Buying a home is a big financial decision — probably the biggest you’ll ever make.
To get you started on the right financial foot, here are some basic tips.
Be cost savvy. Make sure you assess all your costs:
• Monthly housing costs, including your mortgage principal payments plus interest, taxes, heating expenses and condominium fees (if applicable) should be no more than 32 per cent of your household’s gross monthly income.
• Monthly debt load, which includes your monthly housing costs plus all other loans or required monthly payments for your car, credit cards and so on should not exceed 40 per cent.
• Extra expenses like HST and other applicable provincial taxes, appraisal fees, property tax, survey fees, property insurance, land transfer tax, legal fees, service charges, inspection fees, mortgage loan insurance premium and application fee, moving costs and any immediate renovation or repair expenses can add significantly to the base cost of your new home.
• The term of the mortgage, the interest rate, the amortization period and payment frequency all have a direct impact on the size of your monthly payment. It is usually more financially beneficial to choose a shorter amortization period along with the flexibility to increase your overall payment frequency (from monthly to bi-weekly) or to make yearly lump sum payments without penalty.
• The down payment requirement to avoid added insurance costs is 20 per cent of the cost of your home — but the larger your down payment, the lower your monthly mortgage payment will be, and the greater the savings on total interest paid.
• If you are buying for the first time, you can take advantage of the Home Buyers Plan (HBP) which allows you to withdraw up to $25,000 from your RRSP without immediate tax to use as a down payment or for other home expenses. If there are joint applicants, each can withdraw $25,000 – but each withdrawal must be repaid in annual installments within 15 years to avoid tax on their full amount (and you’ll lose all the tax-deferred, compound growth potential on your withdrawals, which could put a significant dent in your retirement income).
Alternatively, you could help to fund your purchase with a Tax-Free Savings Plan (TFSA) withdrawal. There are no ‘first-time homebuyer’ restrictions, no dollar limits, no tax issues, and your RRSP stays intact. As well, you can re-contribute amounts withdrawn from the TFSA starting in the year following the year of withdrawal.
• Either you or your spouse/common law partner can claim (or share) the Home Buyers’ Tax Credit of $750 for first-time home buyers of a qualifying home without affecting your eligibility for an existing RRSP Home Buyers’ Plan.
It’s good to save money and you’ll likely want to pay off your mortgage as quickly as possible — but don’t do so at the risk of other priorities, like building retirement savings and maintaining your family’s financial stability. Your professional adviser can help keep every aspect of your ‘home’ and financial life in balance.
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc. His column appears every Wednesday.