Making the move from renting to buying is a big decision. Renting is generally a more flexible option - your monthly expenses can be lower; property maintenance is the responsibility of the owner; and once your lease is up, you are free to move on to a new neighbourhood, a better apartment, a different city, with a minimum of fuss.
However the rent money you pay goes into building someone else's equity. Monthly rent in major cities can sometimes be equivalent to a mortgage payment. As rent, once it leaves your pocket, it's gone; as a mortgage payment, it builds up as home equity, becoming a valuable asset.
If you have some savings set aside, it is well worth taking a hard look at how much money you lose in rent each month, and whether it would be better spent paying down your own home.
One big factor is mortgage rates. Today's rates are at unprecedented lows, making home ownership possible for more Canadians than ever before. Low interest rates mean lower monthly payments, or a chance to pay down more of your principal in the first few years, which can mean tremendous savings over the long term. Even if you don't have a lot in savings, there are several programs you can take advantage of to make your down payment, including gift payments from family members, drawing against your RRSPs, or taking a high-ratio mortgage with just 5% down.
How much can I afford?
There are some simple calculations you can do to give you a rough idea of how much you can reasonably afford. Keep in mind that these are guidelines only, and you will need to assess your personal lifestyle to determine how much of a comfort margin you want to leave.
Housing price
One way of determining what you can afford is by looking at the maximum house price for your household income. Generally speaking, take your pre-tax income for your household and multiply by 3.4 to get the maximum purchase price.
For example, if you and your spouse together earn $72,000 before taxes, multiplied by 3.4 this gives you a housing price of $244,800.
This is a very rough estimate to put you in the ballpark of the purchase price you can afford; it doesn’t take into account mortgage rates, how much you’ve saved for a down payment, and your other financial obligations. A better guide is determining how much you can afford to pay each month for your home.
Monthly Payments
Calculation #1: Gross Debt Service Ratio (GDS)
This looks at how much of your gross income your home expenses - including payments, taxes, heating and condo fees – should take up.
Multiply your gross monthly income (pre-taxes and deductions) by 0.32 to determine your GDS; this gives you the highest amount your monthly home expenses should come to.
For example, if your gross monthly income is $3500, then your GDS calculation is 3500 x 0.32 = 1120. This means your home expenses should not total more than $1120 each month.
Calculation #2: Total Debt Service Ratio (TDS)
This calculation looks at your total debt load – including home expenses, credit card payments, loan payments, car payments, and other debts/financing - to determine how much of your gross monthly income you can reasonably put toward debt payments.
Multiply your gross monthly income (pre-taxes and deductions) by 0.40 to determine your TDS; this gives you the highest amount your total monthly debt payments should come to. Then deduct all non-housing related monthly expenses: the remaining total is how much you can put toward housing, in light of your total debt load.
For example, if your gross monthly income is $3500, and your non-housing debt payments come to $425 a month, then your GDS calculation is 3500 x 0.40 - 425 = 975. This means your total monthly debt payments should not be more than $1400, and your home expenses should not total more than $975 each month.
The lowest of these two calculations – GDS or TDS (or in the examples, $1120 or $975) -24 is the figure you should use to determine the maximum you can afford to pay each month.
These figures will give you the basis from which to use our mortgage calculator to see how much the home you want to purchase will cost you each month, based on today’s mortgage rates and the down payment you have set aside, and whether or not you can reasonably afford it.
Don’t push your maximum - leave room to build a fund each month for unexpected expenses and small luxuries.
Pre-qualification
Once you’ve figured out roughly how much you can afford, it is a good idea to get pre-qualified by a mortgage lender. Pre-qualification is just short of a full mortgage approval, because you have not yet found the home you wish to purchase. However it involves providing nearly all the same information, including your financial information and supporting documentation, to the lender, who will then determine the maximum mortgage financing for which you are qualified.
Most of the time, pre-qualification will also include a rate commitment by the lender – a guaranteed interest rate hold for a given period, usually one to three months – with the assurance that if rates go up in the meantime, you will still get the lower rate. This is important, as higher interest rates will lower the maximum mortgage you can carry. Usually the rate commitment also covers you in case rates go down in the interim period, by allowing you to take the lower rate.
This pre-qualification makes shopping for a home much easier by narrowing your field of search to only those homes you can afford, and by allowing you to put in firm offers. This can give you a distinct advantage over other bidders whose offers may be ‘subject to financing’, and allow you to move quickly once you’ve find the ideal property.
Note: If you are considering buying a condo, your pre-qualification will include average monthly condo fees. If your chosen condo has fees higher than the average, this may negatively affect your pre-approval amount.
Choosing the right home
Now that you know your price range, it’s time to decide what type of home would best suit your needs.
Choosing a condo
Condos are a very popular choice in the urban centres, and many people like the hands-off maintenance that a condo offers. A condominium involves the shared ownership of a multi-unit building. Condo buildings can be small, with just a handful or units, or high-rise towers. The individual owners pay monthly fees to a condo corporation which then oversees the maintenance and upkeep of the building.
The monthly condo fee can cover a lot of bills, such as electricity, insurance, taxes and upkeep. However keep in mind that condo fees can be quite steep, ranging from $150-$500 a month, and may include features or amenities you don’t need or use. If you are considering a condo, be sure to read the condo corporation’s fine print closely for any caveats or hidden fees.
If the condo is a resale unit, you will need an Estoppel Certificate or Certificate Status (not applicable in Quebec). See the Canada Mortgage and Housing Corporation’s Condominium Buyer’s Guide for more information.
Pros:
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- stability in monthly budget
- no maintenance or yard work
- condo building may have shared assets like gym, pool
- can be a more affordable first home
Cons:
condo fees can be expensive- fees may go up at any time
- you are limited in what you can do to renovate/upgrade your unit
- other rules and regulations may apply
Choosing a house
Houses are a more traditional home, offering potential green areas and more space for a family. Houses can also contain income-earning rental units, helping you offset the cost of your mortgage. A house is yours to do with as you see fit – you can knock down walls to expand your living room, remodel the master bathroom, finish the basement, all of which can increase the worth of the property and your own equity.
Houses come in different forms: townhouses, which are row houses with separate entrances that share common walls; semi-detached, where two houses with separate entrances share a common wall; detached (or single), a stand-alone house; and finally duplexes, triplexes and fourplexes, which are usually single family homes that have been reconfigured into several units that can then rented out.
If you are leaning toward buying a house, then keep in mind you are fully responsible for the upkeep and maintenance of the house; you will need to set money aside for repairs and improvements.
Pros:
potential for yard/garden- usually more residential neighbourhoods
- may have rental unit(s)
- you pay only your own expenses
Cons:
a lot of work- you are responsible for repairs and maintenance
- harder to budget for upkeep expenses
- property taxes can be significant
New vs Old
Another consideration as you go house-hunting is whether to buy a new home from the builder, or go with a re-sale home. Each has their particular benefits and drawbacks: newer homes need almost no maintenance the first few years, but if it’s in a new development you could find yourself surrounded by construction for months or years to come. On the other hand, resale homes tend to be in more settled and mature neighbourhoods, but could be in need of major repairs at any time.
Choosing a new house
A new home can mean buying into a new development, or hiring a builder to custom-build the home of your dreams. Either way, it’s worth your while to research the builder: see other projects they have completed if possible; find it if they belong to a provincial builder’s association; and make sure you know exactly what you’re getting for your money. Even small details like grass sod and a paved driveway need to be specified, or you could find yourself having to pay for a lot of the finishings in the end.
Your builder will likely have a warranty on your new home usually covering labour and materials for at least one year after completion, and structural defects up to ten years; find out about the New Home Warranty program in your province. A new home purchase may also be subject to provincial and federal sales taxes.
Pros:
Modern building techniques can mean durability and energy savings- No need for maintenance in the near term
- New building warranty covers major systems
- Flexibility with finishings, fixtures, plumbing and other features
Cons:
New developments may lack amenities of older neighbourhoods- May be next to ongoing construction
- You may be responsible for outdoor finishes like landscaping and fences
- May not be finished on schedule
Choosing a resale home
A resale home is one that was already built, bought and lived in. Usually the neighbourhoods have been settled for a while, and all the peripheral services and amenities– like supermarkets, schools, churches, gas stations, etc – have already moved into place. Outdoor areas will tend to be established as well, with lawns, fencing and mature trees. Some resale homes will have added value features such as finished basements or rental units.
However, because resale homes are older, it’s recommended to get a professional home inspection to ensure they don’t harbour any nasty surprises like a faulty foundation, leaky roof or major plumbing problem. Also, these homes will be set up to the previous owners’ tastes, and may require extensive reworking of the interior design, such as adding hardwood floors, repainting, renovating bathrooms, fixtures, updating appliances.
Another possibility in a resale home is the ‘fixer-upper’ – a house in need of extensive renovations/improvements, whose sale price is lowered accordingly. While these can mean a lot of work, they can also result in a very customized house whose value is improved well beyond the cost of renovations. Some lenders will bundle the cost of these renovations in addition to the mortgage, with a five percent down payment, payable when the work is complete, under the Home Purchase Plus Plan.
Pros:
Established neighbourhood with services and amenities in place- Mature outdoor areas
- May have added value features such as finished basement, rental unit
- ‘Fixer-uppers’ can be a good investment
Cons:
Older homes may require expensive upgrades of major systems- Interior design may need reworking to suit your tastes
- Not as energy-efficient as new homes (higher heating/electric costs)
- Can require weeks/months of work before it is fully liveable
Other considerations
There are a number of other factors you should take into account when deciding where you want to live, and in what kind of home. These will help you narrow your search field, and focus your efforts on the kind of home that’s ultimately right for you.
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- Space: how many bedrooms do you need? Is your family growing? Do you have older children who will soon leave home? Try to plan ahead for future space needs if you can afford it, rather than forcing a move in a couple of years. What about parking, or a garage? Do you have any large items (such as a boat) to store?
- Special features: Do you want your home to have any special features, such as a swimming pool, wheelchair access, horse paddock?
- School: if you have or plan to have children, are there schools nearby? Find out about their curriculum, reputation, and the logistics of attending.
- Taxes: how expensive are property taxes in the neighbourhood? Can you afford them in addition to your housing costs?
- Zoning laws: does the neighbourhood have special zoning laws or bylaws that will hamper any future plans you might have, such as building a garage or an addition on the house?
- Work: how far would you and other household members be from work?
- Transportation: Is there parking available? How is local traffic, and access to major thoroughfares? Is public transportation available, if you don’t have a car?
- Setting: do you prefer to be in a rural, urban or suburban environment?
- Neighourhood amenities: does the neighbourhood have nearby supermarkets, shopping, restaurants, recreational facilities, places of worship?
The people you’ll need
Realtor
A realtor or real estate agent is not required to purchase or sell a home, but many people choose to use their services for their access to extensive listings, as well as their experience and understanding of all the details that are involved in vetting and purchasing a home. Generally a realtor will charge a commission on the sale, payable by the seller.
If you decide to use a realtor, ask people you know for referrals, or visit the neighbourhoods you would like to live in and look for agent listings on yard signs. You can also visit the national realtor listings database at www.mls.ca to find properties for sale and realtors in your preferred area. Ask for their references, and speak to the people they’ve represented previously to find out about their experiences.
For Sale by Owner
Some sellers choose to sell their homes on their own, without the intermediary of a real estate agent. Often times the sales price will be discounted as there is no sales commission to pay. Homes that are ‘For Sale by Owner’, or FSBO, are listed on several well-established websites in Canada:
If you opt to buy a home that is FSBO with the help of a realtor, be prepared to have to add your real estate agent’s commission to the sales price. You can also choose to do without a realtor’s services, in which case you must be prepared to do the legwork in verifying the property’s condition and value yourself, with the help of a real estate lawyer and home inspector.
Real Estate Lawyer
You will need a real estate lawyer (or a notary in Quebec) to help you draw up an offer of purchase, review the title of the property to make sure there are no liens or other holds on it, review the final contract, and perform the property transfer when the sale is complete.
Fees depend on the lawyer, and the type of purchase you are trying to make, but you can shop around. Contact your local law association (or the Chambre des Notaires in Quebec) to find a real estate lawyer in your area.
Home Inspector
A professional home inspection is the best way to protect yourself when you are considering buying a home. They will perform a detailed visual inspection of the property, from structure to major systems to outdoor areas, identifying any problems that might affect the sale price or even the sale itself. They will also provide you with a list of repairs that need to be made, and the time frame in which they should be completed.
It’s worth noting British Columbia is currently the only province to license home inspectors, so if you live outside B.C. you will need to choose your home inspector carefully. The Canadian Association of Home and Property Inspectors requires its member to meet strict professional and educational requirements, and can be a useful resource for locating a creditable home inspector.
Home inspection fees are approximately $500, depending on the size and type of property.
Appraiser
Knowing the true market value of the property you want to buy is important; it will help you recognize a good deal, establish a fair offer price, and will ensure you qualify for financing. In fact, your lender may require a property appraisal before finalizing the mortgage financing; if the home is valued at less than the mortgage value, you may be denied.
Appraisal fees range from $250-$350 for single family homes.
Land Surveyor
The property you want to buy may need an updated Survey or Certificate of Location, as part of your mortgage application. Generally the certificates are valid for five years; older certificates will require a new survey to be performed.
Visit the Canadian Council of Land Surveyors to find a licensed surveyor in your area.
Insurance Broker
Insurance is generally required when you have a mortgage, in order to protect the lender’s security on the loan (in this case, the home itself). There are different types of insurance you can purchase, that are different from the mandatory mortgage insurance for high-ratio mortgages (where your down payment is less than 20%).
Property Insurance covers the replacement value of the property; premiums vary according to the value of the property.
Mortgage Life Insurance is also available, to protect your family in the event of your death. It can also include payment protection in the event of illness, job loss and other life events that may prevent you from maintaining your mortgage payments.
Your lender can usually provide you with insurance, and there are many insurance brokers available through a number of financial institutions and major insurance companies.
Making an offer
Now that you’ve found the perfect home, and have assembled your team of professionals, you are ready to put in an offer of purchase.
Your real estate lawyer/agent can help you draft your offer, which will include the following elements:
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- The names and addresses of the buyer and the seller
- The legal description of the property to which the offer pertains
- Date of offer
- Expiry date and time of offer
- The purchase price you are offering
- The deposit/down payment amount, to be held in a trust account by the seller’s lawyer
- Financial details of how you will finance the remainder of the purchase price
- Your desired closing, possession and adjustment dates (usually closing is 30 to 90 days from the date of the offer)
- All the chattels (moveable goods, like appliances, hot tub, washer, dryer, blinds, etc.) that will be included in the sale. You will want to be very specific, as anything not covered by the sales agreement can be removed from the house before you take ownership.
- Exclusions, which are any items you do not want included with the sale of the house
- Conditions that must be met before the contract becomes legally binding, such as a satisfactory property inspection report, property appraisal, approval of financing, repairs, etc.
- Request for a land survey (if applicable)
- Your signature
Be prepared to have to negotiate; your first offer may not be accepted as is. The seller may want to negotiate the price, the conditions, the closing dates, and the chattels included in the sale. They may present you with a counter-offer, which you can counter in turn. This can go back and forth until you reach an agreement that is satisfactory to both parties, or until one of you rejects the offer (or it expires). At this point your deposit will be returned to you.
If you or the vendor accept the other’s offer, and all the conditions stipulated in the agreement are met, then the agreement becomes a legally binding contract.
Once all of this is in place, you are ready to take possession of your new home.
Financing your new home
Now that you have finalized the purchase, it is time to finalize your mortgage financing.
Bridge financing
If you are currently a homeowner, you may need bridge financing (also known as interim financing), to cover any gaps between the time you must pay for your new home (including the deposit) and when you receive the funds from the sale of your old home.
Bridge financing literally bridges that gap, but can be quite expensive. If you can arrange the timing to avoid it, you can save the high interest fees. However, if a gap is unavoidable, this will ensure you have the funds to close the deal, rather than lose the home you worked so hard to secure.
There are two types of bridge financing: closed, which means you have an agreement in place for the sale of your old home and a firm date when you will be able to repay the loan; and open, which is when you’ve purchased a new home without having sold your old one. In some cases, interim financing may be used to refer exclusively to open bridge financing.
Open bridge financing is much more expensive than closed, simply because there is a higher risk to the lender.
Completing your new mortgage application
If you don’t need bridge financing, then now is the time to complete your mortgage application. If you have found a home that meets the terms of your pre-qualified mortgage, and the property inspection and appraisal have been successfully completed, then you should have no problems completing your application.
You will need to provide the following information:
Confirmation of employment and/or earnings- Current banking details
- Proof of the funds for the down payment
- A list of assets, including properties and vehicles
- A list of total liabilities and monthly payments, including all outstanding debts such as credit cards and loans
- Property survey
- Contact information for your lawyer (notary in Quebec)
- Details and photo of the property, if applicable
- Building plans and contract if you are having a home built
- Copy of the signed purchase offer
See our mortgage centre for more details on the types of mortgages available.
Closing day
Congratulations! You are now ready to take over your new home. Typically, you will have been allowed to visit the property several times before closing day, to take measurements and make any plans for renovation. By then you will also have to have made moving arrangements, and making changes of addresses with your bank and utility companies.
On this day your lender will provide you your mortgage funds, which you then transfer along with any remaining balance on the purchase to your lawyer, who will pay the seller.
The new property is then registered in your name, and your lawyer will provide you with the deed and the keys.
Closing costs
Closing day carries with it more than just the price of purchase; there are several costs associated with the sale of a home that you must be prepared to pay, either by adding it to your mortgage principal in the application, or by having savings set aside.
They include taxes, legal fees and insurance costs, and can range anywhere from 1.5-4% of the purchase price of your home.
- Legal fees: you are responsible for paying your lawyer or notary for their services during the purchasing process
- Land transfer taxes: Some provinces charge taxes on the transfer of property, which can range from .005% to 2% of the total property value. In most cases the tax rate is tiered, with higher taxes applied to higher values. Some municipalities, like Toronto, also charge land transfer taxes.
- GST: Many properties, especially new homes, may have GST charged on the purchase price. Resale urban homes are exempt.
- Insurance: Fire insurance is mandatory to protect your lender in case the property (their security for your mortgage) is destroyed. Mortgages with deposits of less than 20% of the total purchase price are also required to be insured under the Canada Mortgage and Housing Company or Genworth Financial Canada. The cost of this insurance must either be paid up front, or may be added to the balance of your mortgage principal.
