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PREPARING TO AFFORD YOUR FIRST HOME PURCHASE AS A YOUNG CANADIAN IN THE GTA
*Disclaimer: This is not financial advice. You should always consult your mortgage broker or financial specialist before making any monetary decisions.* Right now, the housing market is absolutely booming in Canada. This is great for those who already own a home, but for someone like me looking to buy a house in the next 2-5 years, it seems like an unachievable goal. The average house is valued at 1.1M in the GTA, so even a very modest starter home in this area will cost you well over half a million dollars. How are young adults able to ever afford that? Well, we are going to be breaking it down into 3 steps so that you can stop focusing on the daunting final goal, rather focus on completing each achievable step along the way. Building Your Credit This is something that you can start to do right after you turn 18. Once you have some sort of job or income you can start thinking about getting a credit card. Getting a credit card and paying off in full at the end of every month costs you absolutely nothing but helps you to establish a history of credit (your credit score). Disclaimer: Do not ever spend money that is not already in your account! Your credit score is a rating which helps banks and lenders judge how likely you are to pay back borrowed money when it is due. People who have little, or no credit history will be unable to borrow enough money to purchase a home. People who have above average credit history and pay their dues on time will benefit from lower interest rates on their mortgages and loans. There are some nuances to this that I will go into detail about in a later post but if you follow these three rules you will be on your way to building good credit. You use your credit card for almost all purchases. You do not reach the maximum amount of available credit ever. (A.K.A Maxing your credit card) You are paying it off in full at the end of each month.(Credit cards have very high interest compared to other loans so I highly recommend you avoid carrying a balance whenever possible) Once you understand these three rules and put them to practice you will be ready to start focusing on the next step. Saving for a Down Payment This is the step that most people are going to get stuck on for a little bit but that is completely normal, and you shouldnt let yourself get hung up on it. Saving even $10 a day adds up to $3650 annually. It starts with budgeting/setting goals and ends with you owning your own home. To me that is enough motivation on its own to cut back a little bit on the extras like eating out at work, going out to bars, or spending money on extravagant vacations. Instead, you can easily pack a lunch, invite some friends over instead of going to the bar, and plan a more modest local get-away. These little sacrifices may seem tough at the time, but the monetary savings will add up quickly, and owning your own slice of Canada will make it all worth it in the end. In Canada, the minimum down payment for purchasing a house is 5%, but you should be aiming to have much more than that. Anyone who puts down less than 20% will have to purchase default insurance. This insurance will cost anywhere from 2.8%-4% of the value of your mortgage. Quick math That means if you were to purchase a $550,000 house and put down $100,000 (18% down payment), you would have to get the extra $22,000 needed for the mortgage insurance added on top of your mortgage value. $100,000 down payment + $450,000 mortgage + $22,000 Insurance = $572,000 If the person from that example had put down an extra $10,000, they would be at the 20% threshold and would not have to purchase the mortgage default insurance. $110,000 down payment + $440,000 mortgage = $550,000 So obviously if it is a possibility, you should be aiming to put down 20% but that is not always an option. There is another way to avoid paying for mortgage default insurance if you do not have the full 20% down payment. As a first-time homebuyer in Canada the government has an incentive where they will help you out with 5% of your down payment. This comes with a bit of a catch though; the government will own that 5% of your house until you pay them back. This means that if your house doubles in value before you sell it, you will also owe the government double the value that they lent you. While it is definitely very helpful to be able to get that extra down payment earlier, it could be worth it for some just to hold off and save that last little bit. That is something you will have to speak with your mortgage broker about, and something that we will cover with more details in a later post. Once you have saved a good chunk of money you will be in a good position to start moving onto the next step. Getting a Mortgage Pre-Approval Once you think your savings are at or close to what you need for a down payment you can reach out to your mortgage broker or mortgage specialist at your bank to get a pre-approval. A pre-approval is a basic analysis of your finances by a mortgage professional who will be able to identify the biggest mortgage that you can possibly be approved for. This can help you understand your budget and will allow you to move to the next step. At this point you are so close to your goal of owning a house, but it is important not to let your eyes get bigger than your wallet. Plan to get a mortgage a bit smaller than what you are pre-approved for and create a list of your house NEEDS and house WANTS. There is a big difference, and you will unfortunately have to make some sacrifices to be able to afford your first home. You are now financially ready to begin the process of purchasing your very first home! You have built your credit, saved for a down payment, and you know how much house you can afford. The only thing left to do is to talk to a real estate agent and start the process of searching for and buying your very first home! Thanks for reading! Tune in next week for a numerical breakdown of three different savings scenarios to help you plan for your down payment. We will break down different payment options and strategies that can work with any financial situation. Until next time! Kyle Huntington Mortgage Agent Sunlite Mortgage 877-305-6267 ex. 195 FSRAO#13304
Index growth slows further in January
In January the TeranetNational Bank National Composite House Price IndexTM was up 0.3% from the previous month. It was the third consecutive month in which the index rose less than the month before. The increase was led by five of the 11 constituent markets: Hamilton (2.0%), Montreal (1.0%), Victoria (0.6%), Halifax (0.4%) and Vancouver (0.4%). Rises of less than the countrywide average were reported for Quebec City (0.3%) and Ottawa-Gatineau (0.1%). Indexes were down from the month before in Toronto (0.1%), Calgary (0.2%), Edmonton (0.4%) and Winnipeg (0.4%). After three months September, October, November in which all 11 markets of the composite index were up from the month before, it was a second consecutive month in which one or more markets were down on the month. The price rise is consistent with the rise of home sales volume over the last several months as reported by the Canadian Real Estate Association. For a fifth straight month, the number of sale pairs entering into the 11 metropolitan indexes was higher than a year earlier. The unsmoothed composite index, seasonally adjusted, was up 0.9% in January, suggesting that the published (smoothed) index could continue its uptrend.