It’s no secret buying a home is one of the largest investments most people will ever make. If you’re on a limited income, homeownership may seem like an unattainable dream but as many of my clients can attest, you can take steps to put that goal within reach – particularly in Clarington, where your home-buying dollars stretch further than in many neighbouring municipalities.
HOW MUCH DOWN PAYMENT YOU NEED
Just how much of a down payment do you need to become a homeowner? Under new rules that came into effect in Feb. 2016, the minimum down payment for new mortgages have been modified. The new breakdown is as follows: For homes with a purchase price less than or equal to $500,000 the minimum down payment is 5%. For homes with a purchase price greater than $500,000 and less than $1 million, the minimum down payment is 5% of the first $500,000 plus 10% of the remaining balance.
There are lots of housing options in Clarington that fall under the latter requirement. The average price of a home here in Sept. 2017 was $535,765. The average detached was $591,212, the average semi-detached was $374,683, the average townhouse was $346,000 and the average condo was $310,314. Another consideration: the Bank of Canada is keeping interest rates low.
FYI: High-ratio mortgages, or anything under the conventional mortgage of 20% down, must be insured by a mortgage insurer, such as the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada or Canada Guaranty. You’ll be required to pay the premium for this insurance.
TEST DRIVE YOUR MORTGAGE
When calculating how much you can afford, it’s important to be honest with yourselves. Small changes – such as eating at home more often instead of going out to dinner – may be manageable but major changes – such as financially supporting parents or giving up vacations – can dramatically impact your lifestyle. Remember, being ‘house rich and cash poor’ can be stressful and doesn’t leave room for unforeseen financial setbacks.
It’s also important to consider your future. Are you planning to have kids or are you hoping to find a new job? Both will affect cash flow and your ability to meet your monthly financial obligations. If you’ve never owned a home before, it’s also important to take into consideration additional expenses you may not worry about as a renter, such as utilities, fencing and furniture.
Before making a commitment to a mortgage, I recommend giving it a test drive. Figure out what your new budget will be, automatically transfer that amount to your savings account less your current housing costs and see how it feels. As an added benefit, you can use those savings to further build your down payment.
QUALIFYING FOR A MORTGAGE
There are 2 affordability rules that determine how much you can spend on housing without risking your financial situation, CMHC reports. As a new homeowner:
1. Your monthly housing costs should be at or under 32% of your gross monthly income.
2. Your monthly debt load (including your mortgage) should be at or under 40% of your gross monthly income.
You can explore your budget options with CMHC’s mortgage affordability calculator. Many financial institutions also offer online calculators.
EVALUATE FINANCES, CREDIT SCORE
CMHC suggests looking at the following calculations and questions before meeting with a broker or lender:
1. Compare how much you currently spend on expenses and debt payments with the amount you’ve saved or invested.
2. How much can you afford to spend on housing each month without risking your financial health?
3. How much do you need to save to pay for upfront costs, which includes everything from the down payment to moving costs?
4. How much would you spend each month with homeownership expenses added to your current financial situation?
5. What’s your credit score? Demonstrate your ability to consistently pay bills and debts with a copy of your credit report.
HOMEBUYERS’ ASSISTANCE PROGRAMS
A tax-free savings account (TFSA) lets you set money aside in eligible investment vehicles and watch those savings grow tax-free. You can use the savings to purchase and renovate a house. Also, a number of programs are in place to help first-time homebuyers:
Land Transfer Tax (LTT) Refund: In early 2017, the provincial government doubled the first-time homebuyers’ maximum LTT refund to $4,000. This means eligible homebuyers in Ontario pay no LTT on the first $368,000 of their home’s purchase price. Learn more at the Ministry of Finance.
Home Buyers’ Plan: Under this federal program, first-time homebuyers can withdraw up to $25,000 from any RRSP account. Pay attention to the fine print. For example, you have to pay back this interest-free loan over a 15-year period and any year you don’t make a payment, that annual sum is added to your income and taxed at your marginal rate.
First-Time Homebuyer’s Tax Credit: If you haven’t owned a home within the last 4 years, you may be eligible for this tax credit, which is based on $5,000 multiplied by the lowest federal income tax rate for that year. For example, the lowest federal income tax rate for 2014 is 15%, so the value of the credit would be $750. Learn more on the Economic Action Plan website.
GST/HST New Housing Rebate: First-time homebuyers residing in provinces that have combined provincial and federal sales tax, which includes Ontario, are eligible for an HST tax rebate through the federal government. Learn more on Service Canada’s website.
DON’T QUALIFY FOR A MORTGAGE?
Even if you don’t yet quality for a mortgage, you can still take several steps toward homeownership. CMHC recommends you:
• Meet with a credit counsellor to improve your financial situation.
• Pay off some loans or other debts.
• Save for a larger down payment.
• Lower your home price range.
• Adjust your budget to spend less or save more.
Interested in learning more about what you can afford in Durham Region which includes the charming community of Oshawa, Courtice, Bomwanville, Newcastle and Orono? I’m committed to helping you achieve your dreams of homeownership so please give me a call today!