Ask the Expert - Buying Your First Home
Hi there Jeff,
I graduated a few years ago, and landed a decent job out of school. But, I’ve been living in my parent’s basement and I think it’s finally time for me to move out. I want to buy my own home, but don’t really understand the true cost of home ownership. Can you provide any insight before I take the plunge into the real estate market?
Saint John, New Brunswick
Thanks for the question Erin.
If you are like most of us, you probably grew up with the notion that to be successful you need to go to school, get an education, land your first job and buy a home. And as far as I can tell from your question, you seem to be right on track with that plan.
But making the decision to buy your first home is huge. In fact, it may be the biggest and most intimidating financial decision you ever make. This is why I am happy to hear that you want to do your homework before jumping in with both feet.
Ultimately, your mortgage lender is going to let you know just how much home you can afford. But before you run off and fall in love with the house of your dreams, there are a few things I want you to consider:
- Have you checked your credit score? Credit scores, and the information contained in your credit report have a significant impact on the amount of money a lender will be willing to give you, and more importantly, what interest rate they will charge. Before you speak to the bank, or start the house hunting process, take the time to get copies of your credit reports. If your scores are low or your report contains inaccurate information, take the time to correct those errors and repair your credit.
- Learn how to budget. It’s one thing to own the roof over your head, but is an entirely different thing to actually afford your mortgage. Learning how to budget your money will help you assess how much mortgage you can realistically afford. It will also help you create a plan to comfortably carry your mortgage while still living the life you want.
- The hidden monthly costs. Okay, they aren’t really hidden costs, but have you given consideration to how you will pay your property taxes, insurance, utilities and potential condo fees? There is a lot more to owning a home than paying your mortgage every month. Consider all the fees associated with ownership and factor these into your budget.
- Pre-approvals. Before you go fall in love with a home that is out of your budget, it’s a good idea to get a pre-approval from your lender or mortgage broker. Understanding how much mortgage you qualify for will help you in the house hunt.
- What can you really afford? Just because your lender pre-approved you for a substantial mortgage doesn’t mean you can actually afford it. Go back to your budget. Taking a good look at the additional costs of ownership and the lifestyle you want to live will give you a better idea of the monthly mortgage payment you can realistically afford.
- The down payment. Have you saved up enough money to make a down payment of 20 per cent or more? If not, it may be worth sticking it out in mom and dad’s basement a little longer. By putting a significant down payment down on your first home you end up making lower mortgage payments and accumulate greater savings on the total interest paid over the life of the mortgage. In addition, anything less than a 20 per cent down payment is considered high risk and will require you to obtain mortgage insurance – resulting an added monthly cost.
- Have you thought about your closing costs? When you purchase a home, you have to consider more than the price of the home. Before you make an offer on your dream abode, be sure you have enough money saved up to cover your legal and real estate fees, home inspection, utility hook-ups, land-transfer taxes and home furnishings.
- Save for a rainy day. Finally, are you prepared for the ongoing and unexpected costs of home ownership? While getting pre-approved for a mortgage is good; it doesn’t take emergencies or savings into account. What happens if your furnace breaks down or your roof gets a leak, do you have the financial buffer to cover these costs? Having an emergency fund in place is an essential part of home ownership, and will cover your bottom line when an unexpected cost catches you off guard.
Taking the plunge into home ownership can be scary. But it doesn’t have to be. Keep in mind that your first place is not likely to be the home of your dreams – but each mortgage payment will build equity and the return on investment has the potential to be substantial. If you plan well, do your research and have a good grip on what you can realistically afford, you will be setting the foundation for a financially successful future.
The other number associated to your personal credit history is your credit score. While your credit report is similar to a report card, consider your credit score to be akin to your GPA. Essentially, this number that takes into account your payment history, amounts owed, length of time you’ve had credit, the number of new credit applications you have made and the types of credit you used – which creates a snapshot of your credit history.
Jeffrey Schwartz is the Executive Director of Consolidated Credit Counseling Services of Canada and President of the Credit Association of Greater Toronto (CAGT).
If you have a question about budgeting with kids in the household or just about finance in general, Jeff is here to help. Send us an email with your question to AskJeff@ConsolidatedCredit.ca. You’ll get the expert advice you need and your question may be featured here on our website.