A home purchase is most likely the largest financial decision a person, couple or family will make in their lifetime.
A home has an important purpose, it provides you with shelter. In addition to shelter, your home can be a place to rest and relax, provide opportunities to entertain your family and friends, and perhaps raise your own family.
There could be numerous reasons why purchasing a new home could compel you to venture into the real estate market. If you’re renting, you may have driven or walked past a ‘dream’ home that was for sale and wondered “what if”? Perhaps a home of a friend or acquaintance came up for sale, a home you could see yourself living in, which compelled you to look at or visit the home’s ‘open house’.
Regardless of the reason for looking at first time home possibilities, at some point during your ‘thinking about it’ home purchase exercise, you ask yourself “Can I really afford to purchase a new home”
The primary information within this post is intended to guide the first-time home buyer who is thinking about buying their first home and is comparing home ownership with renting. The first-time homeowner may need answers about whether they can afford to purchase their first home or not.
Although this post is written for first-time home buyers, there may be insights within the post which may help some buyers who have previously purchased a home.
Let’s get started.
Deciding to finally purchase your first home can be somewhat overwhelming. Where exactly do you start?
Before you get started with your ‘First Time Home Purchase’ research on Google and visiting realtor websites, take some time and reflect about whether buying your first home is the right decision for you. The answer to this question is based primarily on an individual or family’s financial resources and whether buying vs. renting is a better investment or decision.
Most prospective homeowners start with affordability, which we will expand upon in the following pages. Do you have the financial means to save enough for a down payment, pay realtor and legal fees, and sustain the ongoing costs of owning a home?
Most first home buyers start with comparing the costs of owning a home vs. renting. In addition to a mortgage payment, home ownership costs also include many other factors such as on-going municipal taxes, home insurance, maintenance and upkeep, furnishings, day-to-day items, among others. In most cases, renters don’t have to worry about most, if not, all of these ownership related costs.
These home ownership costs and financial responsibilities should be ‘top-of-mind’ when you are deciding whether you should continue to rent or purchase your first home.
We’ll be going into a bit more detail in the next section, however it’s critical that you reflect on your own situation and whether home ownership is a fit for you. Perhaps you’re better off renting and continue building a first home down payment nest egg or investing elsewhere?
From an investment perspective, home ownership may have an advantage over renting, although your specific situation may differ.
On average, the Toronto real estate market has increased 5% year-over-year, for the last 50 years. This type of growth can fluctuate and vary, meaning there are peaks and valleys and highs and lows. While this growth has
been the average, there are never any certainties. With the understanding that home ownership will likely cost more than renting, you may wish to compare whether you are able to save/earn on investments, at an equal to or better rate, than the average increase in home prices. You may be surprised by the comparison.
If you are purchasing your first home strictly for investment purposes, perhaps having a discussion with a financial planner may be beneficial. There may be other investment alternatives that may be best suited for you from a strictly investment perspective, depending on whether the investment is short-term or long-term based.
Home ownership has many responsibilities, including the on-going repair and upkeep of your home and its structure.
Structural repairs such as plumbing, electrical, heating and air conditioning and the roof for example, are critical home components which need to be kept in working order and functional. These repairs need to be performed by qualified and or licensed professionals.
If you’re not sure about a repair, call a qualified professional first. Most maintenance, and minor home repairs like painting or cosmetic changes, or lawn mowing for example don’t necessarily need a qualified or licensed expert. Many homeowners do the simple stuff on their own, with varying levels of quality and success.
If you’re not familiar or comfortable with minor home repairs, your maintenance costs may be higher if you have someone else do it.
In most cases, working on your own home, such as gardening, painting, minor repairs etc., can be very enjoyable and rewarding. Ultimately, the decision is yours to decide whether home ownership is a fit for you or to continue renting without the benefits of home ownership. These are only a few examples of additional costs that you should be considering if home ownership is a serious consideration.
As we mentioned in the previous section, it’s imperative you explore the benefits and risks associated with renting and home ownership specific to your financial affordability and lifestyle, for example.
Home Ownership Research includes (but is not limited to) understanding the following:
If you are currently renting, you are already aware that it usually costs less to rent, here are a few advantages and disadvantages of renting:
If you don’t have the financial means of:
… then perhaps home ownership may not be for you.
If you don’t have the funds for a down payment, however you have the financial means to save for a down payment, then now is the time to start.
In most cases you will need a minimum of (not including closing costs, which we will get to) *:
According to the Canadian Real Estate Association, the average home value in Canada is $538,831, a 5% down payment for this average home would be $30,826. Obviously, that home value may be much higher in major Canadian cities.
Home values in the suburbs of major cities may offer a lower home value and subsequently a lower threshold for a down payment. The average home value in the Greater Toronto Area in April 2021 was $1,090,992, which would represent a down payment of at least $54,550.
Home values on the border of the GTA may be even lower. Whitby, Ontario for example, may have average home values which are slightly lower than the GTA, which would mean a lower down payment.
Whether you need to save $25,000, $35,000 or $55,000 or more, saving up for a down payment will need focus, discipline, sacrifice and hard work.
Mortgage loan insurance must be purchased if you are obtaining a mortgage from a regulated bank and your down-payment is less than 20% of the price of your home. Obtaining a mortgage from a private lender does not carry with it the same requirements to obtain mortgage insurance, but does carry with it increased closing costs. You may wish to read our post on private mortgages ‘Six Factors To Consider Before Contacting a Private Lender’.
Mortgage insurance protects the mortgage lender in the event you fail to make your mortgage payments and are in default. The premium can be added to your mortgage; however, you will pay interest on it and in some cases provincial tax will be applicable.
If the home value is $1 million or higher and if the loan doesn’t meet mortgage insurance standards, mortgage loan insurance will not be available.
The fee for mortgage loan insurance ranges from 0.6% to 4.50%, the rate depends on how much your down payment is, the larger the down payment, the less the mortgage insurance rate will be.
Closing costs are ‘all’ the fees that will need to be paid to finalize the closing and sale of your home. Approximate closing fees range up to 3 to 5% or more of your home’s value.
These fees may include:
As a first-time home buyer, there may be rebates available to help with some of these closing costs, which should be investigated. Of note is the first-time home buyer land transfer tax rebate, which provides a rebate of up-to $4,000.00 on Provincial Land Transfer Tax and a rebate of up to $4,475.00 on Toronto (Municipal) Land Transfer Tax. Qualifications for the rebate are subject to a number of factors, so it is best to speak with your lawyer to determine whether you qualify or not.
Congratulations! You’ve made it to the end of this article, and perhaps you’ve already started your first-home purchase journey.
In our next article “You’ve Decided To Buy: 9 Insights To Help the First Time Home Buyer” we provide insightful details about the first-home purchase process. You will learn about the critical next steps once you have decided that you can afford your first home.
In addition, if you’d like to read more about purchasing your first home, we have linked several articles below discussing similar topics. In addition, please visit our Real Estate Law and Buying A Property sections on the Nichols Law Professional Corporation website.
Sources and links are provided for source credit and attribution, and for additional information purposes only. Nichols Law is not affiliated, associated, authorized, endorsed by, or in any way officially connected with any of the sources or links provided.