Canada's Condominium Magazine
For anyone planning to enter today’s real estate market, any sound advice on how to proceed and what to expect should be helpful. There’s a lot to learn, and for those who have never bought a home before, it can be a little confusing, not to say intimidating. According to the Real Estate Council of Ontario, one-third of Ontarians lack confidence in their understanding of the buying and selling process. Which is why it’s welcome news that the country’s authority on housing, Canada Mortgage and Housing Corporation, has updated its guide for homebuyers, saying it seeks to “demystify” the process of buying a home in Canada. The Homebuying Step by Step guide was released today.
It begins with some basic questions designed to determine whether potential buyers are actually ready to own a home:
- Are you financially ready for such a big purchase?
- Are you aware of the costs and responsibilities of owning a home?
- Are you ready to devote the necessary time to home maintenance?
Next the guide gets into the financial nitty-gritty of homeownership, and the big question is, how much can one afford? CMHC has always used two cut and dried affordability rules to answer this question. You can afford to spend 32 per cent of your gross monthly income on housing costs, which include the mortgage payment, property taxes, utilities, and 50 per cent of condo fees if applicable. If you include other monthly costs, such as car loans and credit cards, your monthly debt load should be no more than 40 per cent of your gross monthly income. If your debt load is too high, you might have trouble getting a mortgage.
These percentages, known as the gross debt service ratio and the total debt service ratio, are based on averages. Even if a person qualifies for a mortgage according to these ratios, it is still a good idea to take a hard look at one’s personal circumstances to be sure that the debt will be manageable. If there’s any reason to doubt this, you might want to consider looking at a cheaper home, or paying off some debts, or saving for a while longer to build up a bigger down payment. Affordability is impacted in a big way by the size of the down payment one has.
Perhaps, as a first-time buyer, you are unaware of the upfront costs associated with a home purchase. These can be substantial. You need a down payment, and the bigger it is the better. It must be at least 5 per cent of the purchase price of the home, but having more will obviously reduce the size of the mortgage you need. Add to that the home inspection and appraisal fees, insurance, land registration, legal fees, moving costs, taxes, and potential renovations and repairs to the property.
The subject of mortgages is next. Some would-be buyers may not realize that it is possible to be pre-approved for a mortgage, and CMHC recommends this. Being pre-approved lets you know how much home you can afford, based on those debt ratios. It is not a guarantee, however. Once a person makes an offer on a home, the bank still has to evaluate it and determine whether the price and condition of the home meet its requirements.
Once you do qualify for a mortgage, CMHC recommends taking a smaller mortgage than the maximum you can afford, just to keep your costs down. It’s also important to talk to a mortgage specialist about what kind of mortgage is best for you, and especially important to know about any penalties or restrictions the mortgage carries. Many mortgage borrowers have been dismayed to learn that it will cost them to make additional payments to pay the mortgage off sooner, or to get out of the mortgage before the stated term. Best to know about these and other possible penalties and avoid them if possible.
Access the CMHC homebuying guide at this link: https://www.cmhc-schl.gc.ca/odpub/pdf/60946.pdf