In the last decade, the benchmark price for a detached family home in Mission has gone up a remarkable 124 percent. Unsurprisingly, many first-time homebuyers have faced difficulty breaking into the current market, and some don’t even know where to begin. With the right planning and preparation, you can start your search for your forever home with confidence. Here I will share with you some tips and strategies on how to afford your first home.
Know the Cost of Purchasing Real Estate
Purchasing real estate is usually the biggest investment a person will make in their lifetime. For the majority of homebuyers, this means they will need to take out a loan to finance their property purchase, also known as a mortgage. The mortgage is then paid back in monthly installments, first paying the accrued interest and then the remainder put toward the principal balance. In order to secure a mortgage, you must first pay a down payment toward your property purchase. If your purchase is under $1 million, you are required to contribute a minimum of 5 percent toward the first $500,000 of your purchase and 10 percent on the remainder. If your purchase is over $1 million, you must contribute a minimum 20 percent down payment. And it doesn’t stop there. A home buyer must also budget 3 to 5 percent for closing costs, which covers property transfer tax, lawyer fees, title insurance and home inspection.
This means if you’re looking at a property that’s $625,000, you must have a downpayment of $31,250 and an additional $18,750 – $31,250 for closing costs. As a first-time buyer your closing costs will hopefully tip toward the lower range as some first-time buyers can be exempt from the property transfer tax (I will explain how later on), but it’s important to be prepared for every situation. I suggest speaking with your financial advisor or mortgage professional about your financial goals and how much money you should have on hand for closing costs before you purchase a property.
Have a Plan to Buy Your First Home
Now that you have an idea of what you will need to purchase a home, it’s time to start saving.
If you haven’t already, I strongly suggest speaking to your financial advisor to discuss your financial goals, strategies for saving, and for more information on how to afford your first home. Creating a budget, eliminating unnecessary expenses, and setting money aside each month is a great way to get started saving, but there are some common ways to help your savings grow faster.
- High-Interest Savings Account: A high-interest savings account is offered by most financial institutions, and it is a savings account that pays above-average interest rates. These accounts tend to be restrictive as they are meant for long-term saving, and often charge high transaction fees for money withdrawn.
- Tax-Free Savings Account (TFSA): A TFSA pays lower interest rates than a high-interest savings account, but the benefit is that your investment is protected from taxes. You can contribute up to $5,500 per year of non-taxable savings and not pay interest on your investment’s growth. You also do not have to pay taxes when you withdraw your money once you have met your savings goal. This is an excellent way to safely save your money for a down payment.
- Registered Retirement Savings Plan (RRSP): An RRSP is primarily used to save for retirement, offering a savings account that is tax-free until you withdraw your money. If you already have an RRSP and are a first-time homebuyer, you can withdraw up to $35,000 tax-free to put toward your down payment with the Home Buyers’ Plan. If your spouse also has an RRSP and is a first-time homebuyer, they could also withdraw $35,000 for a combined $70,000 to put toward your down payment. Because this is considered a loan, any money you withdraw with the Home Buyers’ Plan must be repaid within 15 years, or your withdrawal will be considered as income and you will be taxed on it.
First-Time Home Buyer Incentive
The First-Time Home Buyer Incentive is a program offered by the Government of Canada that allows you to borrow 5 to 10 percent of the purchase price of a home. After you sell your property, or after 25 years if you have not moved, you must pay back the same percentage you borrowed of the current value of your home.
For example, if you borrowed 5 percent, or $25,000, for the purchase of your $500,000 home, and decide to sell your home, you must pay back the 5 percent that you borrowed. If your property depreciated in value and is now only worth $450,000, you only have to pay back $22,500, which is 5 percent of your current property value. If, however, the value of your home goes up when you decide to sell or the 25-year window has closed, you must still pay back 5 percent of the current value of your home, which will be more than the initial loan you received. For example, if your home appreciates in value to $550,000, you must repay $27,500, or 5 percent of your current property value. Speak to your financial advisor to learn more about the First-Time Home Buyer Incentive and if it is right for you.
First-Time Home Buyer Program
The First-Time Home Buyer Program is a program offered by the Government of British Columbia that gives you a reduction of or exemption from the property transfer tax associated with purchasing your first home. In order to qualify for a full exemption, you must be a Canadian citizen that has lived in British Columbia for at least one year prior to registering your property. You must have filed at least two tax returns in the last six years, and you cannot have ever owned property that was your main residence anywhere in the world. The property receiving the property tax exemption must be your principal residence, have a market value of $500,000 or less, and be smaller than 1.24 acres.
You can qualify for a partial exemption if your property has a market value of $525,000 or less, is larger than 1.24 acres, and has another building on the property aside from 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?
There are advantages to disadvantages to all property types, so you should consider what you can afford, your lifestyle, and how much upkeep you’re prepared to do when considering different properties.
- Condos: Condos are a great option for first-time homeowners as it offers an affordable and hands-off approach to ownership. Condos are often managed by a strata corporation that charges a monthly strata fee for maintenance and services that can include building maintenance, landscaping, snow and garbage removal, among other things. Strata fees and services will vary from building to 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, especially for young families looking for a little more space than a condo can provide. Townhomes are more affordable than traditional detached homes and give the homeowner more dominion over their property than a condo, as you often will own the land your townhome is on. Like condos, townhomes are usually managed by a strata corporation, charging 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 right now. A detached home offers the most space and independence as you will be fully in control of the property you own. There is no safety net of a strata corporation, though, and you will be fully responsible for the maintenance of your property.
While the prospect of purchasing your first home can seem daunting, it is absolutely one of the best investments you can make in your life. If you have any more questions or would like to discuss how to afford your first home, feel free to 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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