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Thinking about buying your first house in the next year? You must read this!


Thinking about buying your first house in the next year? You must read this!

Buying vs. Renting

Buying a house gives you ownership, pride, and status. It is also a long term investment that can give you great returns. In accounting terms, the owned property is considered an equity that has tangible value. It increases your net worth. Rent is an expense. It simply transfers your wealth to others. If you are convinced that buying is the way to go, then you should keep reading. 

Check below to see what you likely be able to afford based on the rent amount.

Rent* $1,250 - $1,300

Home value* $163,000 - $193,500              

Monthly mortgage payment* $981 - $1,165


Rent* $1,500 - $1,800              

Home value* $153,000 - $212,000              

$921 - $1,276


Rent* $2,100                            

Home value* $250,000                                 

Monthly mortgage payment* $1,505

(As you can see, your monthly cash out flow isn't that much different. You might even be able to save a little and have some extra beer fund for pub night!)

*The information presented above is for illustration only. Rent and Home prices are based on the Survey of Canadian Prices (Royal LePage, Second Quarter 2005, Issue No.32). Monthly mortgage payment is based on a $150,000-$250,000 mortgage, with 5% down payment at an interest rate of 5.90% per year (rate as of October 5, 2005), on a 5-year closed term and a 25-year amortization. Mortgage payment amount does not include property taxes, insurance premiums, utilities and common expenses.

Have a good credit history?

A credit rating is really just a measure of how dependable you are when it comes to repaying your debts. Credit bureaus create detailed reports containing information about your payment history (and a bunch of personal information that they really should not have). It gives them knowledge of your credit worthiness when you need another loan.

How do you get your credit rating?

You have the right to see the information in your credit bureau file, which includes your credit rating. You CAN receive a copy of your credit report by mail, FREE of charge. For a fee, you can also view your credit report online. (But if you just want that free copy, don't let them talk you into getting that paid version, because they will try VERY hard to sell you the paid version! They may even say, they don't have a free version! That's a lie. I have personally experienced it. I don't know if their offshore-outsourced accented agent didn't understand me or what.)

When you get your report, check your report carefully - if there are errors in the payment information on your credit report, you should send a letter to the credit-reporting agency requesting rectification of your records.

There are 2 major credit bureaus in Canada to contact:

TransUnion Canada: 1-866-525-0262

Equifax Canada: 1-800-465-7166

How do I establish a good credit rating?

ALWAYS pay your bills on time. Credit card, loans, or a line of credit are the main channels to build your credit with the bureaus. If you use your credit cards, at least make your minimum payments, you can develop a history of good credit.

How long does it take to build a mortgage worthy credit rating?

It really varies. It can take many years. (So you better get on it. But don't worry, if your credit is average, you can usually get approved by having a larger down payment or a credit worthy co-signer.) To learn more about how this works, you can contact us.

The information is for general use only; it is not intended for investment, financial, accounting, legal or tax advice.

Start saving for down payment.

Here's a few way to save up:

  • Set aside money each month. As much as you are comfortable with. (The catch is, the less you put away, the longer it will take to reach the goal. You may have the intent to buy, but you may not have the cash! Your piggy bank is not filling up quick enough? Here's a few tricks.)
  • Invest your mortgage fund only in a cash investment, such as a GIC that guarantees you a small interest. (So your principle is safe and pretty much no risk at all.) Right now the interest rate is great. You can get 1.75-2% sometimes on a savings account! I know a few institutions that offers that. If you would like to find out more, contact us here.
  • Contribute to an Registered Retirement Savings Plan (RRSP) account. It's tax deferred. It allows you to get a lump sum tax return back each year and you can put that into your downpayment fund mentioned above.
  • Cash gift from a parent or relative. Try to put most or all of it into your downpayment fund. (These are always pleasant surprises. So thank them very much and show your love! These don't come that often.)
  • If you have a Employee Stock Purchase Plan, contribute to it! It usually guarantees a 25-50% return! When it matures, take it out and but it into your mortgage fund mentioned above..

RRSPs for buying a home

You may be eligible for the government's Home Buyers' Plan (HBP). If qualified, you and your spouse or partner can withdraw up to $25,000 each from your RRSPs to pay the down payment and related costs. (This is free cash flow sitting in your retirement piggy bank, that your normally can't touch until you are 65, but you can borrow it for free only now! Take advantage of this!)

There's no income tax on the funds, if you repay the total amount to your RRSP within 15 years. The repayment period starts the second year following the year you made your withdrawals. If the full $25,000 is withdrawn, the minimum annual repayment would be $1,666. This can be paid as a lump sum as well using your tax refund generated from your RRSP contribution each year. 

For more information on the Home Buyers' Plan, please visit the Canada Revenue Agency website.

The information is for general use only; it is not intended for investment, financial, accounting, legal or tax advice.

How much downpayment do you need?

Two options for down payment relative to property value.

  • 20% or more down payment - This require a conventional mortgage
  • Less than 20% down payment - This require an insured, high-ratio mortgage

High ratio mortgages must be insured by a third party such as the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada or Canada Guaranty and require you to pay an insurance premium. (Unless you are really desperate to buy a house or a business property, I would not recommend going for a high-ratio mortgage. Here's why.)

The insurance premium:

  • Will depend on the amount you are borrowing and the percentage of your down payment (Usually, mortgage default insurance premiums range between 0.6% and 3.15% of your total mortgage amount)
  • Can be added to the principal balance and paid off as part of your mortgage, or paid off in a lump sum at the time of purchase. It may be subject to provincial sales tax which cannot be added to mortgage amount.

(The mortgage insurance is there to protect the financial institution of potential costs in case you default, and it doesn't protect you in any way.)

The information is for general use only; it is not intended for investment, financial, accounting, legal or tax advice..

How much mortgage can you afford?

Things to consider.

  • What's your annual household income? This is one factor financial institution will use to evaluate how much mortgage they can lend you.

  • How much down payment are you prepared to pay? The less downpayment, the more negative cash flow. How much negative cash flow are you able to afford to stay liquid in case there's an interruption in your income stream? If you don't know the answer, you'd better talk to us.

  • What's your debt-to-income ratio? Financial institution uses this ratio to evaluate your ability to pay the mortgage and how much mortgage they think you can manage. (So the lower the better.)

  • Amortization period. In general, you want to take the longest amortization period available. (Years back, when I was a financial planning strategist, we used to learn about various mortgage pay-off strategies, and here is the best one). If you'd like to pay the mortgage off quicker, you can take advantage of the monthly and annual lump sum extra payment options. Most loans have this feature. It does have a maximum you can contribute without penalty, but 100% of the payment goes towards the principle, (The goal is to have as little money going towards the interest as possible.)

  • Know your closing costs. There are many closing costs. It can add up to 1-5% of the total mortgage. You need to have it in consideration. 

  • Property taxes,  home insurance, title insurance, condo fee, utilities, gas, etc.. These expenses can be significant. Financial institutions usually don't factor these expenses into their calculations, so they may over qualify you for what you can actually afford to pay comfortably each month.

To speak to an mortgage advisor, please contact us.

The information is for general use only; it is not intended for investment, financial, accounting, legal or tax advice.


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Written by:

Kevin Sha, Real Estate Professional | Royal Lepage Preferred Real Estate