Buying a home is often the biggest decision you’ll ever make. It involves a series of challenging and complex steps and you simply can’t wait for it to be done. But first things first. Crunch the numbers to determine what kind of offer you’re in a position to make when you find a property you like. This is a key first step to kickstart this journey. Besides the asking price, you also need to budget for less-talked-about fees, some that are part of the deal or other unexpected expenses that crop up. Establishing an appropriate budget will help you steer clear of unpleasant surprises and successfully complete this major life project. Here are five budget-related points for your consideration.
How to assess your financial capacity?
Borrowing capacity
Before determining your borrowing capacity, it’s strongly recommended to figure out your income and expenses. There are several online tools to pick from that help you properly document it all. This budget should include your annual gross salary, monthly payments, lifestyle items, as well as your financial goals and savings. You’ll be able to see how much you can afford to spend on a home and look for listings that match your price range.
Assessing your borrowing capacity is a crucial step. You must respect certain ratios in order to be able to maintain a certain quality of life. According to the Canada Mortgage and Housing Corporation, it’s recommended to:
Allocate a maximum of 32% of your gross household income to housing-related expenses (mortgage payments, home insurance, utilities, etc.).
Allocate a maximum of 40% of your gross household income to the full repayment of your debts, including housing-related expenses (personal loans, mortgage financing, etc.).
There are various calculators to help properly assess your financial capacity without relying on financial advisors. Lastly, your Confia advisor or even your real estate broker can also support you and direct you to the appropriate resources.
Mortgage pre-approval
When you’re planning to buy a home, having a pre-approved mortgage can speed up the transaction in some cases. More specifically, having the backing of your financial institution can help the buying process run more smoothly, while highlighting your own rigorous approach. Be aware that some financial institutions, like Desjardins, offer pre-approved mortgages online. You can also meet with your mortgage advisor in person to find out the maximum value of a property you’re in a position to buy based on your borrowing capacity and available down payment.
New or existing home: the choice is yours
New home: a safer bet and fewer unknowns
There are several advantages to buying a new home. First and foremost, you may notice the transaction process isn’t as rushed as with an existing property. There is less competition in the new home market – each step is considered and respected. Another valid point to note is a new property is less likely to have wear and tear, weather and manufacturing defects. New properties also benefit from the new residential building guarantee plan for a maximum of five years. In addition, the legal warranty provided by the Civil Code of Quebec applies to all homeowners by default and is provided by the owner-builder. A guarantee plan for new residential buildings has been mandatory since 1999. It certifies that new construction meets the legal and contractual requirements of the Regulation respecting the guarantee plan for new residential buildings.
You benefit from significant energy efficiency (insulation, electricity, heating, etc.) since has been done in accordance with current building standards, using new and high-performance materials. You can also enjoy a location that checks off your boxes.
New homes are taxable. However, some government and municipal programs do support the owners of new builds, not to mention the availability of grants and tax credits. Under certain conditions, the buyers of new homes can benefit from a partial refund of GST (up to 36%) and QST (up to 50%).
Downsides of a new build
Part of the budget must be earmarked for landscaping and finishing the basement, plus the time and energy required to coordinate the construction site (trades, permits and documents required, modifications, adjustments, etc.). Lastly, expect a lot of noise and dust when a new neighbourhood of homes is under construction.
Existing property: hit the ground running
Benefits of an existing property
If you’re in the process of buying an existing property and depending on the current market, there may be room to negotiate the asking price. Another important point to note: the sale of a house that is not new is tax exempt.
Market value trends can be all over the map for properties that are already built. It’s therefore recommended to do business with a real estate broker and rely on them to provide the most up-to-date information. Make sure to ask for a report that lists all recently sold properties in a given area.
Most existing homes come with already landscaped grounds and are integral parts of neighbourhoods already served by well-established infrastructure and dotted with mature trees. Finally, certain types of renovation (particularly the kitchen, bathroom, high-performance windows), can really drive up a home’s resale value. Think of it as an investment that will pay off down the road when you sell.
Downsides of an existing property
There may be major renovations on the horizon after buying an existing home. No need to worry. RenoAssistance is a complete renovation service backed by a network of Verified Contractors who can carry out renovation work of all stripes. An existing house may be outdated and need some work. One of your most important decisions will be to find a reliable contractor to do the renovation work. It’s a smart idea to have a rainy day fund to cover repairs as well as unexpected expenses. This type of property involves some short-term interior and exterior maintenance. What's more, depending on the year of construction or the absence of previous renovations, it's not uncommon to see a loss of energy due to less effective insulation, for example.
Learn about five costs related to home buying
1. Fees to expect before signing on the dotted line
Property appraisal fees
Topping the list are those fees associated with a property appraisal. Most of the time, the financial institution will cover this expense. The resulting document is required to get a mortgage and determine a property’s market value. It ensures that buyers are paying a fair price for a house. The cost of a chartered appraiser’s report will vary based on the house and where it’s located.
Property inspection fees
It’s strongly recommended to have a house inspected by a certified specialist who will prepare a detailed report about the condition of a property. The cost of this pre-purchase inspection document varies by house type. It will reveal any defects and things not up to code as well as renovations or repairs to consider. To protect themselves, buyers usually include an pre-inspection condition in their offer to purchase.
2. Home financing
Down payment
When you take out a mortgage, you have to shell out an amount from your personal funds or another source. The minimum required down payment is 5% of a home’s value. Generally speaking, 20% is the recommended percentage. The higher the down payment, the lower your mortgage and interest costs will be. On the other hand, if your down payment is less than 20%, you'll need to take out mortgage loan insurance.
Your mortgage advisor can help you calculate how much you can afford to spend on a home. This amount can be taken from your savings account, your Tax-Free Savings Account for First-Time Home Buyers (TFSA), your Tax-Free Savings Account (TFSA) or your Registered Retirement Savings Plan (RRSP) under the Home Buyers' Plan (HBP).
Mortgage loan insurance
This insurance is based on a percentage of the mortgage amount and protects the lender in the event of a default. The cost is added to your mortgage payments. Offered by the Canada Mortgage and Housing Corportation (CMHC) or by Sagen, mortgage loan insurance is normally required when your down payment is less than 20% of your property’s recognized value. So you’ll pay a 9% tax on the mortgage insurance premium. This tax is paid at the time of purchase.
Mortgage prepayment penalty
This is the amount a borrower has to pay if they decide to partially or fully pay off a closed mortgage before it comes due. Specific situations can lead to a mortgage being broken, such as a divorce, birth or job change. Remember that penalties may apply. You can determine the approximate amount of this penalty by using a mortgage penalty calculator or ask a mortgage broker for more information.
3. Professional service fees
Notary fees
A notary of the buyer’s choosing is the professional who wraps up any real estate transaction. Fees charged to future homeowners cover the title search and preparation of various legal documents relating to the home purchase (deed of sale, land register entry, etc.). Costs vary greatly, depending on the specifics of each case. Note that the Chambre des notaires du Québec does not set the fees.
4. Property taxes
Welcome tax (transfer tax)
The property transfer tax, commonly called the welcome tax, is an amount payable to a municipality when there’s a transfer of ownership of a property located on its territory (e.g., a sale or exchange). This one-time tax must be paid by new owners soon after signing the deed of sale. Check to see if you’re eligible for a grant for first-time home buyers or families. The cost of this transfer tax is established by the municipality and based on criteria like property price. There are various ways to determine the amount to be paid. The amount payable is based on the tax base or, more precisely, on the higher of the following two amounts: sale price indicated in the deed of transfer or property’s market value at the time of transfer.
Property taxes
Property taxes consist of municipal and school taxes. These annual fees are included in a property purchase and are your responsibility when you officially become the owner. When you sign a notarized deed of sale, your notary will calculate the proportion of taxes that you must pay for the current year. If the seller has paid too much tax, you’ll have to reimburse them. A municipal assessment will be carried out to set the amounts. These revenue sources for cities vary according to certain criteria (property value, geographical location, etc.) and are used to finance public water and sewer services, as well as wastewater treatment. As for school taxes, they support school board activities such as school administration, building maintenance and part of student transportation.
Sales tax (GST and QST)
When sales taxes are applicable to the purchase of a building, the percentages are 9.975% for the Quebec sales tax (QST) and 5% for the goods and services tax (GST). In Quebec, the total tax rate is therefore 14.975% and is applied to the purchase price. Be aware that it’s possible to request a reimbursement of taxes under certain conditions. Finally, owners of a new or partially renovated home may be eligible for a partial reimbursement of GST and QST under certain conditions.
5. Other points to consider
Unexpected costs and getting set up
Once you take possession of a home, you now have to furnish it and decorate. Buying furniture or new appliances can put a big dent in your budget. Expenses can skyrocket for first-time buyers as they often have to start from scratch and do exterior landscaping work as well. Major renovations may become necessary for one reason or another and don’t come cheap. Lastly, redecorating or painting rooms to reflect current trends can also represent a significant investment.
Home insurance
This insurance is mandatory and you must have it in hand when going to see the notary. It protects your property and belongings in the event of a loss, theft or fire. There are two components to this insurance: personal property protection and liability insurance. The latter protects you and members of your household from legal responsibility in the event of a loss (injury others or damage to other people's property).
The home insurance premium is determined by a number of factors (value of your home, distance from a fire hydrant, etc.).
Condo fees
This monthly fee is added to the budget when you buy a condo. It is used to pay your share of building maintenance fees and build up an adequate contingency fund. In a divided co-ownership, there is condo syndicate insurance as well as each divided condo owner’s insurance. Insurance taken out by the condo syndicate must provide for the reconstruction of the building but must also cover its liability to third parties. The divided co-owner's insurance covers damage to property inside each owner’s private portion and also improvements made in the condo, in addition to civil liability.
Moving costs
Moving can be expensive. It’s highly recommended to use professionals to avoid damaging your belongings and accident risks. Expect to do the packing yourself when you hire a mover. Lastly, to save money, you could ask your network to pitch in (friends, family, neighbours, co-workers, etc.) and rent a moving van yourself.
Recurring services
According to Hydro-Québec, when it comes to the breakdown of a household’s electricity use, heating and cooling represent 54% of the annual electricity bill. Average consumption depends on different factors and varies according to the type of dwelling and distribution of electricity used. Added to this are monthly charges for telecommunications services (internet and mobile) and subscription television services.
A new lifestyle
Your pace or quality of life may change after buying a home. Whether or not you live close to services can have a direct impact on your wallet.
In conclusion
A lot of legwork is required to buy a home. There are many steps that must all be followed to ensure everything goes smoothly. There are considerable costs involved and other expenses can crop up along the way. That’s why it’s important to stick to your established budget.
Key steps to buying a home:
Assess your borrowing capacity.
Determine your down payment.
Ask for mortgage pre-approval.
Get your mortgage.
Anticipate additional costs.
Are you interested in buying a home and want to work with a real estate broker? Find a broker in your area. Confia has the support and tools you need to get your home-buying project across the finish line. Find out more about its personalized pairing service that connects you with a broker who will help you through every step of your project and beyond.
FAQ
How do you establish a home-buying budget?
It’s important to work within your budget reality and set clear goals. Meeting with a mortgage advisor can help you determine your savings strategy, identify start-up costs and establish a home-buying budget.
What are the monthly costs associated with owning a home?
The costs of owning a home include property taxes, utilities, condo fees (if applicable), home insurance, as well as phone, internet and television expenses. On top of those costs are occasional home maintenance and other unforeseen expenses.
What professional resources are out there to help with the home-buying process?
There are professionals to support you throughout this life project. They are experts in this field who are well positioned to help you plan and execute a real estate transaction. Financial or mortgage advisors, real estate brokers, notaries, building inspectors, appraisers, general or home insurance brokers can give you concrete support and answer whatever questions you have along the way.
Contact the Confia team when you’re ready to get started on your own home-buying project. They will provide the support you need during this pivotal time in your life.
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