THE RIGHT HOME WITHIN YOUR BUDGET

Embarking on the journey to buy your very first home is an exciting decision. Often, we have an idealized "dream home" in mind – complete with lavish features and scenic views. However, before venturing into property viewings that might be beyond your financial reach, it's crucial to take a practical approach.

The allure of your "dream home" can quickly turn into a financial burden if a substantial portion of your income goes towards the mortgage, leaving little room for other essentials. Overextending yourself financially can dampen the joy of homeownership and add stress to your life.

A prudent approach to home buying involves understanding your financial capacity and acting sensibly upon it. Particularly for first-time buyers, financial assistance from banks or financial institutions is usually necessary, given the significant funds required for home purchase. This entails combining personal savings with funds acquired through a mortgage arrangement.

To ensure that the home you choose aligns with your budget, it's important to realistically assess your needs, determine your financial limits, and often temper your expectations. Enlisting the guidance of a real estate professional is a prudent step. They can help you hone in on your homeownership aspirations and provide valuable insights into mortgage options, interest rates, and any government incentives for first-time buyers.

Here are some strategies to ascertain your financial limits:

Set a Realistic Price Range: Calculate the maximum amount you can allocate towards a purchase (down payment) and the highest loan (mortgage) you can comfortably manage. Generally, housing costs should not exceed 35 percent of your gross income.
Prioritize Down Payment: For most first-time buyers, the initial down payment is pivotal. This amount, paid in cash, is a crucial starting point. While some homes can be purchased with as little as five percent down, having a larger down payment eases the management of other expenses like the mortgage, utilities, and property taxes.
Determine Borrowing Capacity: Financial institutions gauge your monthly repayment capacity through a debt-service ratio calculation. This accounts for all loans (car, personal loans, credit card balances) along with mortgage payments, which together should not surpass approximately 40 percent of your gross income. The mortgage payment and taxes, on the other hand, shouldn't exceed about 30 percent of your gross income.
Grasp Interest Rates: The available mortgage size, based on affordable payments, hinges on interest rates. Lower rates mean a larger feasible mortgage, rendering home buying more affordable. Yet, consider other factors such as mortgage flexibility, portability, and prepayment options. Consult with a REALTOR®, banker, or financial advisor to choose the most suitable option.
Explore Additional Funding Sources: Regular contributions to a Registered Retirement Savings Plan (RRSP) can offer a potential down payment. The RRSP Home Buyers’ Plan permits eligible taxpayers to withdraw up to $20,000 per person ($40,000 per couple) tax-free from their plan for a qualifying home. This amount must be repaid in annual increments or face tax penalties.
Leverage Provincial Programs: The Ontario Home Ownership Savings Plan (OHOSP) provides tax credits on annual contributions for Ontario residents earning less than $40,000 a year (or less than $80,000 per couple) who haven't owned a home. While deposits are unlimited, tax credits apply to annual contributions of $2,000 ($4,000 per couple) or less. Depending on income and investment, tax credits can reach up to $500 for individuals or $1,000 for couples annually.
Utilize Mortgage Insurance: The Canada Mortgage and Housing Corporation (CMHC) offers a five percent down mortgage program for both first-time and repeat buyers. This aids those who can manage monthly payments but find saving for a substantial down payment challenging. CMHC may insure up to 95 percent of the lending value of the home, and an insurance premium of around 3.75 percent of the mortgage is charged.

Additional sources for down payment funds include savings, investments, loans, or gifts from family members. Existing homeowners moving to a new property can also utilize proceeds from the sale of their current home.

But fear not! The basics of mortgage arrangements are actually quite straightforward, and you have a network of real estate professionals ready to assist you, with your REALTOR® and the mortgage specialist at your bank being the top resources.

Nevertheless, it's beneficial to familiarize yourself with the mortgage process, how to arrange one, and the different financing strategies involved.

First and foremost, it's important to know which types of institutions are willing to lend you money. While banks and trust companies are the most common options, credit unions and private lenders also provide funds. Additionally, you have the option to consult a mortgage broker who has access to a wide variety of lending sources, including domestic banks, trust companies, pension funds, real estate syndicates, and foreign banks. In some cases, you may even have the opportunity to "assume" the existing mortgage held by the seller. Assuming a mortgage can expedite the buying process and lead to cost savings in terms of paperwork, legal fees, and closing costs, although it's essential to consider the current lending rate compared to the assumed mortgage.

Once you understand the lending options available, it's time to explore the different types of mortgages. The most common type is the "conventional mortgage," where lenders offer up to 75 percent of the appraised value or purchase price of the property, and you contribute the remaining 25 percent. Many people save specifically for this purpose, but alternate or "secondary" financing options may be available in certain cases.

If you don't have a 25 percent down payment, a "high-ratio" mortgage is an alternative. These mortgages allow you to borrow up to 95 percent of the appraised value or purchase price of the property, subject to government regulations. However, high-ratio mortgages must be insured, and the cost of insurance falls on you, typically ranging from one to three percent of the mortgage amount.

Both conventional and high-ratio mortgages can be offered as either "variable-rate" or "fixed-rate." Variable-rate mortgages have monthly payments that remain fixed for a specific term, while the interest rate fluctuates based on economic conditions. This means your monthly payments may increase if interest rates rise or decrease if rates fall. Fixed-rate mortgages, on the other hand, maintain a consistent interest rate throughout the negotiated term.

Understanding additional concepts that impact your mortgage and financial well-being is crucial. Amortization refers to the time period assumed to pay off the mortgage. The most common amortization period is 25 years, which means your interest and principal payments are calculated as if you were repaying the borrowed amount over a 25-year schedule. A shorter amortization period results in lower overall interest payments.

Prepayment privileges are essential considerations for borrowers. These arrangements allow you to make additional payments towards the principal, reducing the total interest paid over time. Open mortgages typically offer more flexibility with prepayment options, while closed mortgages have fewer or no prepayment opportunities.

Don't be overwhelmed by the multitude of concepts and terms related to mortgages. Arranging one is not as difficult as it may seem. All it takes is a little research on your part and the guidance and expertise of a knowledgeable REALTOR® or mortgage professional.

For further information on buying or selling a home, you can contact the Ontario Real Estate Association at 1-800-563-HOME to request a free copy of the How to Buy Your Home or How to Sell Your Home book.