Usually, one would have to say that prose borrowed, is re-printed with permission, but at the end of the day I'm giving promotion to a good publication about house buying. This bit below has already appeared in The Globe & Mail.
By the way, the story refers to the controversial Toronto tax on home buying. That doesn't exist in Woodstock, but land transfer tax is certainly a factor and is essentially 1% of purchase price.
In buying a new home, the main item buyers seem to forget is that their brand new house (usually) does not curtains, blinds, etc.
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In this excerpt from the MoneySense Guide to Buying and Selling Your Home, a book in the "Best of MoneySense" series, writer Rachel Mendleson tackles the task of figuring out what you can really afford when buying a home.
What can you afford? When Jennifer Ballard and Mike Tusche started hunting for their first home–a two-bedroom condominium in downtown Toronto–they knew that what they could afford would depend on more than just the listing price. Besides the down payment, the young couple was also expecting to shell out extra for condo fees and a parking space. What they weren’t anticipating were closing costs, which, at about 2 per cent of the final selling price, can easily exceed $10,000. "We were hoping to put that toward the down payment, but that’s now going to lawyers’ fees, city tax" and so on, says Ballard. "That really changes things."
For first-time home buyers and experienced homeowners alike, figuring out what you can afford is no simple task. That’s because there is no single answer, but rather many possible scenarios that depend on both your financial situation and the lifestyle you want. But by understanding the basic costs of buying and how all the hidden extras add up, you can get a realistic picture of your purchasing power before you start perusing the listings.
As Ballard and Tusche discovered, when you buy a home, the purchase price is just the beginning of the costs you’ll incur. In most jurisdictions, buyers must pay a land transfer tax, which can amount to several thousand dollars. If you are buying a home that includes "chattels"–moveable personal property such as appliances–you may have to pay provincial sales tax on the value of those items. For those buying newly constructed homes, you’ll have to pay 5 per cent GST (though depending on the purchase price, you may be eligible for a rebate). Other one-time costs include legal and inspection fees. (Realtor commissions come out of the seller’s take.) In addition to a monthly mortgage payment, owning a home means you also have to shoulder various ongoing costs, including annual property taxes (rates vary by municipality), utilities and maintenance. When you buy a condo or townhouse, maintenance is included in monthly strata fees. If you buy a house, you have keep in mind that you will be responsible for any necessary fixes that crop up along the way. Though some repairs are fairly inexpensive, others can put a big dent in your bank account. "These are all the kinds of bills that you have to factor into the decision," says Sarah Daniels, a Vancouver-area real estate agent and author of Welcome Home: Insider Secrets for Buying or Selling Your Property.
By far the most significant upfront cost is the down payment. The minimum down payment you need to get an insured mortgage is 5 per cent of the purchase price, but if you can put 20 per cent or more down, you don’t need to be insured, and therefore won’t have to pay the premium. If you’re a new homeowner, your down payment will come from your savings and investments or, if you’re lucky, a family gift. Experienced buyers, meanwhile, can rely on the equity from their previous property.
Unless you’ve got deep pockets, the budget for your first home will depend primarily on how much financial institutions are willing to lend you–and on what terms. The size of the mortgage for which you can get pre-approved is the maximum amount you can reasonably be expected to repay with interest over a set period of up to 30 years. According to Canadian Mortgage Trends editor Rob McLister, based on current interest rates, someone with an annual income of $50,000, who puts down 12.5 per cent and has about $25,000 in household debt could theoretically be approved for a $194,000 home and monthly mortgage payments of about $820. But estimates such as these, which you can come up with on your own by plugging a few numbers into one of many online mortgage calculators, are very general, and don’t account for crucial determinants like credit history. (For our purposes, McLister assumed a 3.94 per cent fixed rate for five years, property taxes of 1 per cent, $100 in monthly heating, no condo fees and a good credit score.) "There are an endless number of exceptions. That’s why it’s best to have a professional do it," says McLister, who recommends consulting a mortgage broker or a bank’s mortgage specialist.
Just because you are pre-approved for a certain amount doesn’t mean you should plan on spending it all, though. When a financial institution calculates the amount it’s willing to lend you, it does so based on what it thinks offers a comfortable ratio between income and expenses. But while lenders will let this number–called the debt service ratio–reach higher than 40 per cent, McLister says you might want to think about giving yourself an even bigger cushion. "You’ve got to ask yourself, ‘If something bad happens, do I really want to be in a 44 per cent total debt service ratio?"
Another important consideration is that the interest rate you negotiate when you first buy your house isn’t set in stone. When your mortgage is up for renewal–typically after five years, though the length of the term varies–you may find that interest rates have increased substantially. That means that if you don’t leave yourself enough breathing room, you could wind up in a very tight spot. You don’t want to be forced to sell your home in a rising interest rate environment, when housing prices are trending down. As McLister sees it, "You have to take these things into account and project into the future, and determine the worst-case scenario."
As any mortgage broker will tell you, there are plenty of ways to play around with the numbers and secure financing for the home that you want. But no matter what the calculator says, you have to be honest with yourself. Beyond the incidental costs associated with owning and maintaining a home, don’t forget to think about your lifestyle, and how much you’re willing to sacrifice. While you may be able to technically afford the house of your dreams, will buying it mean that you can no longer go to the movies or take vacations? "You have to make sure that you can still live a normal life," says Daniels. "Nobody wants to live in a great place but only be able to afford Kraft Dinner."
Excerpted from MoneySense Guide to Buying and Selling Your Home (Rogers Publishing Limited, $9.95). The book is available at bookstores and newsstands or online at http://moneysense.ca/myhouse Mortgage negotiations
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