Purchasing a home: How to prepare financially

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Have you been dreaming for a long time about becoming a homeowner? Or maybe it’s a new dream since you’ve become dissatisfied with your apartment. Whatever the reason, it’s gratifying when you find a place that suits you. We get it, so we’ve put together essential information for helping you to prepare.

A few calculations first: Prepare a home-buying budget

Do you have a complete picture of your current finances, including your savings and debts and interest that you owe? If not, create this overview so that you can take a close look.

How much can you borrow?

Your borrowing capacity is one of the first things to check by getting a mortgage pre-approval.

Institutions that make mortgage loans will analyze your situation and credit report. Usually this will result in a mortgage loan pre-approval up to a certain amount. This is the maximum you can spend on a property.

Pre-approval also allows you to lock in an interest rate while you are looking. However, it’s not an obligation to lend.

At this stage, ensure that your income is sufficient for covering the mortgage payments and the upcoming expenses. Leave yourself some allowance for the unexpected.

A smart tip: Save the difference between the current cost of your rent and the future mortgage. This will show you how your budget will work when you start making mortgage payments. If your rent is $1,000 a month and your mortgage is $1,600, start putting aside $600 a month right now. You'll have more cash available either for expenses when you make the purchase or for a bigger down payment.

A home entails a series of other expenses:

Over time you may plant a few trees, hire someone to clear snow, replace the water heater. Do you have visions of your money frittering away? It’s not surprising. An overview and a realistic budget will allow you to be in control of the situation.

To round them out, you can get the support of a financial security advisor. They have the skills to help you prepare a balance sheet and do the necessary calculations for making your dream come true.

If it turns out your finances mean you need to rethink your purchase or postpone it a bit, don’t lose hope. A few months of additional savings will make it easier down the road.

Plan for a down payment

The down payment will reduce the amount you need to borrow when you become a homeowner. The minimum you must pay depends on the cost of your home or condo. For a property selling for $500,000 or less, you’ll need to pay at least five per cent of the sale price.

A bigger down payment has the advantage of reducing the mortgage and interest. Is it a challenge for you to raise this money? Check out government financial assistance programs to see if any apply to your situation:

  • Tax credits (when purchasing a first home, for example)
  • Under certain circumstances, the Home Buyers' Plan (HBP) allows you to use an RRSP for a down payment
  • A tax-free savings account for the purchase of a first home (FHSA)

You need to know: There are other programs or subsidies, maybe even in your town. Do your research. It pays!

Set up an emergency fund

When it comes to a home, expect the unexpected. Even if you have it inspected before purchase, be sure to have a financial safety net. Set up an emergency fund (This hyperlink will open in a new tab).

You’ll find there is more than one way to calculate the amount you should save in this fund. We won’t mention them all, but we’d suggest you accumulate at least three months’ salary to meet surprise expenses.

Does this amount sound unrealistic? Save gradually, putting aside a few dollars per week. Invest in a savings vehicle such as a TFSA, which allows you to access funds when you need them, without penalties.

Your emergency fund will save you from having to use credit if your heat pump gives out, for example. And it will help you sleep better: No small thing!

Learn about the various insurance offerings

When you request a mortgage loan, the financial institution will recommend insurance tied to the loan. Before agreeing, it’s best to look at your options.

Mortgage loan insurance (CMHC)

CMHC insurance, also called mortgage loan insurance, is insurance that protects your financial institution in the event you are incapable of making your payments, for example, if you should declare bankruptcy. Usually the lending institution requires mortgage loan insurance if your down payment is under 20% of the home purchase price. This insurance allows you to acquire the property with a minimum down payment of five percent. However, this insurance doesn’t protect you. It protects the lender.

Other institutions, such as Gentworth and Canada Guaranty offer mortgage loan insurance, A financial security advisor is well suited to help you make an informed decision.

Life and disability insurance protects you and your loved ones in the event of disability or death. You have two options:

  • Take out the insurance tied to a loan that is offered by your lender. The cost is added to the amount of the loan.
  • Shop around for insurance coverage from an insurance company. It will be completely separate from your loan.

Life and disability insurance tied to your loan

This protection is offered by your lending institution to cover the mortgage loan in the event of your disability or death. Even if this insurance protects you, it belongs to the lender. This means you don’t have the right or choice to personalize your coverage. The cost may increase when your mortgage is renewed or if you transfer your loan to another institution.

Be careful, some financial institutions will increase your interest rate to include the cost of insurance in your mortgage payments. Over a period to 20 or 25 years, this means thousands of extra dollars!

Life and disability insurance offered by an insurance company

This insurance allows your mortgage payments to be continued in the event of death, illness or disability. In the case of disability, the insurer will pay the desired amount for covering your standard of living. If you should die, the death benefit goes directly to your beneficiaries, regardless of the balance of the loan. This means more flexibility and freedom since  your beneficiary may use the money as desired.

  • As your mortgage is paid down, the value of your lender’s coverage decreases, although not the cost. Coverage under life and disability insurance remains the same over time. And the cost is fixed and guaranteed for the whole contract term.
  • Insurance with the lending institution ends if you change institutions. But a term life insurance policy goes with you, since it belongs to you.

Beneva offers a free webinar so you can find out more.

Of course, once the home is purchased, you’ll need home insurance (and don’t forget: this is right up our alley!) Find out how can I save on this essential coverage to keep the most money possible in your own pockets.

See yourself in the future

Have you taken enough time to dream about your planned purchase? To choose the best home for you (or the perfect condo), think about what kind of property and the features that will suit you best. Yes, you’ll probably have to make compromises, except on the features that are non-negotiable. So it’s best to be clear before moving in!

The more you flesh out your dream home and what you can afford, the faster you’ll have the keys to the door of your dream home.