The benchmark price for a detached family home in Mission has gone up a remarkable 124 percent in the last decade. Many first-time homebuyers have faced difficulty breaking into the current market. Some don’t even know where to begin. With proper planning and preparation, you can confidently start your search for your forever home. Here are tips and strategies on how to afford your first home.
Know the Cost of Purchasing Real Estate
Buying real estate is usually the biggest investment people make. Most homebuyers need a loan to finance their property purchase. This is also known as a mortgage. You pay back the mortgage in monthly installments. First, you pay the accrued interest, then the remainder goes toward the principal balance.
To secure a mortgage, you must first pay a down payment. If your purchase is under $1 million, you must contribute a minimum of 5 percent toward the first $500,000. Then, you pay 10 percent on the remainder. If your purchase is over $1 million, you must contribute a minimum 20 percent down payment.
But the costs don’t stop there. A homebuyer must also budget 3 to 5 percent for closing costs. These cover property transfer tax, lawyer fees, title insurance, and home inspection.
For example, if you consider a property that’s $625,000, you need a down payment of $31,250. You also need an additional $18,750 – $31,250 for closing costs. As a first-time buyer, your closing costs will hopefully be lower. Some first-time buyers can be exempt from property transfer tax. (I will explain how later on.) However, prepare for every situation. Speak with your financial advisor or mortgage professional. Discuss your financial goals. Ask how much money you should have for closing costs before buying a property.
Have a Plan to Buy Your First Home
Now you have an idea of what you need to buy a home. It’s time to start saving.
If you haven’t already, speak to your financial advisor. Discuss your financial goals and saving strategies. Get more information on how to afford your first home. Creating a budget, eliminating unnecessary expenses, and setting money aside each month are great ways to start saving. There are also common ways to help your savings grow faster.
- High-Interest Savings Account: Most financial institutions offer this. It pays above-average interest rates. These accounts tend to be restrictive. They are for long-term saving. They often charge high transaction fees for withdrawals.
- Tax-Free Savings Account (TFSA): A TFSA pays lower interest rates than a high-interest savings account. However, your investment is protected from taxes. You can contribute up to $5,500 per year of non-taxable savings. You pay no interest on your investment’s growth. You also don’t pay taxes when you withdraw money after reaching your goal. This is an excellent way to safely save for a down payment.
- Registered Retirement Savings Plan (RRSP): People primarily use an RRSP to save for retirement. It offers a tax-free savings account until you withdraw money. If you already have an RRSP and are a first-time homebuyer, you can withdraw up to $35,000 tax-free. This goes toward your down payment with the Home Buyers’ Plan. If your spouse also has an RRSP and is a first-time homebuyer, they could withdraw another $35,000. That’s a combined $70,000 for your down payment. Since this is a loan, you must repay any money withdrawn with the Home Buyers’ Plan within 15 years. Otherwise, your withdrawal becomes income and you will be taxed on it.
First-Time Home Buyer Incentive
The First-Time Home Buyer Incentive is a Government of Canada program. It allows you to borrow 5 to 10 percent of a home’s purchase price. After you sell your property, or after 25 years if you haven’t moved, you must pay back the same percentage you borrowed of the home’s current value.
For example, you borrowed 5 percent, or $25,000, for your $500,000 home. If you sell it, you must pay back that 5 percent. If your property depreciated and is now worth only $450,000, you only pay back $22,500 (5 percent of the current value). However, if your home appreciates to $550,000, you must repay $27,500 (5 percent of the current value). Speak to your financial advisor to learn more about this incentive and if it is right for you.
First-Time Home Buyer Program (BC)
The First-Time Home Buyer Program is a Government of British Columbia initiative. It gives you a reduction or exemption from property transfer tax. This applies when you purchase your first home. To qualify for a full exemption, you must be a Canadian citizen. You must have lived in British Columbia for at least one year before registering your property. You must have filed at least two tax returns in the last six years. Also, you cannot have ever owned property that was your main residence anywhere in the world. The property receiving the exemption must be your principal residence. It must have a market value of $500,000 or less. It must also be smaller than 1.24 acres.
You can qualify for a partial exemption. This applies if your property has a market value of $525,000 or less. It also applies if it is larger than 1.24 acres and has another building on the property besides the main residence. Learn more about the First-Time Home Buyer Program and how to apply here: https://www2.gov.bc.ca/gov/content/taxes/property-taxes/property-transfer-tax/exemptions/first-time-home-buyers
What Type of Home is Best to Buy?
All property types have advantages and disadvantages. Consider what you can afford, your lifestyle, and how much upkeep you’re prepared to do.
- Condos: Condos are a great option for first-time homeowners. They offer an affordable and hands-off approach to ownership. A strata corporation often manages condos. It charges a monthly strata fee for maintenance and services. These can include building maintenance, landscaping, snow removal, and garbage removal. Fees and services vary by building. For a first-time homeowner, it can be comforting knowing you are not responsible for every aspect of your property.
- Townhomes: Townhomes are another excellent starter home. They suit young families needing more space than a condo. Townhomes are more affordable than traditional detached homes. They give homeowners more control over their property than a condo. You often own the land your townhome sits on. Like condos, a strata corporation usually manages townhomes. It charges a monthly fee for maintenance and services like snow and garbage removal.
- Detached Homes: A detached home is the most expensive and sought-after property type in the Fraser Valley now. A detached home offers the most space and independence. You will be fully in control of the property you own. However, there is no strata corporation safety net. You will be fully responsible for your property’s maintenance.
While buying your first home may seem daunting, it is one of the best investments. If you have any more questions or want to discuss how to afford your first home, contact me directly at 604 302 0177. I have helped countless clients break into this competitive market, and I would love to help you, too!
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