Island Savings

Taking the pain out of home buying

Some expert tips for first-time home buyers

With housing prices in the Lower Mainland among the steepest in Canada, it may seem like home ownership is a far-fetched dream for many in their 20s and 30s. But with interest rates near record lows, you may want to consider taking the plunge to purchase your first home—just make sure you do your research first.

Entering the housing market can be daunting. There are so many factors to consider, from saving up for a down payment to figuring out how much you can afford, to understanding the hidden costs associated with home ownership. But with some careful planning, patience and research, home ownership may be a lot closer than people realize.

As with any big purchase, the first step in moving towards home ownership is to save for a down payment. While it may be tempting to take advantage of current low rates by putting down the minimum possible, that is not always the best solution. The larger the down payment you make, the smaller your mortgage will be and the less interest you'll pay over the term of your mortgage.

If you have a large savings goal like a down payment, you should start by paying yourself first. Before you spend any of your paycheque, transfer a set amount of money into a savings account so you're not tempted to spend the money. First-time home buyers can also take advantage of a one-time opportunity to withdraw up to $25,000 from their RSPs to finance their home purchase and use those funds to offset a down payment or to help with other closing costs. This means a couple can withdraw up to $50,000 to put towards their first home purchase.

You can also prepare for home ownership by meeting with your account manager for a financial check-up before you apply for a mortgage. If you have existing debt, review your options to consolidate and extend the terms and lower your payments—which will also help you qualify for a larger mortgage. Having a lower payment allows you to use the extra money to make lump sum payments towards your existing debt to pay it down faster or direct the funds to save for your down payment. You'll want to bring proof of your income with you—this will help your account manager determine what you can afford and is necessary to complete your mortgage application or preapproval.

It's important to make sure you buy a home that you can actually afford—both now and in the future as interest rates begin to increase. An experienced account manager can also help you navigate interest rate de-risking strategies to navigate through this unknown factor that affects every home owner.

It's a good idea to sit down with your account manager to review your financial plan and go through all the costs associated with owning a home to obtain a rough idea of what your total expenses will be. Once you have determined your estimated costs, save the equivalent amount from each paycheque minus your current housing costs. This will help you understand what it will feel like to live at this new adjusted level. We all want to buy our dream home right away, but the last thing you want to do is get in over your head.

As a rule of thumb, your monthly housing costs, which include your mortgage payments, property taxes, hydro, heating bills to strata fees, should not exceed 30-35% of your gross monthly income. Make sure you leave some extra cash to live life and to ensure you don't feel overwhelmed with debt.

Beyond the initial purchase price of a home, there are many other costs people need to consider and factor into their budget such as inspections, appraisals and legal fees, tax adjustments, home insurance, mortgage protection insurance and preparing wills and power of attorneys.

Educate yourself on mortgage basics, such as learning the difference between a fixed rate mortgage and a variable rate mortgage. While a fixed rate mortgage offers less flexibility, it is a great option for people who like security and want to know exactly how much interest and principal they'll be paying throughout the duration of their mortgage. Variable rate mortgages fluctuate with the market and are often preferred by people who are willing to take a chance for possibly lower interest costs.

Finally, make sure you get a formal mortgage pre-approval once you are with in 90 days of your planned purchase. The pre-approval process will secure the mortgage rates for 90 days at a time so if interest rates rise while you're looking for your new home, you'll be protected. Buying your first home is both exciting and intimidating. There is a lot to learn and there are many big decisions involved. At Island Savings, we will work with you to take the worry out of home financing and give you the information you need to make an informed decision and take that first step towards home ownership.

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