11 Steps to Afford Your First Home and Beyond! Series: Part 1 of 11
Overview and Tips on Getting Pre-approved for a Mortgage
My goal is to help you realize your dream of owning a home! This is a decision that requires a lot of research and insight, and I am here to provide you with the right tools to succeed. This is Part 1 of a 11 part series that I will share with you weekly.
Buying your first home can feel like you’re on an emotional rollercoaster; if you’ve never dealt with the real estate market before, it’s often hard to know where to start. While reflecting on your goals and motivations are a common first step, turning a dream into reality requires careful planning. Once you’ve decided you’re going to buy, your next step will typically involve counting costs and figuring out what you can actually afford. This article will provide some tips on how to make buying your first home affordable, even if you don’t make a lot of money. Before we get started, let’s consider some typical costs, and then we can explore some strategies to overcome these costs without becoming ‘house poor’.
Let’s take an example from my home town, Victoria, BC. Today, as of December 2021 the average benchmark price for a townhouse in Victoria is $763,300. While Victoria is not Vancouver or Toronto, it’s worth noting that this is still considered an expensive market compared to much of the country. As a first-time buyer, the first and most significant cost our buyers will need to consider is the deposit. While it’s a common misconception that buying a home requires 20% down, in actual fact your deposit can range between 5% – 20%, depending on your available funds and financial goals. The main thing to keep in mind, however, is that any deposit below 20% will require mortgage insurance. With that in mind, let’s assume our first-time home buyer is able to put down the minimum requirement of 5% on the first $500k, and 10% for the balance. This would be a total deposit of $51,330. Although this will be their largest cost, it’s not their only cost that should be considered. Below are some further costs our buyers should be aware of before they start their home buying journey:
In this case, let’s assume the following:
- our buyers opt for a home inspection ($1000)
- mortgage insurance will add 3.10% – 4% to the value of their mortgage ($28,479)
- Our buyers don’t qualify for an exemption for property transfer tax, so they must pay the full amount ($13,266)
- this house is an older build, so there will be no GST costs
- legal fees are $1500
- property taxes are $3200, split 50/50 ($1600) between the buyer and seller.
This means that our buyers could have an upfront cost of $68,696, with an additional $28,479 added to their mortgage over the mortgage period. As a one time cost, $68,696 is A LOT! But now we also have to consider the cost to own, not just the cost to buy.
Our new homeowners will now have to consider the following potential carrying costs, assuming a 2.762% mortgage interest rate:
All combined, our new owners could be paying $4,313 on housing per month if there is no strata fee. With a detached house, costs like utilities and maintenance are typically higher, whereas condos/townhouses have strata fees that typically cover shared building maintenance, and sometimes offset utility costs. Again, this is not cheap by any stretch of the imagination. According to the Canada Mortgage and Housing Corporation (CMHC), monthly housing costs should not exceed 35% of your gross income.
Assuming this is the case, our buyers would be expected to bring in at least $12,323 per month before taxes. Taking in these numbers may cause some to despair, but don’t lose hope! Recognizing that we don’t all make this kind of money (or are able to put down a large deposit) it’s important to consider some creative and practical strategies to get around this.
The rest of this series will cover 9 steps you can take to be able to afford your first home and beyond! Today we will start with number 1, financing:
1. Get pre-approved for a mortgage
Figuring out what you can afford first may sound obvious to some; however, most people start window shopping and thinking about buying a home long before they ever talk to a mortgage broker. While this causes no immediate harm to your pocket book, it also does little to help you identify and plan realistic property goals. The biggest reason to get pre-approved is to put you in the driver’s seat, giving you the ability to make decisions regarding your financial future. Consider this, let’s say you are browsing the market and maybe you even have an agent who is helping you to see a few properties. One day, you find that perfect dream home but you don’t have your financing in line to be able to do anything about it. In today’s hot market, that house could be gone within a week and you’re stuck with 1-2 weeks to go on submitting your documents to a broker while your dream home slips away. Don’t get caught in this nightmare situation – if you’re looking to buy, make sure you start by getting pre-approved by a mortgage broker. In order to get properly pre-approved you’ll need to talk to an actual person and submit your financial statements (online calculators can only take you so far). Getting pre-approved is commitment free, lasts for 90 days, can be easily renewed with a quick call, and gives you options if you do find that perfect home. This is a lot better than the alternative of looking without being ready to buy. Best case scenario, you make no progress toward finding your first home, while the worst case scenario sees you finding your dream home and watching as it slips through your fingers to another seller who is ready to buy.
Next time we’ll look at how to make your first purchase more affordable, so you can get into the market sooner and start building equity instead of paying someone else’s rent.
Stay tuned for part 2!
I am a Victoria based local realtor with eXp Realty. My commitment to honesty, integrity, loyalty and hard work have been important pillars for me because they drive a high standard of excellent service for my clients. Helping you realize your dream is my goal!
I service Vancouver Island, but my focus is on: Victoria, Sooke, Saanich, Malahat, Shawnigan Lake, Cobble Hill, Duncan, and the rest of the Cowichan Valley.
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