Ranging from a-quarter-mill to over $1m, your house is probably the biggest purchase you will ever make. So, it stands to reason that a substantial amount of due diligence and consideration should be given when weighing the options of one house versus another, or a more expensive house versus a less expensive option.
This can be especially overwhelming when you’re looking to purchase your first house. For example, many prospective homebuyers get caught up in the idea that there is one perfect house. Only one. And when it comes up, you NEED to offer and buy it. Or that there are so few reasonable options, they feel like their hand is forced and they have to pay more for what they want.
Because of the size of the purchase, this is a dangerous game. Very rarely will a first-time buyer be able to buy a home in cash. This means extra dollars in house price likely translate heavily into equal portions of extra debt via a mortgage.
Debt is often necessary, but it doesn’t have to be something weighing you down for a full 25- or 30-year amortization period. As first-time buyers in 2018, we definitely didn’t want that. The idea of a mortgage for 25 years was not an option when we were searching. So, coming out of that experience, we have identified 8 different things to consider before you buy your first house. These steps ensure your costs stay reasonable and that you aren’t overloaded with debt or stress upon closing.
1. Know what you need. If you read nothing else in the post, read this point and take it to the bank: If you simply go out to open houses, or drag an agent from house to house without truly understanding what items make up your “Need” list, you will run into problems and you will waste their time and your own time.
Items on your “Need” list are non-negotiables. The house must have these things. Examples could be a roof (haha, but seriously…), open concept layout, a finished basement, a “big” yard, proximity to your child’s school, etc. When we were searching, we knew that we needed to have no commute over 45 minutes. We also wanted a well-maintained home. This meant structurally-sound, no major issues with the foundation or roof, no major cosmetic issues, no major appliance replacements or repairs needed in the short-term.
2. Know what you want. Once you have your needs outlined, the rest are negotiable, and you weigh the merits of these back and forth depending on the house because no house, I repeat – NO HOUSE – will have everything you want. Make a list of all of the things you would want in a home. When seeing homes, you will be able to tick off or ‘x’ off these wants so you can better weigh whether a house is for you or not.
Ignoring #1 and #2 are dangerous because they invite “lifestyle creep.” Think about this – you wanted a $350,000 house but didn’t know what you truly needed or wanted – even the $350,000 price tag was not listed as a ‘need’, so you looked at $375,000, then $400,000 and before you knew it, you were in love with $450,000 homes when $350,000 would have ticked all of the boxes… had you made lists and stuck with them. Now you have an extra $100,000 in debt to pay back at increasing interest rates.
3. Know what you can afford. Contact a mortgage broker or go to your bank and have them preapprove you for an interest rate and maximum amount. This will give you a ceiling amount and it is completely up to you whether or not you want to go right to that ceiling value.
We recommend that you do not.
“But why don’t I want to? They said I can afford it!”
Because banks are in the business of making money off of you. They understand that, based on your income metrics, you can borrow, say, $500,000 at the current rates, stress-tested up fractions of a point in case rates increase. But here’s the problem: your monthly fixed mortgage payment is over $2,600 and likely 35% of your take-home pay. That is a LOT. Then lump in taxes, utilities, and home insurance. Add in routine house maintenance items. And add in a sinking fund for a renovation or other large maintenance as needed. Even without the sinking fund, you could be over $3,500 and approaching 50% of your monthly net pay. That’s a bad spot to be in for potentially 25 years.
In our case, we could have used up the entirety of the $500,000 mortgage we were pre-approved for. We used $65,000. This is extremely small and often not indicative of a first-time buyer so maybe a $300,000 amount would suffice. Ultimately, be careful about that ceiling. It’s a false ceiling in many ways.
4. Know what you want for a down payment. This is very important. In Canada, the CMHC requires mortgage insurance if your down payment is less than 20% of the purchase price. Insurance can be as high as 6.5% of the mortgage value. This could add $32,500 in carrying costs to a $500,000 mortgage, which will translate into higher interest and higher monthly payments.
Be careful! Mortgage insurance also affects what you can afford! Lenders will often pass through the CMHC insurance costs to you because you’re the buyer and they don’t want your added risk. Consider the following:
If you have $50,000 down on a $550,000 house, you’ll want a $500,000 mortgage.
So, if you have mortgage insurance at 6.5%, that’s another $32,500 on to the mortgage for a total of $532,500. If you only have a pre-approval for $500,000, the ‘mortgage+insurance’ amount must equal no more than $500,000, so $532,500 will not work and you likely can no longer afford the house you want.
To avoid all of this added math and stress, it is important that your down payment be that 20%, minimum, and if you can’t make this level, budget in the mortgage insurance and take it into account when considering a house purchase. Sometimes it’s a necessary evil if you want into the market and the market is expensive. However, if you don’t have a down payment to nullify the CMHC insurance (or other insurance) requirement, it might be worthwhile to reconsider your purchase and rent/save a bit longer to save that 20% amount.
5. Line up an agent and lawyer you trust. Prior to commencing our search in this area, we found a real estate agent we thought reputable and knowledgeable, and with whom we have a great rapport at the beginning of the process. She ended up being a dud and we would rather see houses without her (open houses) than deal with her. Luckily, she referred us to someone else and we built a great rapport with that agent. Make sure you find this for yourself. If we had a rapport with our agent from the start, it would have made the process much easier. A tactic is to speak to a number of agents pre-househunt and decide on someone to be your go-to. Think of it like an interview process and you’re the hiring manager. If you have a great rapport with them, it will make your search and purchase easier.
Do the same with a lawyer as well, especially if you’re looking at a quick close. Real estate transactions less than 45 days can be difficult to schedule, especially in the middle of a hot transaction season. Find a lawyer you trust and ask what their general turnaround times are so you can schedule your close and smoothly follow a transaction through once your offer is accepted. The lawyer with whom we have our wills and POAs is also a solicitor, so we did our real estate transaction through her. If you’re new to an area or unsure what lawyer to work with, take the same approach as you would with a real estate agent.
6. Know how you plan to tackle the mortgage. Okay, picture yourself having completed the purchase; you have the house and you have the mortgage.
Before you offer on the house, make sure you have a plan to repay the mortgage. Are you going to ride out the full 25-year period? Are you paying it off quicker? How? Making greater monthly payments? Making large quarterly or annual lump sums to chip away the principal? Saving in a money market account for a MASSIVE lump sum near the end? Lay everything out and know what your approach is, then make sure your future mortgage has the proper allowances to accomplish this. For example, if you want to pay the principal off quicker, make sure your mortgage will allow annual lump-sum contributions to the principal and confirm the percentage. Commonly, it will be 15 or 20%. Budget that into your fixed expenses so you stay on target and write it all out. Having a written plan will increase the chances that your plan is successful.
7. Understand your timelines. When your offer is accepted, you’ll have to schedule a home inspection, finalize insurance, finalize the mortgage, schedule movers, ensure the lawyer can complete the documents in the required amount of time. There are a lot of moving pieces. Have a plan and walk through them. Despite working with a mortgage broker, it took MUCH longer than planned to finally obtain the mortgage and that caused a fair bit of stress. If we had done a better job of communicating with the broker and understanding their turnaround time, we could have saved ourselves all of that extra stress that we did not need.
Know when things need to happen and how long they will take. This will allow you to set a doable schedule to execute the transaction and move while mitigating much unnecessary stress from your life.
8. Lastly, and maybe most important, BE PATIENT! Your ideal house may not be on the market when you begin your search. That’s okay. Ours certainly was not. We started getting discouraged after a few months. We had seen 70+ houses and nothing was clicking with us. We actually started considering whether we would be renting for another year and started running the numbers on what that would look like. Shortly after, however, our house did come on the market and one month later, we had an offer accepted.
Look at as many houses as you want and take your time. It may take weeks or months, but your ideal house will make itself known. Once it does, if you’ve considered the other seven points above, you’ll be ready to act quickly and precisely.
Even though there are some things we’d change if we had to do it all again, we considered all of these steps and actioned them to the best of our knowledge.
We made “Need” and “Want” lists. We knew what our ceiling was and we didn’t go anywhere near it. We set a goal for a down payment and pushed to reach it before buying. We worked with an agent and lawyer with whom we were familiar and built great working rapports with them. We spoke with our mortgage broker to understand what our prepayment and lump sum repayment options were, and we set a plan to repay within the first 15 months of the mortgage.
A lot of this is communication, but it’s mostly planning and ongoing evaluation. If you don’t have a plan and you’re making it up as you go because you’re feeling the pressure to get into the market or relocate within the market, you can unknowingly stumble into some big financial issues.
Take your time. Consider options. Have a plan. Use these tactics to build your strategy, and then conquer.
~Calm ‘n Cents