The home-buying checklist overview
For many people, buying a home is one of the goals to work toward after deciding to start a family. For others, real estate is solely viewed as an investment— an income-generating property to be placed in a portfolio of assets. Whichever motivation is fueling your intention to purchase a home, the initial question you need to ask yourself remains the same: “Can I afford this transaction?” This is often a difficult question to answer, especially for people entering the process for the first time.
Let’s break it down!
For those of you unfamiliar with the costs and procedures associated with buying a house, it is likely you will be caught off guard by unexpected expenses and requirements. These unexpected items can make the home-buying process more stressful. No one wants to spend the time securing a mortgage and purchasing a home only to find out they did not set aside enough money to cover all of the transaction costs. Luckily, we have put together a list for you! Here, we talk about each expenditure you might encounter during the home-buying process. We have broken the process down into two sections: the steps and costs of purchasing a property and the expenses of owning a home. After reading this blog, you should be fully equipped to crunch your own numbers and determine whether you are in the financial position to purchase a house.
Purchasing a property
1. The down payment
The down payment is the amount of cash you will put towards the purchase price of the house you are planning to buy. Determining how much you need to save for your down payment is a good place to begin the home-buying process. Understanding your down payment will help you determine what price range you can afford. In Canada, the minimum down payment percentage is five per cent of the property’s value. However, a good rule of thumb is to save a minimum of 20 per cent, so you can avoid having to purchase mortgage insurance from the CMHC. We will further explain mortgage insurance and down payment amounts in future posts, but for now, just assume you will be saving for a 20 per cent down payment.
E.g. A house with a $365,000 sale price will require a minimum down payment of $18,250 (five per cent), but has a preferred down payment of $73,000 (20%).
2. Securing a mortgage
This part is the most technical, and can be confusing for many new home buyers. The mortgage on a home is a loan that represents the difference between your down payment amount and the price at which you purchased the property. There are three aspects of mortgages that you will need to become familiar with:
- The principal: The original dollar amount of the loan (the difference between the property price and your down payment).
- The rate: The level of interest paid on the amount of the principal.
- The amortization period: How many years you will take to pay off the loan and interest.
These three aspects determine the amount you will be paying each month, so it is crucial to find the right mix to create a payment schedule that fits your budget. There are many lenders who offer mortgage loans, such as banks or credit unions, but if you are looking to get the best rate available (and you should be), it is best to work with a mortgage broker.
3. The hidden costs of purchasing a property
Now, these are the costs that will sneak up on you. The following is a list of expenses that may not be necessary for all circumstances, but represent some significant costs that are easily overlooked.
- Home inspection: Average cost between $200 and $500
- Legal fees: Average cost $1500+
- Provincial land transfer tax: Average cost between .5 per cent and 2 per cent, depending on the purchase price and the city where you purchase the house.
- Mortgage insurance: For high ratio mortgages (less than 20 per cent down payment). The average premium is between .6 per cent and 3.15 per cent
- Moving costs: Average between $1,500 and $5,000
The costs of owning a home
Once you have determined how much you need to save to cover your down payment and hidden costs, you are ready to start budgeting the costs of owning a home. That’s right, the fun doesn’t stop once you have made your down payment and moved in—you are now responsible for the monthly expenses of owning a property. These expenses vary greatly between different residential areas and house sizes, so we will not be outlining average prices. What we will do is give you a comprehensive list of the average household expenses.
- Mortgage payments: Paying down the loan for the house.
- Property taxes: Paid to the municipality, usually monthly or quarterly
- Utilities: Hydro, gas, water heater rental
- House insurance
- Entertainment and communication: Internet, home phone, cable, etc.
- Property maintenance: Lawn care, repairs, gardening, etc.
- Renovations: Painting or any major changes you would like to make to the property
This concludes our breakdown of what expenses to expect when buying a house. Our team is more than happy to help you build a budget that accounts for all of these expenses, so you are prepared to take on the home-buying process like a professional. Reach out to us through one of the following links, or you can get in touch with me here!