Road to home ownership: Preparing to buy a home
In terms of learning to cope with change, 2020 will be a tough act to follow. However, as is often the case, preparedness can be the key to success. If one of your goals for this year is to be a first-time home buyer, our three-part series, The Road to Home Ownership, will provide you with information to help you succeed in reaching that goal.
First up in the series, here are some ways you can financially prepare to buy a home.
Start saving as soon as possible
It’s hard to save for a home, especially when you may also have other savings goals such as retirement to consider when setting up your savings plan. However, it is possible to do both. For example, if you choose to put your savings into a Registered Retirement Savings Program (RRSP), not only can you get some of your savings back in the form of a tax refund, you can also allocate some of those savings towards the purchase of your first home.
The Home Buyers’ Plan (HBP) is a federal program that will allow you to borrow from your RRSPs to buy or build a qualifying home. The current withdrawal limit under the HBP, as of March 2019, is $35,000, and amounts borrowed under the plan must be repaid within 15 years.
Take care of your credit
Qualifying for a mortgage is more than a simple calculation of affordability. For even those with excellent credit, the mortgage stress test means that you must be able to meet the qualification requirements at either the benchmark rate for a conventional 5-year mortgage, or the contract rate of the mortgage plus two percentage points, whichever is higher.
If your credit score is low, the contract rate of your mortgage will also generally be higher than the rates that you see advertised. Usually, the lowest mortgage rates are only available to those who present the lowest credit risk to lenders.
Budget for the unexpected
Owning a home is a wonderful feeling, but it also requires a certain tolerance for the unexpected. There is no right number to budget for home repairs because these expenses tend to come out of nowhere, but a good guideline is to set aside one percent of the home’s value each year for home repairs and general upkeep. That means approximately $100 a week for a home with a purchase price of $500,000.
Other expenses you will need to consider when determining a budget for your first home include closing costs, property taxes and legal fees. It’s worthwhile to speak with a realtor and a mortgage broker well in advance to get a sense of a realistic home purchase price based on your financial circumstances.
Use every resource at your disposal
When it comes to buying your first home, it’s a good idea to consider every available option to help you reach that goal. For example, in addition to the HBP, there is also a federal program that is specifically geared towards would-be home owners in Canada.
The First-Time Home Buyer Incentive provides 5 or 10% of a home’s purchase price for a down payment in an effort to make home ownership more affordable. You should also know that if your family is in a position to provide you with financial assistance, many lenders will allow for gifts when the time comes to demonstrate the source of your down payment.
Buying a home is a dream for many Canadians, and Home Trust is here to help make that dream come true.
Visit our website to learn more about financing your home.
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