While some first-time homebuyers may think the first step to home buying is house shopping itself, it’s better to take some preparatory steps before you get deep into the house hunt.
Here are some tips to help you be ready to “seize the moment” when you spot the perfect house.
Tip #1: Save that down payment
The first step in the home-buying process should be to ramp up savings. Remember, the more of a down payment you have, the less you’ll have to borrow. And, if you have at least a 20% down payment, you won’t have to pay mortgage default insurance premiums.*
Mortgage default insurance is required by the Government of Canada when home buyers are putting less than the 20% down payment typically needed to qualify for a conventional mortgage. This type of insurance compensates mortgage lenders for losses caused by a mortgage default.
By saving a good nest egg you’ll be better prepared for the unexpected expenses that come along with a new home, from legal fees and moving expenses to routine upkeep.
You can begin building a down payment by creating a budget and deciding how much you can save each month (Check out Scotiabank’s Money Finder Calculator). You’ll see that even $100 per month can quickly grow into a sizable amount over time.
Also consider other options like rounding up your purchases and putting aside your change each time you make a purchase.
A banking program like Scotiabank’s Bank the Rest® savings program automatically helps put money into your savings account every time you use your debit card to make purchases.
You may also explore other sources for a down payment, like the Home Buyers’ Plan, a program created by the federal government that allows first-time homebuyers to withdraw funds from their Registered Retirement Savings Plan (RRSP) to put towards the down payment on their first home.
Earlier this year, the federal government increased the amount that first-time home buyers can withdraw tax-free from their RRSP from $25,000 to $35,000. This limit had not been adjusted for 10 years. First-time home buyers purchasing a home jointly with a spouse or partner can now each withdraw up to $35,000 from their own RRSP under the Home Buyers’ Plan, for a total down payment of $70,000.
Tip #2: Know how much you can afford
Lenders typically calculate your ability to afford a mortgage based on traditional debt-to-income principles relating to your monthly housing costs, your family’s gross monthly income and all of your other debt obligations, including loans, credit cards, lease payments, etc.
You can get a good sense of the mortgage you could qualify for by trying out an online mortgage calculator, such as Scotiabank’s What Can I Afford? tool.
Tip #3: Get preapproved
Once you’ve set your savings plan and determined how much home you can afford, getting a preapproved mortgage is the next step. This is important because, if the perfect home comes along, you may need to act quickly, especially in a competitive housing market. With a preapproved mortgage, sellers know that you’re creditworthy, and you have the ability to make an offer right on the spot.
This article originally appeared in the Advice Matters newsletter.
*Some conditions might apply.
Legal Disclaimer: This article is provided for information purposes only. It is not to be relied upon as investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, and other investment factors are subject to change without notice and The Bank of Nova Scotia is not responsible to update this information. All third party sources are believed to be accurate and reliable as of the date of publication and The Bank of Nova Scotia does not guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific investment and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.