Many people dream of some day owning their own home. For many it is already a reality. In the long run, it is generally the least expensive way to put a roof over our heads unless living in a tent appeals to you. Buying a home is one of the biggest emotional and financial decisions you’ll ever make. Some things to consider to make sure the dream doesn’t turn into a nightmare are:
Down-payment – According to the Canada Mortgage and Housing Corporation (CMHC) website, “Mortgage loan insurance helps protect lenders against mortgage default and enables consumers to purchase homes with a minimum down payment of 5% with interest rates comparable to those with a 20% down payment. Mortgage loan insurance is typically required by lenders when homebuyers make a down payment of less than 20% of the purchase price.” Effective May 1, 2014, the premium that will need to be paid by the borrower for a mortgage of between 90 and 95% of the home value will increase to 3.15% of the borrowed amount. So, a home purchased for $400,000 with 5% down means a mortgage of $380,000 and a CMHC premium of $11,970 paid by the buyer. If added to the mortgage, $391,970 is actually financed which means interest will also be paid on the CMHC insurance premium.
Too much house – According to Consolidated Credit, your debt-to-income ratio should be 36 percent (of before-tax-income) or less. Salary.com states that, “Most lenders will finance buyers whose monthly house payment (including loan payment, property taxes and insurance) will not exceed 28 percent of their gross monthly income.” It can be very tempting to go right up to the maximum to get into that so-called dream home. The mortgage may become difficult to manage if there is an interruption in employment or if interest rates increase beyond a certain point. It may be better to start with a smaller home and move up to larger ones as equity is built up and incomes become more stable.
Needs vs wants – According to the CMHC website, “Once you have a good idea about your finances, you’ll need to think clearly about the home you’d like to buy. Try to buy a home that meets most of your needs for the next 5 to 10 years, or (choose) a home that can grow and change with your needs.” It is critical to sort out ‘needs’ from ‘wants’ when choosing a home. If something won’t really be needed for 5 years or longer, today it is just a want. In life the only thing that remains constant is change, At every stage in life our needs and wants change for various reasons such as increase or decrease in income, a change in health, proximity to work, retirement, marriage break down, addition of children to name a few, Just remember. it’s your next house not your last.
Cost of ownership – Along with other debts that are being serviced, there will be ongoing costs to keep your home operational and maintain the property value. After all your home is an investment. You want it to increase in value not decrease. Remember, as a home owner, the responsibility will be entirely yours, including: property taxes, utilities (power, water & sewer, heat, cable, phone), property insurance (usually required by lender), neighborhood
fees (condo and/or homeowners), repairs and maintenance, landscaping and fence (if a new home), renovations, etc., up grades and improvements
Lifestyle protection – As your home could be your largest financial commitment ever, it is important to protect you and your family from losing it in the event of accident, sickness or early death. Having the correct type and amount of insurance is critical. – M Dumond
Speak to your insurance advisor before you buy a home.
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