Buying your first or even second home can be a daunting task - there are tons of things to consider, questions to ask and scenarios to prepare for.
One of the biggest questions for buyers is how much they should be putting down. While many homebuyers, if they could do it over would make a bigger down payment, there’s a bit of a catch 22 to Toronto/GTA buyers. Since home values are increasing so quickly, prices have been outpacing how much people can save in a year.
Whether you’re putting the minimum 5% down or looking to make a bigger down payment, many overlook some key points like budgeting for ongoing costs like inspections, land transfer taxes and possible upgrades or renovations. These are all things that good agents should be explaining and sharing with you right from the start.
Since there’s no do-overs in life, I thought I’d put together a few tips when preparing to buy your next home - a checklist that can make the experience a whole lot more enjoyable and save you future headaches.
1. Budget First: put together a complete budget before you even start looking. Create a spreadsheet with current bills, expenses and debts. Then start playing “what if” - you know you need to pay for your phone, groceries, entertainment, internet etc., but what happens when you introduce monthly mortgage and maintenance fees? Don't forget to add in a miscellaneous area for unknown costs because something will come up you didn't expect. This will give you a good sense of what your financial situation will be like and what you can truly afford.
2. Educate Yourself: home ownership doesn’t just stop when the deal closes - that’s when the real work starts. Put together a complete breakdown of what each month requires, from the day you sign the papers to a year down the road. This includes lawyer fees, land transfers, maintenance costs, mortgage payments, repairs and other utilities. Always round up and for housing budgets; add an additional 1% of the value of the home for regular home maintenance each year. If your home is going to cost you $400,000 it should cost you approximately $4000 per year for “STUFF” especially the first year for first time buyers who don’t have all the tools and supplies to maintain a home.
3. Now vs. Later: while many said they would rather buy earlier, a lot of respondents said they would put a bigger down payment if they could go back in time. Before rushing into home ownership, weigh the pros and cons of buying now versus two or three years from now. Would renting for another two years let you buy a nicer place, with a smaller mortgage and no CMHC insurance costs?
Here’s that catch 22 again. If your able to save 10% of your take home income each year for the deposit are you REALLY going to be able to get ahead?
For example, if a couple makes a combined income of $160k a year. After taxes of 30% and savings of 10% of net you’ve saved $11,200 but the average increase in value for a home in Toronto has been 5% per year over the last 10 years. So a $400k home with even a 4% increase is $16k more than it was a year ago.
If you can’t save more then 4-5% of the value of the home in a year its historical been better to buy as soon as you can.
4. Think of the Investment: many people forget that buying a home is an investment. Let’s say you put a $40,000 (10%) down on a $400,000 home. When the value of the home goes up even 3%, you’ve increased your value by $12K. With a 3% interest rate, you would have paid $755 more in interest then you did off the principle the first year and your STILL up $11K+.
Now, subtract that $4,000 in “STUFF” costs – that brings you to $7,000, which means you would have had to make a 17.5% return on that $40,000 to give you the return you’re house just produced.
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