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 home buyers:
- 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. You can 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.
The next step is to find a buying agent
A 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 mortgages
As a first-time home buyer, 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 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.