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Home buying 101

Upgrade your financial knowledge

SO, YOU WANT TO BUY A HOME.

As excited as you may be at the prospect of having a place to call your own, there’s some financial groundwork to cover before you can make it happen.

Let’s break down the steps that will take you from dreaming about your future home to living in it.

DO YOUR RESEARCH

First things first. You should get a basic understanding of the home-buying process and all that goes into it.

"It’s important to educate yourself," says Ainsley Cunningham, founder of MoneySmart Manitoba. "Things like, ‘What is a mortgage? What is a term?’ "

An offshoot of the Manitoba Financial Services Agency, MoneySmart Manitoba aims to help Manitobans increase their financial knowledge. There’s a whole host of FAQs on its website, Cunningham says, where would-be homeowners can learn the key lingo ahead of their homebuying journey.

SET A BUDGET

You need to know where your money is going right now, before you add home expenses to the mix. Consider all your monthly bills and any existing debts, like car or student loans. Then, factor in the costs that come with buying a home.

The big one is the down payment. For a home that’s selling for less than $500,000, the minimum down payment is 5%. While that might not seem like a lot, consider that a down payment of less than 20% will have you on the hook for mortgage loan insurance. In some cases — if you’re self-employed, for example, or if you have a poor credit rating — you might have to buy mortgage insurance even if you do have a 20% down payment.

Saving such a large amount may be a challenge, but it’s far from impossible.

Cunningham suggests opening a special savings account, where you stash away what you can afford each month.

"It might mean you have to cut out going for dinner once or twice a month and putting that money into your savings account instead," she says.

Other upfront and closing costs include legal fees and set-up costs. These will vary depending on your situation, such as whether you need to hire movers or buy new appliances or furniture.

There are also ongoing costs, such as monthly utility bills, general maintenance costs, insurance and property taxes.

"You can choose not to buy furniture and sit on the old chair," says Cunningham. "But when you buy a new home and get your tax bill, that’s a bill that has to be paid."

FIGURE OUT WHAT YOU CAN AFFORD

When you get a mortgage through a bank, you’re required to pass a stress test — as in, how much stress your finances can withstand. The point of a stress test is to protect you from borrowing more money than you can afford.

It works by using a higher-than-average interest rate to calculate your mortgage amount, giving you extra wiggle room in case interest rates rise.

In Canada, the going stress-test rate is 5.25% or the rate offered by your lender plus 2% — whichever is higher.

For example, you might qualify for a $300,000 mortgage with a five-year fixed interest rate of 2.25%. That is, until the bank uses the stress-test rate of 5.25% and your mortgage amount drops down to $240,000.

The test may not be realistic based on your current circumstances, but it is a good gauge of what you can comfortably afford if the market shifts. If your lender — whether a credit union or other lender that isn’t federally regulated — doesn’t require a stress test, do it anyway, Cunningham advises.

"You don’t want to get in over your head," she says.

GET PRE-APPROVED

"Shop around for the best mortgage rate and get pre-approved," says Cunningham. "It saves you stress and time when you’re going to put an offer in."

It’s also appealing to the seller, especially if there are multiple offers on the table. Rather than waiting for a financing condition to be lifted, the seller knows you already have financing in place.

How do you know you’re getting the best rate? Some people choose to go with a mortgage broker, who shops around for you, while others will visit a few lending institutions to compare what they have to offer.

CHOOSE WISELY

Now for the fun part. With financing in place, you can start looking for a home that fits within your means. A realtor can help with the search, while a real estate lawyer will protect your interests as you close the deal.

"Buying a home is most likely the largest single purchase anyone will make," Cunningham says. "It’s not something you walk into lightly."

To learn more about the home-buying process and how to make it work financially, visit MoneySmartManitoba.ca.

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