A Two Part Guide to Buying Your First Home

Millennials in Canada are facing a vastly different homebuying environment than their parents or grandparents. Soaring real estate prices, high levels of student debt and precarious employment are making it difficult for young people to get into the housing market.

Home ownership is a retirement issue, seen through the lens of long-term retirement planning. A home is, almost always, the most important financial asset most people acquire. That is why it makes sense to place its initial purchase firmly within the context of sound financial thinking. Still, getting started is problematic for most people setting out in life and millennials in particular recognize the difficulties.

At Everything Retirement, we are also acutely aware that parents and grandparents – many of whom have millenials for children and grandchildren – entertain a strong conviction that (when their resources allow) they are in a position to help their offspring manage some of the entry level costs of home ownership.

Despite these challenges, a recent survey found that 80% of Canadian millennials want to own a home. What’s more, 27% already do. If purchasing a home is a goal for you or a younger family member, here are some tips to guide you through the process. But since a mortgage – they come in a wide range of structures and applications – is a complex financial instrument, we suggest you get professional guidance.

4 Initial Thought-Starters

  1. Look at home prices in and around your desired location and be realistic about what you can afford.
  2. Consider moving just outside your preferred location if that brings the real estate price down.
  3. Reconcile yourself to acquiring a smaller property.
  4. Explore the possibilities of bringing in a rent paying tenant to reduce your carrying costs.

Initial Logistics

Buying a property doesn’t end with the purchase price. The purchase price of a property is just the beginning. Other expenses associated with that purchase include:

  • Closing costs – real estate commissions, legal fees and land transfer taxes (if applicable) can add an additional 4% to the purchase price.
  • Ongoing expenses ­– factor in property/municipal taxes, mortgage insurance, homeowner insurance, utilities and estimated maintenance costs.

Understand that by putting down 20% or more of the purchase price, you’ll avoid needing to purchase mortgage insurance – which can add thousands of dollars over the course of the mortgage. And don’t forget that, depending on the purchase price of the home, at least 5% of the purchase price is required for first-time buyers.

For further clarity on a frequently misunderstood issue, consider reviewing the Complete Guide For First Time Home Buyers by MoneySense.

First Financial Steps to Contemplate

  • Consider setting up a dedicated home-buying fund and putting aside money from every pay cheque.
  • Pump up your savings with tax refunds and any bonuses or gifts you receive. Do not fritter these financial windfalls (however small) away.
  • Do not ignore the potential for negotiating a personal loan from parents or a family member to put towards your down payment. Such a loan can be legally documented and supported by a legally binding repayment program.
  • Investigate the Home Buyers’ Plan (HBP), a government program that lets you borrow from your RRSP tax-free (up to $35,000) to buy or build your home. You then have 15 years to pay back the amount you withdrew, interest-free.
  • Look into the First-Time Home Buyer Incentive, a federal program that helps first-time homebuyers reduce their mortgage payments and the total interest paid over the life of the loan. It’s available to households with an income of $120,000 or less and offers a loan of 5 – 10% of a home’s purchase price to put towards the down payment. A potential drawback of this program is that repayment is based on the fair market value of your home at the time – if it increases in value, you’ll pay back more than you borrowed.
  • Investigate the First-Time Home Buyers’ Tax Credit. New homeowners can claim a non-refundable tax credit of up to $750 to cover closing costs.
  • Be aware of the GST/HST New Housing Rebate. If your home is a new build and costs less than $450,000, you may be able to recover a portion of the GST and HST that you paid. Your province may also offer rebates on the provincial portion of the GST or HST.
  • Understand land transfer tax rebates. Some provinces and municipalities (for example, Ontario, British Columbia, Prince Edward Island and the City of Toronto) offer rebates on the land transfer tax for qualifying buyers.

Conclusion

In our follow-up blog post on this same topic, we will offer some specifics on mortgages. If you need help deciding which mortgage is best for you, you should consider speaking to a mortgage broker, who can give you expert advice at no cost to you. You can also speak to our partners at Interior Savings and Coastal Community Credit Union, who are well qualified to guide you through the process.