I ended up buying my first home in a seller’s market when houses were often on the market for days rather than weeks. The house I bought had 3 offers on the first day and I ended up paying slightly less than the listing price. While I stayed well within my budget, I felt that I had settled for a place that wasn’t really suited for our needs. If I could go back in time, when first reviewing MLS listings, I would point out the following:
- Be realistic about how you can afford to spend. I am strongly against any mortgage term longer than 25 years, as the different in interest between and 25 and 30 year mortgage is astronomical! Moreover, if you took the 30 year mortgage, it would be several years before you started to really build up any equity in your home. Although you may expect to earn a lot more in future and plan on increasing your mortgage payments at that time, a higher income may not actually increase your cash flow. Perhaps your spouse may work less to help with the family, your other expenses may increase significantly (especially if you plan on having children) and the interest rates on your mortgage may also climb. As well, there are a lot of hidden costs (both over the first year and ongoing) to owning a home that renters may not know that. I like the idea of planning on having your home paid down 10 years before retirement in order to give you an extra 10 years to top up retirement savings with the money formerly used for mortgage payments or for a bit of wiggle room if you need or want to retire earlier. In many situations, families don’t put a lot into retirement savings until this point for many reasons, including paying down the mortgage and putting their children through school. Although I went to the other extreme and probably should have spent a little more to get a better-suited home, I am still thankful that I was never ‘house poor’ and scrambling each month to meet mortgage, property tax and the myriad other expenses that went with owning a place. In many cases, a smaller home may make more sense if it means the ability to take more vacations, pay down the mortgage significantly sooner and have less day-to-day worry about making ends meet.
- Don’t settle too much! I had planned on paying off my place within 10 years and was well on schedule before I got divorced. All the same, the house choice was a constant source of conflict and tension. I also had a commute of over an hour each way to work and was constantly exhausted trying to squeeze a life in between bus rides. I also have numerous friends that are constantly in renovation mode and nursing various home-repair related injuries. While “fixer uppers” can be great investments, they also require a lot of time, money and expertise to pay off. My suggestion is to be honest about your inclinations, abilities and free time. I also suggest taking into account estimated renovation costs in advance and increasing them by 10% (although 25% is probably safer). If you want to go for it and can afford the renos, great. If you’re not wired that way, then perhaps you should keep looking. I agree with my dad’s view that you should plan on staying in a home for at least 7 years. If you can’t see yourself lasting that long, then the costs associated with an additional move and realtor fees may eat up the savings in housing costs you enjoy in the short term.
- Consider life, disability and / or critical illness- insuring your house but DO NOT get bank creditor insurance to do so if possible. It would be a shame if sickness or death also meant having to leave your dream home, especially at a time when you are already vulnerable. Term life insurance on individual lives or a cheaper first-to-die policy is usually very inexpensive for most first time home-owners. Consider some time of disability or critical illness coverage as well. I strongly suggest private coverage rather than bank protection for reasons too numerous to mention. It is often cheaper to do so as well. As well, no matter how it appears, you do not have to take out bank-owned insurance as a condition of getting a mortgage – that is something called ‘tied selling’ and is illegal.
- Consider using money from your RRSP under the Home Buyers Plan to pay up to $25,000 per spouse for first-time buyers (or if you’ve not owned for about 5 years or longer.) Essentially, you borrow money from your RRSP to pay part of the down payment. You do have to pay yourself back over 15 years starting the second year after purchase but this can be a great way of getting enough of a deposit to avoid having to pay otherwise mandatory mortgage insurance. It is not for everyone and is better suited for people who have already put a lot into RRSPs. Only contributions made 90 days before the purchase are eligible for withdrawal, too. As well, be careful that you won’t be stretched financially when you have to repay the money (or be taxed on it) down the road and that you are still on track for retirement.