First-Time Homebuyers Beware

Buying a house is one of the biggest purchases you will ever make. If you are buying for the first time, how can you avoid getting in over your head financially?

"If you are buying a home to live in over the long term, you shouldn't worry too much about whether the market is high or low," says Chartered Accountant Steven Dolman, a Partner with Mintz & Partners LLP in North York. "The real key is location. If you buy in a good location you will always be able to sell quickly if you need to, and the house is more likely to increase in value."

To determine how much you can afford to spend on your first home you should prepare a realistic budget that includes your income and all of your expenses. "It's a matter of cash flow," says Chartered Accountant Eli Palachi, a Senior Manager on the Assurance and Advisory team at Soberman LLP in Toronto. "Your budget should also include some type of ‘rainy day' savings to ensure that you can still pay the mortgage if there is a financial emergency."

Your down payment should be as high as possible. "Keep in mind that a down payment of less than 25 per cent requires Canada Mortgage and Housing Corporation insurance," says Dolman. "Paying zero or five per cent down and having all of your disposable income go toward a home purchase isn't advisable. But you should look at the discretionary items in your budget and stretch yourself as much as possible."

You may be able to borrow money from your Registered Retirement Savings Plan (RRSP) to help finance a down payment. You and your spouse are allowed to borrow a maximum of $20,000 from each of your RRSPs to help buy a house, providing neither of you have owned a house in the past five years. You do not have to pay tax on the money withdrawn and you don't have to pay interest on the money while it is outside your plan. But you are required to repay the borrowed amount to your RRSP, over 15 years, starting in the second year after the year of the withdrawal. You will be taxed on any required payments not made.

Before you start looking for a house, you should try to get pre-approved for a mortgage. Any chartered bank can process your application.

You may also want to use a mortgage broker. "A mortgage broker will find the best lender for the best rates and help you get pre-approval for the mortgage," advises Dolman. "A broker will also discuss your risk tolerance with you. If you are going to lose sleep if interest rates go up, you may want to lock into a fixed rate, so you will know what your costs are going to be over a certain period of time. It can give first-time buyers real peace of mind."

When working out your home-buying expenses, be sure to include hidden costs. "Some of these include the land transfer tax, property tax, legal fees, mortgage appraisal fees and home inspection fees," says Palachi.

Other costs include utilities, insurance and maintenance. "Be sure to include maintenance in your budget, so you can deal with things like furnace, roof and window repairs when they crop up," adds Dolman.

Before you buy your first house, be sure to consult a Chartered Accountant.

"A CA can help you project your cash flow to ensure you can meet the financial requirements of home ownership," says Palachi. "A CA can also help you decide whether it's a good idea to cash in your RRSPs for a down payment and whether you can even deduct certain interest costs."




Brought to you by the Institute of Chartered Accountants of Ontario.