Daren Givoque, CDFA, Financial Advisor
O’Farrell Wealth & Estate Planning | Assante Capital Management Ltd.
Buying a house is an important milestone but one that is becoming increasingly difficult in today’s market. Here are 5 things you should be aware of before you take the leap into home ownership.
1. Understand GDS and TDS
Your Gross Debt Service (GDS) ratio and your Total Debt Service (TDS) ratio are the two numbers that lenders will use to qualify you for a mortgage.
Your GDS ratio is the percentage of your income needed to pay all your monthly housing costs, including principal, interest, taxes and heat. Fifty per cent of condo fees are also included if applicable. Typically, your GDS ratio needs to be bellow 39 per cent in order to secure a mortgage for a new home.
You TDS ratio is the percentage of your income needed to cover all your debts. This includes car payments, credit cards, loans and alimony. Most lenders will consider you for a mortgage if your TDS ratio is 44 per cent or lower.
Because GDS and TDS are so important for being able to secure a mortgage having a good idea of your financial situation before you go to a bank or private lender is ideal says Tina Murray (Mortgage Broker from Dominion Lending). Pay down debts and make sure your credit is in good shape to improve your chances of qualifying for the mortgage you need.
2. Don’t be afraid to use mortgage loan insurance
The down payment needed to buy a house in Ontario is 20 per cent. This means that if you are trying to buy a house that is $400,000 then you would need to save $80,000 for the down payment. A challenge for even the most fiscally responsible. If this is not feasible you have the option of putting down as little as 5 per cent of the cost of the house IF you insure the other 15 per cent.
The Canada Mortgage Housing Corporation (CMHC) and Sagen are two organizations who sell insurance products that will allow you to insure the portion of the down payment that you don’t have ready to go. Generally, the premium will be around 3.5 per cent. Some people say it is better to wait until you can afford the entire down payment before you buy to eliminate the premium and interest payments that can add up over the years. That being said, if you wait to buy a house it is likely that you will be paying more in the long run anyway as housing prices tend to go up. As a generally rule it is better to become a homeowner sooner to help grow your net worth and improve your financial security into the future.
3. Have a budget
The last thing you want is to be house poor. This happens to people who buy a house that they can afford on paper but haven’t taken into consideration extra costs like property taxes, legal fees, moving costs and house insurance. Therefore, it is extremely important to have a budget that takes into account all the costs associated with buying and maintaining the home. It is also important to include other living expenses that don’t factor in to your GDS or TDS in your budget like food and entertainment. The more accurate you can be with projecting your expenses in your new home the better. It is a good idea to have $5,000 to $10,000 set aside for extras so you don’t end up with unforeseen costs that you can’t pay.
4. Accept help
Housing costs in Ontario are at an all time high with the average home costing around $600,000. Veteran real estate agent Geraldine Taylor says the issue is that housing costs have skyrocketed while the average income has increased at a much slower rate. This makes it particularly hard for young people to break into the housing market and many are turning to their parents to help. Taylor says that 80 per cent young homebuyers are depending on their parents to help them make their first purchase. Buying a house is an investment in your future so don’t shy away from help if it is available to you.
5. Buy as much house as you can afford
It is important to plan for the future when purchasing your first home. As mentioned, you don’t want to become house poor but ensuring that the house you buy will continue to fit your needs down the road will ensure that you don’t have to go through the homebuying process again in just a few years. It’s expensive to buy a or sell a house with paying a real estate agent, legal fees and other moving costs. It makes a lot more sense to buy a home that you can grow into rather than one that you will need to turn on a dime and sell.
Buying a house is a great investment and one that will contribute to your financial security as you age. It has been shown that people that get into the housing market early typically retire more comfortably than those who wait until later in life. Make sure you surround yourself with the proper experts (real estate agent, financial advisor mortgage broker etc.) to make sure you are well equipped to journey into the world of home ownership.
Feel free to contact us if you have questions.