4 key financial considerations for first-time homebuyers

If you’re in the market for a home, assess your lifestyle needs against your property wants, as your needs may have changed due to the pandemic (Getty Images/10’000 Hours)

With Canadian home sales rebounding by 63 per cent month-over-month in June—up 150 per cent from the weakest April on record—the real estate market seems to be holding steady despite hindrances from COVID-19.

Despite this, the Canadian Mortgage and Housing Corporation (CMCH) predicts that home prices will plunge up to 18 per cent from their highest levels due to several factors including job loss, income decline and stalls on construction and, in response, it has tightened lending restrictions. 

Still, with the Bank of Canada keeping interest rates, down to hit historic lows, down, some Canadians are feeling optimistic about the real estate market. 

If you’re looking to buy a home at this time, here are some considerations.  

1) ADJUST YOUR EXPECTATIONS

In recent months, many households have spiraled into a place of financial uncertainty with job loss, business closures, income decline and a rise in borrowing.

Calling Canadians “among the world leaders” in household debt, the CMCH predicts the gross debt to GDP ratio will increase up to 130 per cent (up from 99 per cent pre-pandemic) by Q3 2020, and the debt to disposable income ratio will climb more than 200 per cent (from 176 per cent) through 2021.  

Keeping this mind—even with employment intact and a lifestyle relatively unscathed thus far—if you’re set on purchasing property, consider adjusting your expectations by weighing your needs against what you wish to own. Do you really need a single-detached home? If you’re working remotely long-term, is living outside the city an option? 

“Specifically look at how much you actually need,” says CPA Emanuel Mascoll, vice-president, finance at Achievers. “Maybe having a backyard doesn’t matter as much … and you can go to a condo and you’ll save some money that way.”

Adjusting your expectations to reflect the precariousness of this time will help you better assess what you can afford, while hopefully keeping some savings in place. 

2) ASSESS WHAT YOU CAN AFFORD

What you can afford should be based on your lifestyle, not the lure of record-low interest rates or the bank’s approval, advises Toronto mortgage agent James Robinson, of Dominion Lending Centres Mortgage Watch. An active savings strategy should also be factored in and not be compromised for the sake of owning a home. 

“You don’t want to stretch yourself to the limit in terms of affordability,” he says. “The banks use a formula that says you can spend this per cent of your income on housing, [while] your own individual lifestyle will dictate what you can actually afford.”

Robinson adds that, with historically low interest rates, buyers will see lower mortgage payments with a payment split of more than 50 per cent going towards principal over interest. The Bank of Canada, announced earlier in July, that it will keep the benchmark interest rate near zero, at 0.25 per cent, until 2023 or longer.

However, the CMHC warns that, if housing prices do decline, a first-time homebuyer, who purchases a home for $300,000 with five per cent down, could lose more than $45,000 on a $15,000 investment if prices fall 10 per cent (this calculation includes the mortgage insurance premium and home-selling costs if forced to do so due to unemployment). In contrast, putting 10 per cent down would protect against those significant losses. 

3) ALIGN YOUR BUDGET

A logical next step, says Mascoll, is establishing a budget that is used to determine a down payment, while accounting for your expenses and leaving some liquidity. When Mascoll bought his first condo back in 2009, this meant taking a conservative approach and using what he earned at the time, while factoring in his expenses and continuing to build up savings.  

“I made sure I had a realistic budget, something I could actually stick to,” he says. “It’s going down the list [of expenses] and thinking about all the cash flows that are going to come in.”  

This includes, Mascoll explains, conducting a risk assessment and finding balance between “increasing your equity and decreasing your cost of borrowing against liquidity.” He adds that contingency plans should also be identified and reflected in that budget in case a worst-case scenario, such as job loss or unexpected costs, arises.  

“There is no one right answer, but everyone should at least consider cash flow and liquidity, so that they are prepared if the worst occurs,” he says.  

Robinson adds that, particularly during uncertain times like these, it is best to maintain substantial savings, over relying upon credit to pull through.  

“The old standard was to have savings equal to six months of living expenses,” he says  “Given all of  of the uncertainty in the world right now, we should all be doing this as a minimum.”

4) PLAN FOR HIDDEN COSTS

There’s a lot to pay beyond what you put down, mortgage payments, and interest plus principal. 

• Closing costs include legal and administrative fees, ranging from 1.5 to 4 per cent of the purchase price, land transfer tax (depending on the province) and other potential costs such as title insurance.
• Upfront costs include property inspections, condominium fees and mortgage default insurance, where required.
• Less obvious expenses include other government charges, that vary across the country, imposed on new developments, including infrastructure, planning approval and zoning fees. A 2019 study by the Building Industry and Land Development Association (BILD) analyzed how these fees increase the cost of home ownership across six Canadian and six U.S. cities. Robinson recommends seeking legal advice to review these types of purchase agreements, as these fees can mount up.  “It’s important to understand what the costs are and negotiate some preset limits on what they’re going to be,” he says.
• Additional expenses, once a homeowner, include utility bills, property tax and insurance, not to mention those unexpected maintenance and repair costs. “Buying a house requires a fair amount of cash and, once you own it, there are always unexpected costs that pop up,” says Robinson. “I always advise homebuyers to budget for the thing that is going to break in the first six months that you were not expecting.” 

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