If you are considering purchasing your first home, you are making a decision that involves what will likely be your largest financial investment and, if done wisely, will give you and your family security over the coming years. Making the leap from renting to owning can be intimidating — and financially burdensome. However, there are programs in place — such as a tax credit for first time home buyers — designed to motivate people to purchase homes rather than keep renting. The tax credit can ameliorate the total cost of buying your house.
First Time Home Buyers in Alberta and BC
So where should you begin? The pre-approval process helps you determine how much “house” you can afford. Just because you get a pre-approval letter for $800,000, though, doesn’t mean you have to limit your search to houses between $775,000 and $799,900, though. One trap that many first-time home buyers fall into is choosing the house that is absolutely at the top of their affordability spectrum. Then they run into trouble when they decide to upgrade in the car department or lose their job and have to take one that pays slightly less. Choosing a home that is less than your pre-approval maximum allows you to build some cushion into your budget. If you budget so that you’re making extra payments, you’ll have the house paid off sooner — and if your income drops, you’ll still make your minimum payments on time without running afoul of your lender.
Another reason to stay well below your pre-approval limit is that the Canadian mortgage process almost ensures that you won’t have the same interest rate for the life of the mortgage. Most people take between 15 and 30 years to pay off their loans, but they end up going through at least three or four mortgages, if not more, because you can’t sign a loan that has a term of more than ten years. At the end of a loan term, if you’ve been making your payments on time, the bank will likely renew it, but the interest rate can change to match new market conditions. Right now, interest rates are at historically low levels, which means that they are likely to be higher at the time of renewal, so you’ll want to budget for that increase in your payments — and make extra payments now so that you’re not a hostage to interest rates for the next three decades.
When you do get pre-approval from a lender and then find the house that you want, don’t feel like you’re bound to take the mortgage that the lender offers you. Instead, use that as leverage to shop the loan around. Different banks have different guidelines for their lending practices, and what sounds like a good deal from a lender can pale in comparison to what another bank would have to offer. Even a difference of a half-point in interest rate can save you tens of thousands of dollars over the amortization period of your mortgage. Remember that you are the person taking out the loan — you are the one bringing in money to the bank. The bank is taking a risk on your behalf, but you are paying the bank handsomely for it. If you buy a home for $750,000, if you pay over the whole life of the loan, you’ll likely end up paying at least $1.5 million to own it at the end, after you add in the cost of interest.
When you meet or talk with a potential lender, get all of the potential terms in writing. Remember that there is no rush. You might feel like you’re under the gun to get a loan approved so that you can go to closing, but also remember that you’re going to be paying for this house for the majority of your adult life. You don’t want to have to regret a deal that you signed because you felt rushed or pressured. Finally, don’t sign paperwork for a mortgage that is right at the maximum of what you can afford — or a little more. Too many people make that mistake and end up facing monthly stress to make each payment. It’s not worth it just to have a slightly nicer home.
If you manage these steps wisely, you’ll end up in a home that will one day be all yours, free and clear — and you’ll get there with a minimum of stress and frustration. Amansad Financial helps First Time Home Buyers by connecting you with the ideal lender for your situation.