Laura McKay is the co-founder and COO of PolicyMe, Canada's fastest-growing digital life insurance company. In 2021, she was named one of the Women of the Year by Bay Street Bull. Laura has a Bachelor of Mathematics from the University of Waterloo. Her degree focused on Actuarial Science, which included learning about mortality risk, the basis of life insurance pricing and valuation. After her degree, she was employed by Manulife and Munich Re in Actuarial Science. Laura then worked at famed management consulting company Oliver Wyman in New York from 2013-2018. In this position, she worked with many Fortune 500 life insurance companies and helped them develop growth strategies and solve operational problems and regulatory issues.
November 20, 2020
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9 minutes
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Buying a home is exciting – but it’s also one of the biggest financial moves you’ll ever make.
Which means you’ll want to prepare for buying a home long before you actually do.
As tempting as it may be to put an offer on the first home you fall in love with, it’s important to prepare for your big purchase before you take the plunge. After all, it’ll be hard to enjoy your his and hers sinks or hardwood floors if you go way over budget and end up facing a mountain of debt.
Here are the top tips to prepare you for buying a home, both beforehand and what it’s going to cost you once you sign on the dotted line.
Let’s start home shopping!
5 Steps to Take Before You Buy a Home
Maybe you’re living at home and looking to buy, or maybe you’re done with renting. Either way, here are the five things you need to do before you start shopping.
1. Save, Save, Save
Since buying a home is a big expense, it’s important to start saving for it as soon as possible. A great way to do this is to automatically transfer a percentage of each pay cheque to a savings account. This way, you won’t conveniently “forget” to tuck money away every time you get paid or be tempted to spend the money on something else instead.
If you’re a first-time home buyer, you can also take advantage of the Canadian government’s Home Buyers’ Plan. This program allows you and your spouse to withdraw up to $35,000 from your RRSP account to pay for a home purchase. You won’t get taxed on the withdrawals as long as you repay the money to your RRSP account within 15 years.
2. Improve Your Credit
For the most part, people don’t buy a new house outright. , you’ll probably get a mortgage to help you pay for it. When you apply for a mortgage, your lender will look at your credit score – a measure of how reliable you are as a credit consumer.
To boost your chances of getting approved for a mortgage at an affordable rate, work on maximizing your credit score now. The best ways to do this are to pay all of your bills on time and keep your credit card balances low.
It’s also smart to check your credit score report about once a year to make sure it doesn’t contain any errors.
3. Reduce Your Debt
In addition to scrutinizing your credit score, a mortgage lender will also calculate the amount of debt you have. They’ll want to see that you’re able to pay off your debt on time. And they’ll check to make sure that you aren’t carrying too much debt relative to your income. Specifically, you’ll need a debt-to-income ratio of less than 32–40% if you want to qualify for a standard mortgage in Canada.
4. Get Preapproved for a Mortgage
Before you start searching for a home, it’s a good idea to get preapproved for a mortgage. This way, you won’t end up in a situation where you’ve committed to purchasing a home but you can’t get approved for the mortgage you need.
Having a preapproval letter from a mortgage lender also tells sellers that you’re a serious buyer. And if you’re able to exclude mortgage financing conditions from your offer to purchase, it can give you an edge in a bidding war.
5. Identify What You Can Afford
Once you know the size of the mortgage a lender is willing to give you, it’s time to identify how much you can afford to spend on a home. To do this, consider your savings, existing debt, and mortgage. You’ll also need to factor in all of the expenses that come with buying a home.
The Costs of Buying a Home
When you buy a home, you’ll need to consider more than just the listing price of a property. That’s because there are lots of other expenses you’ll need to pay for. Here are some of the most important ones you’ll want to make note of.
Deposit
If you put an offer on a home and the seller accepts it, you’ll probably be expected to pay a deposit within 24 hours. This amount is usually 5% of the purchase price, although you can negotiate it in your offer.
The good news is that the deposit isn’t an additional amount on top of the purchase price. When the sale of the home closes, the deposit will be credited toward the purchase amount.
Home Inspection
Don’t want to buy a home and find out later that it needs major plumbing work or structural repairs? You can make your offer conditional on a home inspection.
During a typical inspection, you’ll pay a third-party inspector to check the electrical work, plumbing, heating and air conditioning, walls, ceilings, floors, and windows. If the inspection reveals a significant problem, you can ask the seller to fix it before closing, negotiate a lower purchase price, or withdraw your offer altogether.
Appraisal
An appraisal tells your lender how much the home you want to buy is actually worth. Lenders use appraisals to approve mortgages based on the actual value of a property (rather than a potentially inflated purchase price). Although your lender may arrange for the appraisal, you might have to pay for it yourself.
Down Payment
When the sale of your new home closes, you’ll need to pay the down payment. This is the amount that you agree to pay in cash up front. The rest of the purchase price will be paid by your mortgage lender.
Ideally, you’ll pay a 20% down payment on the home you buy. Because if you put down less than 20%, you’ll have to pay for mortgage default insurance too. This is insurance that protects your mortgage lender in case you aren’t able to afford your mortgage payments.
Remember that the deposit you paid when your offer was accepted gets credited toward the purchase price. So if you paid a 5% deposit, you’ll pay only an extra 15% on closing for an overall 20% down payment.
Mortgage Payments
If you take out a mortgage to pay for your new home, you’ll need to gradually pay it off by making mortgage payments each month. You might need funds for only the first monthly payment when the sale of your home closes. But you’ll want to factor your mortgage payments into your typical monthly expenses and budget to make sure you’ll have the funds to afford them.
Title Insurance
As part of your mortgage conditions, you might need to buy title insurance. This is insurance that protects you against any defects or errors in the title for your property. The cost of title insurance varies depending on the type of home you buy and the province or territory it’s located in.
Home Insurance
Most mortgage lenders will also require you to buy home insurance. Home insurance covers theft and the types of damage listed in your policy. In most cases, it’ll also protect you from liability if someone slips on your icy driveway or a fire starts in your home and spreads to the house next door.
Land Transfer Tax
In most Canadian provinces and territories, you need to pay taxes to the provincial or territorial government when you assume ownership of a property from someone else. Some municipalities, such as Toronto, also charge their own land transfer tax.
Legal Services
When you buy a home, you’ll need to hire a real estate lawyer to represent you in the sale. Your lawyer will review all the paperwork, ensure there aren’t any claims on the property, and distribute the funds from the sale to all relevant parties.
Moving
If you plan to hire movers or a reliable courier service to help you move into your new home, be sure to factor their fees into your budget. Keep in mind that even if you plan to take care of the move yourself, you might still need to pay for moving boxes and a rental truck.
If you’ve taken out a mortgage to finance a home, you’ve probably done it with the assumption that you’ll live long enough to pay it off. But it’s entirely possible that you could die before this happens. And if it does, your family might have a hard time making the monthly mortgage payments without the help of your income. This might ultimately force them to sell the home.
The good news is that although you can’t guarantee that you won’t die early, you can make sure that your family will be protected financially if the unthinkable happens. If you purchase life insurance and factor your mortgage into your coverage amount, your family will receive the funds they need to pay off the mortgage even if you’re no longer around to contribute.
Note that when you get a mortgage, your lender might try to sell you mortgage life insurance. They seems similar, but mortgage and term life insurance have some major differences. For most, mortgage life insurance ends up just being an additional expense. Term life insurance can a mortgage if need be, and offers additional flexibility mortgage life insurance does not.
Final Notes on Buying a Home
Purchasing a home – especially if it’s your first – is a big step. That’s why it’s helpful to know how to prepare financially and the kinds of expenses you’ll need to cover.
Specifically, if owning a home is on your bucket list, it’s never too early to start saving money, building good credit, and chipping away at debt. This way, you’ll be in the best position possible to buy a home you love and pay for all the expenses that’ll accompany your big purchase.
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