Buying your first house is a huge decision! Most home owners, looking back, remember it as a very rewarding experience. In the moment, though – the process can feel overwhelming.

To help you out, we have compiled a list of some of the most frequently asked questions our clients need answered.

 

1. Should I buy or rent?

This is a very personal decision, and your answer will depend on your circumstances and your stage of life. Both renting and owning have advantages, but here are some things to consider:

If you are in debt, do not have any money saved up for a down payment, or if buying would tie your entire savings up in a house, renting is probably the best option. Being house-poor can be very uncomfortable, not to mention financially risky.

If you move often, either by choice or because of career or family obligations, renting may keep your life simpler.

If you think of a house as an investment, but you are a savvy, financially disciplined investor who knows how to earn more on your money elsewhere – you may come out ahead by renting.

If you live in a city where housing is unaffordable, you may have no choice but to rent until there is an option to move away.

However…

If you have saved up enough for a down payment and closing costs, and you still have a little cushion left over in your savings, you may be ready to take on a mortgage

If you are ready to stay in the same place for the next five years, are thinking of starting a family, and are financially stable, buying a house could be a sound investment.

If you think of buying your home primarily as a financial investment, and are willing to stay in the market for the long term, that is when the gains are typically most significant.

 

2. How much money do I need to buy a house?

In Canada, the standard minimum down payment for a high ratio (or insured) mortgage is 5% of the purchase price, up to $500 000, and more if the purchase price is higher.

There are lenders and websites that advertise “No Down Payment” options, but what these really mean is that you can borrow your minimum down payment, and you must qualify for that loan, too.

 

3. What is the difference being “pre-qualified” and “pre-approved?”

Pre-qualification is a first step on the road to pre-approval for a mortgage.

You may even be able to get pre-qualified online by answering a few simple questions about your finances. The purpose of this step is to give you an estimate of what you can afford, and what mortgage rates and options may be available to you.

Pre-approval is an in-depth analysis of your financial picture. It requires proof and documentation, including a full mortgage application, a credit review, tax returns, pay stubs, etc. Once the lender has verified your information, they will give you a written commitment for the amount they are willing to lend, subject to appraisal of your chosen property. The commitment includes an interest rate that is locked in for a certain period of time, regardless of any increases in market rates. If the rate goes down, though, you will get the lower rate.

Being pre-approved does not tie you to that lender. You are still free to shop around for a better mortgage, if you choose to.

 

4. Should I buy with 5% down?

This is another one of those questions that only you can answer. We can help you understand the risk of buying with the minimum down payment, but the rest is up to you.

Lenders require that home buyers have a down payment to ensure that they have some “skin in the game,” so to speak. That way, if times get tough, the temptation to just walk away from the property and let the lender repossess it should be less intense . . . or so the theory goes.

Five percent of $500 000 is $25,000, which is the equity you would have in your house. Most people who worked to save up $25,000 would not easily throw it away.

But what if the market suddenly nosedived – and there was a “correction” to the housing market? How would you feel if your own portion of the equity in the property got wiped out by market forces that could take years to recover? Would you be able to handle knowing that your mortgage was higher than the value of your property for a period of time? If your goals are long term, and you are prepared to weather this type of storm, buying a house with a lower down payment may be a good option for you.

The reality for many years now has been that values have continued to climb, and many buyers with low down payments have done very well for themselves. This is especially true if they have improved the home’s value with finishings or renovations.

 

5. Does my credit score matter?

Your credit score will affect the type of mortgage and the interest rate your lender can offer you. Before buying a house, it is wise to check your own score and take time to improve it, if you can.

 

6. Are there tax benefits to owning a house?

• In Canada, if you buy a qualifying home as a first time buyer, you can claim $5000 on your income tax return in the year of your purchase.
• In some cases, there may be benefits to using tax-free dollars from your own RSP savings toward your down payment.
• Canadians with disabilities may qualify for a tax credit if they buy a home that is more accessible or adapted to their needs.
• If your primary work space is in your home, you may be able to write off a part of your home expenses on your tax return.
• The most significant tax advantage is that the increase in the value of your primary residence is a non-taxed capital gain.

 

7. How can I get the best rate on a mortgage?

There are a few ways to do this.  Spending some time building an excellent credit rating is definitely the first step toward getting a good rate.  Banks like to work with clients who have a history of paying their bills consistently and on time.

If you have a good relationship with your bank, one option is to walk in and negotiate directly with them.  They may reward your loyalty with a good rate and a few product perks (waiving your appraisal fee and/or banking fees for a while).

Online shopping doesn’t stop at Amazon; you can shop for mortgages online yourself.  This tends to work best for buyers whose circumstances are “typical,” with a regular, steady, and predictable income.  It is more challenging for anyone who is self-employed or has unpredictable income or expenses.

Alternatively- and this is what we always recommend – you could seek the help of a mortgage broker.  Their job is to shop for the best mortgage for you, and the lender usually pays their fee.

 

8. Should I use government incentive programs?

Maybe.  There are always pros and cons to every offer, and these programs may not be the best option for you.  We strongly recommend (again) that you speak to an experienced mortgage broker who can explain how each program works and what your other options are.  For more information about using your RSP’s for your down payment under one incentive program, check out this article.  And for more information about the CMHC Shared Equity program, click here.

 

9. How much protection does a home inspection offer?

A home inspection can put your mind at ease.  The interior systems that the home inspector will check include electrical, plumbing, ventilation, heating, air conditioning, insulation, flooring,  walls, windows and doors.  He or she will do a visual inspection of the exterior, including the roof, chimneys, gutters, downspouts, windows, doors, wall surfaces,  foundation and grading.  Any deficiencies in these items will be noted, and some inspectors may estimate what the cost would be to remedy them.

An experienced inspector will look for signs of hidden problems, such as efflorescence on basement walls that may indicate water infiltration, dark spots that could be a sign of mould, or vermiculite materials that may contain asbestos.

The limitations of a regular home inspection include anything behind finished walls, or anything that is latent and concealed.  For example, during a dry spell, an inspector may not be able to tell if the basement will leak during a rain storm.  Since the inspection is visual, the inspector may not be able to tell what the life expectancy is of a given component – as long as it is currently in working order.  Problems with clay sewage pipes, lead water supply pipes, or environmental contamination are typically not discovered during a home inspection.

For rural properties, a separate inspection must usually be booked for the septic system, well, and wood-burning appliances.

Ask your chosen inspector for references, and read their policies carefully to be sure of what warranties they offer on their services.

 

A final word…

Since so many of these questions have to do with financing, we highly recommend working with a skilled mortgage broker who takes the time to explain the process, potential pitfalls, and personal details to you. Understanding the financial details goes a long way toward helping you make a confident decision.