How much can you afford and do you need to save? How do you do it?
When it comes to saving to buy your first home, there are four things you need to consider before anything else:
How Much Home Can I Realistically Afford?
Identifying how much you can truly afford starts with a look at your current monthly income and expenses. To qualify for a loan most lenders will require that your monthly housing costs, (mortgage payments, property taxes, condo fees and heating expenses), are no more than 32 per cent of your monthly income before tax (gross income). They also want to ensure that your total monthly debt payments including car loans and credit card payments, are not more than 44 per cent of your monthly income before tax.
As well as qualifying for the mortgage loan at the rate offered by the lender, if you are putting less than 20 per cent down and are therefore applying for a high-ratio mortgage, you will also need to qualify at the Bank of Canada’s five-year fixed posted mortgage rate which is usually higher. In that case your lender will also require that housing costs are no more than 39 per cent of your monthly income.
This extra “stress test” is the Government of Canada’s response to the sharp increase in house prices in certain Canadian cities, and concerns that currently low mortgage rates will eventually rise. All home buyers applying for a high-ratio loan, and therefore requiring mortgage insurance, or those required by their lender to get mortgage insurance for other reasons, will need to pass the “stress test”. It assures mortgage lenders that the home buyer would still be able to afford the mortgage if rates rise.
How Much Do I Need To Save For A Down Payment On A Home?
To buy a home in Canada you must be able to hand over at least five per cent of the purchase price (10 per cent for the portion of the house price above $500,000) from your own money. If your down payment is less than 20 per cent of the purchase price you’ll need to pay for high-ratio mortgage insurance as well. Some home buyers with 20 per cent or more to put down may also be required by the lender to get mortgage insurance based on the property value and their financial stability. In this case, the lender might not pass on the cost of the insurance to the borrower.
So how much do you need to save in order to purchase that dream home?
Say the average price for the type of home you want to buy in your area is $200,000. You will need to have saved $10,000 as a down payment, plus between $1,000 and $5,500 for the mortgage insurance.
If the average price is $550,000, you will need to have saved $30,000 - $25,000 for the first $500,000 at five per cent and $5,000 for the $50,000 over $500,000 at 10 per cent - as a down payment. Plus you’ll need to find between $2,750 and $15,125 for the mortgage insurance. At 20 per cent the down payment amount rises to $110,000.
How Do You Save for a Mortgage?
Once you know roughly how much you need to save for your down payment the hard work starts! The good news is that there are lots of ways to save.
Watch this 2-minute video for ideas on how to save for a mortgage.
What other fees and costs will you have to pay on closing day?
When you are saving to buy a home, the down payment tends to loom large. But there are a number of other up-front costs that you will also have to be prepared to pay out-of-pocket when the purchase goes through. We have listed some of the fees and costs below, but you should check with your home buying team
regarding all of the amounts due. Closing costs are estimated to be 1.5 per cent of the purchase price/value of the mortgage. Remember to add these costs to your home saving goals:
- Appraisal fee: If you want to ensure you aren’t paying more than the home is worth, or if required by the lender, an independent appraisal will give you an estimated value for the home. The cost for an appraisal ranges from approximately $300 to $400.
- Mortgage insurance premium: If you plan to put less than 20 per cent down on your home you will need to purchase mortgage insurance. Some lenders ask you to pay this amount in full when the purchase closes, or you can add it to the amount of your mortgage. Premiums usually range from 0.5 per cent to 2.75 per cent of the mortgage amount.
- Mortgage brokerage fee: If you use a mortgage broker to find you a lender, you may need to pay that person at closing – check the broker agreement and disclosure form before you sign. Fees for mortgage brokers range from 0.5 per cent to 2 per cent of mortgage loan amount. Negotiate, if you have to.
- Legal fees: All legal fees must be paid on closing day. Average fees range from $800 to $1,200 for the purchase of a $200,000 property depending on what payments your lawyer made for you upfront such as for title searches.
- Home inspection fee: Costs for home inspections vary depending on the age, size, type and condition of the home and start at approximately $350.
- Land Transfer Tax: In Ontario and in certain Ontario cities such as Toronto you are required to pay a percentage of the property’s purchase price to the province and the municipality, but there are some exemptions for first time home buyers. The Ontario land transfer tax alone on a property worth $400,000 is $4,475. Effective January 1, 2017, families buying their first home will receive an Ontario land transfer tax refund of up to $4,000 on an eligible property.
- Property tax repayments: If the seller has already paid property tax on the home for the year, you will have to repay them on closing day.
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