What Buyers, and First-time Homeowners Want To Know
Buying your first home comes with a lot of questions and emotions. We’re talking about one heck of a large purchase here! I’m guessing it’s the largest purchase you’ve ever made – no wonder you’ve got a lot on your mind. I love client questions and aim to answer them all.
Some of the questions I hear the most have to do with words – words you assumed had a straightforward definition until all of sudden they seem like so much more! These are some of the terms you’ll hear bandied about while you research your options as a first-time homeowner in Ottawa.
Income: There are many types of income. You may work for a salary, receive a bonus, you may be on a commission structure, receive tips, or maybe you work for cash only. There is a mortgage for every situation but… If you don’t declare the cash income, chances are you will pay a higher interest rate for the privilege. Freelancers, don’t worry. From bloggers to graphic designers to mechanics – I’ve helped them all!
Credibility: How you treat your credit? How much credit you have? What type of credit do you have? And, most importantly, how do you utilize it?
Stability: Do you like to move jobs and houses? This plays a role in your financing. Even if you have a bit of a nomadic spirit, you’ll have to demonstrate that you’re a reliable and stable prospective mortgage client. Thankfully, we have extensive experience working with clients whose path to homeownership is anything but typical. We can help you put together the perfect application!
Collateral: What are you bringing to the table? This is your down payment. Where did it come from? Your mortgage lender will want to know that you haven’t taken on debt in order to post collateral for more debt.
How Much Can I Afford To Spend On A New House?
Believe it or not, there’s a formula that determines how much money you can afford to spend on a new home. Known as the “Total Debt Service Ratio” or TDS, it’s a measure of what you can afford based on how much debt you’d be carrying. This affordability is based on a percentage of your gross income. If you have excellent credit, that number is 44%. That means no more than 44% of your monthly, pre-tax income can be spent on your principal, the interest, your property tax, heat, and other debts.
Why is a heating bill included in that list? Chalk it up to #LifeInCanada! Virtually no one in Canada can handle winter without some kind of home heating. It’s a non-negotiable aspect of homeownership.
Soon-to-be homeowners often do their own calculations to figure out just how much they can afford to spend each month. While it’s an excellent idea to go over your budget and have a solid understanding of your monthly cash flow, at the end of the day, it comes down to percentages.
Do I Have To Pay The “Stress Test” Rate?
A “stress test” is something banks use to calculate how much you can afford to spend on a mortgage. Banks are required to vet your applicationusing a minimum rate that’s equal to the Bank of Canada’s five-year benchmark rate PLUS two percentage points. Those two points can look mighty scary on paper! But that’s not the rate you’re going to pay. It’s a theoretical rate that reassures the bank that even if the economy drastically changed you could still pay your bills.
Can I Pay 5% For My Down Payment Or Is That Just For First Time Buyers?
It’s a myth that only first-time buyers can use 5% of their total purchase price for their down payment. In fact, anyone who qualifies can use as little as 5% down, whether it’s their first house or their fifth.
What About Using Your RSP? That’s Just For First Time Buyers, Right?
Another myth! There are some timelines that must be observed and the original amount, known as a homebuyer’s loan against your RRSP, must be repaid, but you can use your RSP again.
Can I Count On Getting The Provincial Land Transfer Tax Credit Again?
Alas, this one isn’t so flexible. This is a one time credit, just for first-time homeowners. It’s pretty strict – if you and your spouse are buying a house and one of you was a previous homeowner, you won’t be eligible for the tax refund. But we can all dream, right?