So, you've decided to take the big leap and purchase your first
home. Most of us have a dream home tucked away at the back of
our minds — complete with six bedrooms, two fireplaces and a panoramic
view. Before setting off to view properties you likely cant afford,
step back and take a reality check.
Your dream home can easily become a nightmare when most of your
money goes to pay the mortgage and there's little left over for
anything else. Overextending yourself financially is the quickest way
to destroy the excitement of home ownership and add stress to your
Smart home-buying means knowing what you can afford and being
practical about it. Most first-time buyers, in particular, lack the
funds needed to buy a home without assistance from a bank or financial
institution. Buying a home means combining savings with money borrowed
through a special arrangement called a mortgage.
To keep mortgage payments within their means, most first-time buyers
purchase what is commonly known as a starter home. A starter
home is just that — a way of getting started in long-term real estate
To match the home you buy to your pocketbook you have to
realistically assess your needs, determine what you can afford and,
usually, lower your expectations. Begin by enlisting the services
of a real estate representative. This individual will help you
target your home ownership dreams and provide valuable information on
mortgage options, interest rates and incentives, such as government
programs, for first-time buyers.
In the meantime, here are some ways to determine how much you can afford.
Set a maximum price range
To determine your affordability price range, you must calculate
two amounts; the amount of cash you can afford to put towards
the purchase (down payment) and the maximum amount of loan (mortgage) you
can comfortably carry. Typically, household expenses should not
exceed 35 per cent of your gross income.
Put down as much as you can
The key to getting started for most first-time buyers is the initial down
payment. This is the part of the purchase price you have to put
down as cash. You may be able to buy a home for as little as five
per cent down. But remember that the larger the down payment, the
easier it will be to manage the other expenses (mortgage, utilities and
An ideal down payment is 25 per cent of the purchase price. Keep
some cash in reserve though for unexpected expenses related to a home
purchase and typical expenses such as land transfer tax, legal fees and
Know how much to borrow
To establish your maximum mortgage limit, a financial institution will
determine the monthly payment you can afford by calculating your
debt-service ratio. List all your loans (car, personal loans, monthly
credit card balances). The sum of these and your mortgage payment,
including principal, interest and taxes, should not exceed about 40 per
cent of your gross income. The mortgage payment and taxes should
not exceed about 30 per cent of your gross income.
Understand interest rates
The size of the mortgage you can arrange, based on payments you can afford,
depends on interest rates. The lower the rates, the larger the possible
mortgage and the more affordable home-buying will be.
However, there are other variables to consider: How open is the
mortgage? Is it portable? Would prepayment be allowed?
Discuss your mortgage options with your REALTOR, banker or financial
advisor. Decide whats best for you, establish a limit and stick
Look at other sources of funds
If you have been contributing regularly to a Registered Retirement Savings
Plan (RRSP), you may have to look no further for your down
payment. The federal governments RRSP Home Buyers Plan allows
eligible taxpayers to withdraw up to $20,000 per person ($40,000 per
couple) tax free from their plan to buy a qualifying home. However, you
have to pay back every year at least 1/15th of the amount taken out
until it is all paid back, or there will be a tax penalty.
The Ontario Home Ownership Savings Plan (OHOSP) is a provincial
program which provides tax credits on annual contributions to an
Ontario resident earning less than $40,000 a year (or less than $80,000
per couple) who has never owned a home. While there is no
limit to the amount you may deposit in an OHOSP, you can only receive
tax credits on annual contributions of $2,000 ($4,000 per couple) or
less. Depending on your annual income and the money you invest, you can
earn up to $500 individually or $1,000 a couple in tax credits a year.
The plan must be closed and a home purchased by the end of the seventh
The Canada Mortgage and Housing Corporations (CHMC) five per cent
down mortgage program is available to both first-time buyers and those
who have already owned a home. This benefits buyers who can afford
the monthly payments, but would have trouble saving for a larger down
payment. Under the program, CMHC may insure the mortgage on your
home (against default in payments) for up to 95 per cent of the lending
value. An insurance premium of about 3.75 per cent of the mortgage loan
is charged. This amount can be added to the mortgage or paid on a
Other sources of funds you can tap into for a down payment include
savings and investments and loans or gifts from your family or
relatives. If you're already a homeowner and moving up, you can
use money that you get from the sale of your present home.
Information courtesy of the Ontario Real Estate Association.