A First-Time Homebuyer's Guide
On the market for your first home? Start here for everything you need to know about the homebuying process.
Here, we’ll go through what you need to know from now until you move into your new home.
Before you start: How to prepare to buy your first home
You’ve already taken the first step: committing to inform yourself
Your first home may be the most important investment you’ll ever make because it won’t be your last home. How you do on the eventual sale of your first home will inform what you can afford for your second home, and so on.
If you time your purchase right, and you get a deal on something that will appreciate substantially, you’ll be in great shape when the time comes.
Besides researching the home-buying process, you’ll also want to look into the neighbourhoods you’re thinking about to avoid one of these common mistakes made by first-time homebuyers:
- Choosing a neighbourhood close to the office. We’ve all learned the flaw in this strategy after 2020.
- Being “where the action is.” It’s fun when you’re ready for action, but far less fun when you’re not in the mood and you can’t escape it.
- Discounting a school district because you don’t have kids. You might have them one day; and even if you don’t, it’s a feature worth paying for now because you’ll get it back in spades come selling time.
- Focusing on the changeables. Anything cosmetic or functional can be changed over time. Walls can be moved. Floors can be swapped in and out. Windows can be knocked out. Heck, even stories can be added. Focus on the unchangeables like property size, location on the street, proximity to transit, hospitals, schools, highways and fire hydrants (which can positively affect your home insurance), parking and how much of it. These are the things you’ll have to live with in your new home.
- Not stretching your budget for what you love. Betting on yourself in the present beats kicking yourself in the future — especially if you forego a better first house for a few orders of take-out sushi a month. That $150/m could be the difference between a great first move into the housing market and a “meh” one.
The next step is to find a buying agentA buying agent is, as you’d expect, a real estate agent who helps people buy property.
As the buyer, you’re not paying for anything leading up to the purchase of the house. All the up-front costs (which, for you, would be the time your agent spends pounding the pavement with you) are rolled into the sale price at close.
Recommended minimum requirements for a buying agent
- They’re pleasant to be with. You’ll be spending a lot of time with them. Are they someone you’d enjoy having lunch and dinner with on the same day? Because you probably will on more than a few Saturdays.
- They’ve sold a home before. If they’ve been on the other side of the table, they can spot tricks and red flags, call bluffs and apply effective pressure.
- They’ve bought homes you like. If they understand what’s important to you before you tell them, they’re less likely to waste your time with obvious no-gos.
- They work the neighbourhoods you’re targeting. This makes them more likely to have eyes and ears on the street sniffing out off-market opportunities.
- They respect your budget. In most cases, you’ll pay your agent up to 2.5% of the sale price as commission. If they’re pushing you to spend more, that might be why.
Once you have your buying agent, you need to prepare yourself to pull the trigger when the perfect property pops up.
Getting started: How to prepare to buy your first home
Saving for your first home and types of mortgagesAs a first-time homebuyer, you’d be looking for a residential mortgage (as opposed to a commercial mortgage). Depending on the size of your down payment, you’d either get a conventional mortgage (>20%) or high-ratio mortgage (<20%). In Ontario, the minimum down payment requirement for a high-ratio mortgage is 5% on the first $500,000 and 10% on any amount over that.
Regardless of what you put down, you’ll have to undergo a stress test to make sure you’ll still be able to make your payments if the mortgage rates increase in the future.
A rough way to guesstimate what a monthly mortgage will cost is to add around $300 to the cost for every $50,000 added to the mortgage. So, a $200,000 mortgage would cost roughly $1,200 a month to carry.
Your next choice will be between an open and closed mortgage. Both require monthly payments that combine the principal (the money you borrowed) and the interest on the loan (the lender’s profit on the deal).
The difference between them is that an open mortgage lets you pay down your principal as you wish in addition to your regular payments, whereas a closed mortgage limits payments to the scheduled ones as outlined in the contract. Lenders usually prefer closed mortgages because they can count on steady income for a longer period of time. To incentivize home buyers in that direction, they attach lower interest rates to closed mortgages.
Once the rules of your mortgage have been set, the final choice is between a fixed, variable or convertible rate mortgage.
In a fixed rate mortgage, the interest rate doesn’t change over the mortgage’s life span. This is a popular option for more conservative folks who like consistency. In a variable rate mortgage, the percentage fluctuates with the market, which means you’ll either be paying your principal off faster or slower. This is for people willing to take more risks. A convertible mortgage starts out as a variable mortgage but will let you lock in at a specific rate after a certain amount of time or if the market rate hits a pre-determined threshold.
None are better or worse than the others; and none are more right or more wrong. The type you choose will depend on your risk tolerance. But regardless of which way you go, taking advantage of the free money available to you as a first-time home buyer will make carrying your first mortgage easier. Having said that, a fixed rate is usually a touch higher than a variable rate.
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Canada’s first-time home buyer incentives
The Canadian government wants as many Canadian homeowners as possible, and not just because of the symbolism of putting down of community roots. It’s been shown that, in addition to property taxes, the average owner of a detached house in Ontario will generate roughly $5.5K of commerce related to maintaining their homes.
To incentivize you to take the plunge into becoming a first-time homebuyer, the federal government offers two unique financial benefits:
- The First-Time Home Buyer Incentive is a shared-equity mortgage with the federal government that pays up to 10% of the price of your home. This means you’d have to come up with less of a down payment. The program essentially acts like an interest-free loan. If the government kicks in 5% for you to buy the house, you pay them back 5% of your sale price. The difference is the program’s profit, and part of how it can continue to exist. Of course, the con is that you would own less of your home and pocket less at resale.
- The Home Buyers' Plan (HBP) lets you withdraw from your registered retirement savings plans (RRSP) to buy or build a home. The current withdrawal limit (as of March 19, 2019) is $35,000. The con here is that the liquidity of your next egg will be temporarily compromised. But, if you choose the right first property to buy and sell it at the right time, you’ll more than make up the difference, even with all the taxes and fees you’ll have to pay as part of the sale.
The home-buying processOnce you identify the property you want to buy, you’ll want to know exactly what you’re buying. For this reason, having the property professionally inspected is strongly recommended. Have your inspector check the foundation, the roof, the basement underpinning, the HVAC, the electrical and the plumbing. And if you think you’re going to want to do a reno at some point, ask to see the most recent land survey so you know what will be possible in the future.
When you’re ready, you’ll make an offer through your buying agent who will register it with the selling agent. After all the bids are in, the seller – with help from the selling agent – will select a bid and sell their house to the bidder behind it.
If everything checks out, you’ll make an offer based on the list price. But, unlike shopping for shoes or apples, the listed price isn’t the price, but rather where the buyer is starting the bidding.
How a seller sets the bid will tell you a lot about what they’re looking to get out of the transaction.
A high-selling price tells the market that the seller is looking for a few potential bidders who may drive the price a bit over asking but not much. They’re in no rush and will pull the property off the market if they don’t get what they want.
On the flip side, a low selling price is encouragement for a bidding war amongst multiple suitors who’ll ideally drive the price well above market value. They’re usually in a rush to get a deal done and want to maximize the value, usually to put towards their next bigger house.
Knowing the seller’s goals will put you in a better position to offer a more competitive bid.
If your bid is selected, you’ll negotiate on a closing date, which is the day you get the keys from the seller. Closings are usually anywhere from two weeks to three months — essentially, the time it takes for both parties to prepare for a move.
Additional home-buying costs
In the final stretch of home buying, you’ll pay a lawyer to notarize the deal and handle the money, movers to bring your stuff over and any initiation fees to set up your hydro, internet, home security and other similar in-home services.
Also keep in mind that, as a homeowner, you’re inheriting the house as is. You’ll know from the inspection you (ideally) had done before you bought the property what needs immediate attention and what can wait.
You’re best to address immediate issues as soon as you can for a few reasons:
- You’re more in debt to your property than you’ll ideally ever be, so now would be a good time to pile it on.
- You’ll get more enjoyment out of your new home for longer if you don’t spend the first phase of it living in fear that the roof might cave in or the pipes might burst.
- The cost of repairs always go up, but the pandemic accelerated the rate. So, the sooner you do it, the less you’ll pay for it.
Finally, you’ll want to invest in home insurance to protect your new place, so you know that you’ll be able to afford your next place regardless of what happens.
While home insurance isn’t mandatory to own a home in Ontario like car insurance is, a home insurance policy is no less important, because you never know what can happen. You can be the safest, most conscientious homeowner, and still your next-door neighbour could fall asleep with the stove on and cause significant damage to your house. With home insurance, you’ll know that your possessions will be replaced and that you’ll have a place to live while you get yourself and your family back on track.