First-time Home Buying
There are so many things you learn when buying a house, many of which you should probably know upfront. The following list is many of the things I learned in my home buyer's journey that I wish I had known before. This isn't going to cover everything but will hopefully be a good starting point.
Calculating the true cost of ownership
Paying rent is just paying somebody else's mortgage!
- Every home owner I know (almost)
While it's tempting to compare rent with a mortgage payment there are so many other costs worth considering before deciding if home ownership is the right financial move.
The best resource I've found comparing renting to owning in Canada is "The Wealthy Renter". It goes over data from many Canadian cities and how you can estimate your cost of ownership.
If you are simply looking for a rough estimate quickly you can checkout this video on "The 5% rule" from Ben Felix. The 5% rule says that the unrecoverable costs of ownership are about 5% of the value of the property and that if your annual rent is less than 5% of the purchase price of a similar house then you should rent.
Once you identify your estimated cost of ownership you can then make an informed decision as to whether ownership is the right choice for you at this point in time.
Get a pre-approval for a mortgage
I didn't know what a pre-approval really was until after I actually got one. It is simply a document indicating what property value a bank would likely approve you for. While a pre-approval doesn't actually guarantee that you will be approved for a mortgage of that amount, it is vital to identify what range of properties you could qualify for before you start looking!
If you're interested in buying a home you should have a pre-approval. I recommend Breezeful to all my friends as they were the best overall broker I dealt with. They spent hours on the phone answering questions and even when I managed to find a better rate (after seeking out several other brokers) they offered to match it through enhanced cashback.
Searching and putting in offers for homes
After you get your pre-approval you can start viewing homes and when the time is right you can start putting in offers! There is SOOO much to talk about here but some of the highlights are:
Common Offer Conditions
- Inspection - This allows the buyer to have an inspection done and depending on the results they can:
- Negotiate a lower price
- Negotiate remediation of issues (performing repairs before closing)
- Revoke your offer if you change your mind for any reason
- Financing - This ideally allows the buyer to back out of their offer if they fail to get mortgage approval, but in reality you can revoke your offer for any reason.
- Current Home Sale - This doesn't affect first time buyers, but if you have a primary residence that you are planning on selling before buying this new house you can make that a condition on the offer.
Unconditional offers are appealing to sellers and as housing markets heat up, you will notice that most offers on desirable properties are totally unconditional. This makes it even more important to be well within your pre-approval amount. Hot spots like the GTA and Metro Vancouver rarely sell with conditions but often will have things like inspections done before the house is listed. In the end, the report will be available to all the possible buyers so they know what they are getting into.
Managing Stress and Mental Health
- If somebody else was willing to pay more than you for a house it was by definition "out of your price range", try your best not to dwell on it.
- Try your best not to fall in love with a house. You probably will fail (I did) but you should still try to stay objective! Getting attached to houses will make the process much more emotionally draining; it will happen but try your best to mitigate it.
- Many agents will purposely set their listing price below market value. Don't let low listing prices trick you into thinking that amazing dual garage single family home was within your price range - it never was but the selling agent wants you to believe it!
- Have a support system! Find some close friends or family to whom you can vent your frustrations.
- House hunting can be exciting but think twice about sharing with too many friends and colleagues. You may be hunting for a while and it can be draining answering the question "did you find a place yet" repeatedly when you catch up with them.
- If inspection conditions are normal in your market have an inspection condition on your offer!
- If you really like a house and think you want to put in an offer you can hire a structural engineer to come with you to a house viewing to try and catch any issues before you submit your offer. Structural engineers are expensive so if you have a friend or family member that is in the trades they could likely help you out as well!
- Houses are built in groups. Research houses in your area and common problems in houses built in that area at that time. Things like asbestos, aluminum wiring, flooding, etc.
- There is always a risk you get a lemon so unless you're getting a new build, make sure you have some liquidity available for an emergency repair or to remediate existing issues.
Get ALL the mortgage rates you can
When I eventually got an offer accepted on a home I contacted multiple brokers and even a couple of banks directly. Here are some of the things I learned:
Features of a mortgage
Interest rate: Often referred to simply as "rate", this indicates the rate at which your mortgage accumulates interest. If you have a mortgage of $500,000 at a rate of 2% you will pay approximately $10,000 a year in interest. Higher rates are more expensive while lower rates are cheaper.
Amortization length: The amortization is the duration of time it takes for your mortgage to be paid off. The most common is 25 years but if you make a downpayment of 20% or more you can qualify for a 30 year amortization (usually at a slightly higher rate than 25 years).
Cashback: Many lenders and brokers offer cashback bonuses. Some lenders offer bonuses on specific types of mortgages and brokers will often offer additional cashback to beat a competing offer you may have with another lender/broker.
How to get a mortgage
- Brokers beat every bank quote I got by a LARGE amount (except for HSBC, they were really competitive). Next time I need to shop I might just use a few brokers and ignore banks altogether.
- Brokers make money off commission so don't tell them you are actively working with other brokers/lenders. They might assume you'll just shop around with the rate they give you. Ultimately, you WILL do this but don't tell them about it up front.
- The lowest rate doesn't mean it's the best option. You should explore all available options: variable vs fixed rate, fluctuating vs fixed payment, 25 or 30 year amortization, conventional vs collateral, repayment terms, etc. If you don't know what these terms mean ask and figure out what suits your lifestyle best.
- Get everything in writing! Rate, amortization, downpayment, repayment terms, cashback (and how it will be paid), etc.
This is by no means an exhaustive list and if there is interest I will break this section out into its own article. For the time being, I encourage you to heavily research any terms you're unfamiliar with and ask your broker any questions you have!
Get a lawyer you trust
Your lawyer is the person who verifies that your purchase agreement is valid, that your mortgage gets processed, and that you provide your downpayment. They even give you the key on close! The best advice I have is pick your lawyer on referrals not price.
Often the fees you're quoted shopping around are just a range and they will be incorrect if your house ends up requiring more work to close. There is no way to know if the place that quotes you the lowest price at the beginning will end up being the most expensive in the end. So if you have a good referral from a friend, go with it.
Once you picked a lawyer you can ask them all your dumb questions - they have heard them all! I even asked mine "how do I set up my water bill?", "how do I pay my property tax?", etc. They will tell you a date that they need the downpayment, if/when you need to set up house insurance (usually a requirement from your lender), and what day you need to sign documents.
Making a down payment
I thought I would just need to provide a bank draft but the proof of downpayment was much more complex than I expected. You won't find this out until after your offer is accepted but most lenders require you to provide a "proof of downpayment", which is a 90 day history of where the downpayment has come from. This is simple if you have it sitting in a chequing account but can be more complex if you have your downpayment invested or split across multiple accounts or if you are taking advantage of the HBP.
The bank wants to give you a mortgage! So long as you legitimately earned the funds required for the downpayment you should be able to send the lender all your bank statements and they will figure it out. However, if you are being gifted large amounts of money you should ensure that your mortgage broker is aware it's transferred well before closing and that you have a letter outlining that the funds are a gift.
I knew about closing costs like land transfer tax and legal fees but there were many that were a surprise:
Prorated Property Tax: As a home owner you will pay property tax 2 times a year. If you take possession of the house in the middle of the year you are normally required to pay the current owner for the portion of property tax they already paid for, this ranges from the low hundreds to thousands of dollars.
Title Insurance: This protects you from title defects, errors in land surveying, title fraud, etc. It's not a requirement to get but ~$1,000 is a small price to pay to ensure you are protected from any title issues for the entire ownership period.
Appraisal fee: Depending on your mortgage you might have been charged an appraisal fee. An appraisal can range from $100-$500 and depending on the lender they may never actually step foot on the property but you bet they will charge you for it.
Land transfer tax: Whenever a property changes hands you are required to pay a lump sum to the government. This amount is a function of the purchase price but if you're a first-time home-buyer in Ontario, you qualify for a $4,000 credit. Expect this to be 1-2% of the house price.
Legal fees: You need to pay a retainer to your lawyer when you find one you like (this will be a few hundred dollars) and on closing you will pay the remaining legal costs which usually amount to ~$1000.
While move in costs aren't totally unique to home ownership, most renters may have never paid for water/gas/hydro before.
Utilities: You will almost certainly need to set up water and hydro (unless you're in a condo that includes them in their condo fees). Natural gas may also be required if your furnace/water-heater uses gas. Each service charges account setup/transfer fees which are $50 each.
Property tax: This depends on your city but for Ottawa this is paid in 2 parts and is due in March and June. So, even if you paid the previous owner property tax at closing you won't necessarily have a full 6 months before your next payment is due.
Inspection: I didn't have an inspection condition when I bought my first home, but I did get an inspection done immediately after moving in! Getting an inspection by a licensed structural engineer will cost ~$500, and on top of putting your mind at ease they can save you thousands if the inspector catches a problem (bad drainage, plumbing, electrical) early.
Maintenance and upgrades: If you're aware of things you want to fix/change soon then it makes it much easier if you budget for them before moving in! It's a pain to replace drywall/paint/flooring/lighting once you get all your stuff unpacked. If you have the luxury of doing so before you unpack and buy furniture it will make your lives a lot less stressful and you will be able to move in without a laundry list of renos. If you did an inspection this is also a good time to figure out if there was anything you should fix.
I hope some of the above information was new or useful to you and I hope the experience of buying a home doesn't seem as scary now! If you have any suggestions I should add to this list please email me at email@example.com!