This week we are starting our Home Ownership series (super creative title!). We’re all about collaboration, so over the next few weeks, we’ll be partnering with our Mortgage Broker, James Loewen of Loewen Group Mortgages, to discuss all things to do with buying a home. We’re really excited to launch this series and we hope you’ll find it useful!
Before we get started, lets introduce James;
James Loewen is a Mortgage Broker and Owner of Loewen Group for over 10 years in Burlington. He has become Canada’s best and highest rated Mortgage Brokerage by taking the time to understand clients’ needs and provide solutions. Their goal is to provide the knowledge, expertise and support to help their clients make the best decision for their unique needs. They work with you, for you! (Like they did for us)
Between the three of us, we’re hoping to give you enough information that you can feel confident about buying your first home, understanding the finances of home ownership and everything in-between!
Before we get into the finances, let’s start with some basics. Jumping into home ownership is a big adult commitment and you need to be prepared. Whether you’re going in this solo or with a partner, there are some questions you need to think about:
- Where do you want to live? Are you a city dweller, a suburbanite or a country gal/guy at heart?
- What is your budget?
- Have you started the pre-approval process of getting a mortgage?
- What type of a home are you looking for? A condo/apartment/townhome/semi-detached/detached home?
- How long are you willing to commute to work?
- Do you have kids or pets/plan on having either?
- What amenities do you want to live by?
- Are you looking for a starter home or a “forever home”?
- How much of your income should you spend on your mortgage?
Let’s back up a little bit and break this down further. You may be wondering, “How much should I budget for a mortgage?” and “what information do I/we need to be pre-approved for a mortgage?” James is here to help answer some of these questions and more!
How does one figure out their budget for a mortgage?
We use a simple (yet effective) mathematical calculation called “TDS” (Total Debts Servicing) to help determine what budget should be spent on home ownership. The ratio set forth by the Canadian government is 44%. This means, of your total gross (before tax) income, 44% of this is the maximum allowed for mortgage payment, property taxes, heating costs and condo fees, along with any remaining debts outside the mortgage (such as car loans, credit cards, lines of credit etc). We complete this budget together, review the figure and actually prefer to be a little more conservative and advise to set 40% as your max. What’s life if you can’t afford a steak and beer every once in a while!
How do I know if I am even financially ready for a mortgage?
A good test is to take a look at your existing finances. Ask yourself: am I balancing my present budget, paying my rent on time, paying my bills and setting aside savings for a down payment? Usually, owning a home costs more than renting and if you’re struggling to pay rent then you’re not ready. If you’re setting aside funds for RRSP and managing all debts, then its time to seek a pre-approval partner. You can see the costs of home ownership and truly test your budget on our free app (Loewen Group) as well.
How does the pre-approval process work? What information do I need to have?
Mortgage pre-approval consists of three parts:
- Credit Review: your “beacon” score is the summation of your credit habits and this will be reviewed. Most banks require a minimum beacon score of 650. Having a beacon score of over 680 will make your approval even easier and give you full access to all lenders in Canada. A broker can work with you if your present score isn’t high enough and provide counsel on best strategies to improve at no cost.
- Budget Analysis: we will need employment information, generally in the form of a letter of employment and a recent paystub to confirm your base salary. We want to ensure you fit within the TDS guidelines and ensure you’re never “house poor”.
- Down Payment: homes can be purchased with as little as 5% down. As of 2016, a sliding scale has been implemented such that its 5% of the first $500K and 10% for anything above. Down payment can be comprised of RRSP’s (up to $25K per borrower on your first home), TFSA, savings, gifts from relatives and even borrowed from lines of credit.
Do I need to have a full-time permanent job to apply for a mortgage? What happens if I am on contract/self-employed?
If you are hourly, then we’ll use your guaranteed minimum hours. If you work over time, have commissions, bonus, self-employed or any other “variant income”, we’ll use a two year average of income, so ensure to have your last two years Notices of Assessment or T4’s.
What is wrong with renting? Why is everyone obsessed with buying a home?
Let’s be clear, there’s nothing “wrong” with renting. It can be the right solution for many based on budget, uncertainty or many other reasons. Unless you’re buying a home with a rental suite or willing to rent out a room of your house, the vast majority of the time, owning a home will cost more than renting. Having said this, every penny of rent is “gone” with no return to yourself. This is where I think many come to state you “should” own a home comes from. Here are some reasons to buy a home:
- Paying down principal: if you’re paying a $1500 mortgage payment, generally 50% of this will be repaying the principal of your mortgage. It is essentially forced savings and you’re now “paying yourself” instead of rent paying your land lord.
- Appreciation: I’m seeing some staggering numbers. In Toronto, the average home is appreciating at $550 A DAY! That’s more than the average household income earns combined, not to mention on your primary home, this is also TAX FREE (outside of TFSA, this is the only tax-free opportunity to earn in Canada). Outside the GTA, we’re also seeing double digit appreciation even in the first four months of 2016. Making $100, or $200K even $300K in three years is not an uncommon, and I think we all know how many years (if not a lifetime) it would take to save $300K of after tax dollars.
- Pride of Ownership: simply enjoying the fact you get to call it your own, it’s that simple.
We know this is a lot of information to process. However, a lot of people don’t fully recognize the financial commitment they make when buying a home. Next week, we will be looking at x, y and z’s of mortgages, down payments and confusing home ownership terminology.