Home Buying 101: 6 Things to Consider Before Buying Your First Property
Posted By: Rachel Kavanagh
August 14, 2023
When you’re shopping for Markham homes for sale, it can be an overwhelming prospect the first time around. Instead of jumping in feet first, it helps to take a step back and rethink your approach.
In this article, we’ll look at six things you should consider before buying your first property to ensure it is the right decision for you.
1 Your income
It might feel like the right time to buy a home, but are your finances telling you something different? Buying a home is expensive and continues to present financial strains if your budget and income can’t cover a mortgage and all the expenses that come with home ownership.
Therefore, you need to assess your income and monthly expenses to determine whether you can afford to buy a home.
First, tally up all your expenses in detail. Then, look at your net income (after taxes and deductions). Subtract your expenses from your income and see where you come out. If you break even or see a deficit, you are not ready for home ownership.
2 Your down payment
You’ll need a down payment of at least 5% for a home costing up to $500,000. So, unless you’re shopping for Markham homes for sale under $500,000, you’ll need significant savings to cover your down payment. The government requires the following down payments:
- 5% for homes up to $500,000
- 5% for the first $500,000, and 10% for anything above $500,000 for homes up to $999,999
- 20% for homes over $1 million
With the current prices for homes for sale in Markham, you will likely need at least $65,000 for the average 1-bedroom condo, which costs about $650,000.
3 Your credit score
You will be less likely to qualify for a mortgage if you are in debt, lack a credit history, or have poor credit. We always advise our clients to shed their debt and clean up their credit scores before shopping for homes for sale in Markham. This increases the odds of qualifying for a mortgage.
If you don’t have a credit history, apply for a credit card, make monthly purchases, and pay the balance immediately to help build your credit score.
4 The mortgage stress test
To qualify for a mortgage, you need to pass the stress test. You’ll need to prove you can afford not just the mortgage interest rate that the bank offers you now but an increase of 2% or a rate of 5.45%, whichever is higher. Considering current interest rates, the lowest rates available are about 5% for a closed high-ratio 5-year fixed mortgage.
That means you need to afford a 7% interest rate, which is relatively high. For example, if you put down $47,500 on a $650,000 home, your mortgage would be $602,500, and at 7% for a five-year fixed mortgage amortized over 25 years, your payments would be $4,220 each month or $50,640 a year.
5 Mortgage pre-approval
For peace of mind, we always advise our clients to apply for mortgage pre-approval before shopping for homes for sale in Markham. There are a few reasons we do this:
- You will know if you qualify for a mortgage.
- You will be given a maximum number that the bank is willing to lend you to set your budget.
- You will lock into an interest rate for about two months, and should rates drop by the time you put in an offer, you are given the lowest interest rate.
If you don’t qualify, you save yourself a lot of woes. However, if you are eligible, you can access the best interest rate and set a firm budget to help narrow your house search.
6 Government programs
We can explain the government programs available to help ease the financial burden of buying your first home. These programs include:
First-Time Home Buyer Incentive
As a first-time buyer, you are eligible for a shared equity mortgage with the government. This program, known as the first time home buyer assistance program, helps increase your down payment amount to reduce your mortgage payments. You can apply as long as you have the minimum down payment for an insured mortgage and meet the criteria.
If approved, the government adds 5% or 10% to your down payment. You repay 5% or 10% of the property’s market value when you sell, or at the 25-year mark, whichever comes first. Using our $650,000 condo as an example, you would qualify for up to $65,000 more to add to your down payment, which at 5% interest would reduce your monthly payments from $3,504 to $3,126.
Home Buyers’ Amount
You can enjoy up to $750 of income tax relief for qualifying homes purchased during the tax year using this $5,000 non-refundable tax credit.
Home Buyers’ Plan (HBP)
If you have an RRSP, you can withdraw up to $35,000 in a calendar year to buy or build a qualifying principal home.
GST/HST New Housing Rebate
If you buy a newly built home, you might qualify for a rebate for part of the GST or HST. This rebate can also sometimes apply to GST spent on a home where you invest substantial renovations or additions and for a non-residential property you converted into a home.
Weigh the Pros and Cons of Home Ownership
If you go through all the above considerations and find that you can afford your first home, you should weigh the pros and cons of home ownership to help you decide if it is right for you.
- You own your home and can decorate and renovate it to your liking.
- You build equity with each mortgage payment, as opposed to rent that goes to the landlord.
- You can access equity via a Home Equity Loan to help pay off debt, investments, home renovations, cover emergency expenses, etc.
- You can create a basement or loft rental apartment to help pay off your mortgage or generate income.
- You are responsible for all costs to maintain and repair your home.
- You might have added expenses compared to your current rental home, such as water, hydro, utilities, etc., on top of home insurance and property taxes.
- A risk of rising interest rates could cause you to default on your mortgage.
Speak to a Real Estate Agent
Once you decide that you want to start shopping for homes for sale in Markham, you should speak to a real estate agent who knows the area. We are here to:
- Answer your questions.
- Help you understand mortgages.
- Introduce you to first-time buyer programs.
- Talk about your finances.
- Recommend the best areas in Markham suited to your budget.
- Narrow down your search.
- Walk you through the homes you wish to see.
- Protect your interests.
- Negotiate on your behalf for a fair deal and the best possible price.
- Alleviate stress and make your buying experience positive.
At Benczik Kavanagh Real Estate Team, we offer a combined 94 years of experience and serve home buyers exploring the real estate market in Markham. To start the buying process, call 905-477-7766 or contact us here.