The second you sign the lease on a rental apartment, several people you’re related to (probably the parents; maybe a meddling aunt) will fire off this question: Why pay some other clown’s mortgage when you can have a place of your very own? When you’re 20 and swimming in student debt, it’s a question easily ignored. But then you get older, land a real job, and sock away a bit of cash, and you start thinking that your meddling aunt might be onto something. So you lose a weekend clicking through MLS listings and discover that, last month, the average detached home in the 416 went for $749,000. Scary!
Uncurl yourself from the fetal position: You can still buy a house in this town for much less than that. To get one of those homes, though, you’re going to have to look hard, move fast, and let words like “five-year fixed-interest term” fall effortlessly from your lips. We can’t exactly help you there—but we (or, more accurately, our expert panel) can help ease 10 of the most common newbie concerns. Deep breaths, first-timer, and read on.
No. 1: Should I Even Buy a House?
Perhaps you’re tired of renting or roommates; that’s not a good enough reason to buy a house. Maybe you’ve already saved up a healthy down payment; that still doesn’t get you all the way there. Not to sound like your dad, but owning a home is a commitment—you’re going to have to fix stuff on the regular and have actual conversations about things like water heaters and tuck-pointing.* You’ll have to comparison shop for tree trimmers and compromise with your neighbours. Buying is expensive, and so is selling, so you’ll also need to really love your spot and be willing to stay put for a decent chunk of time (like, at least five years). Do not buy a home because you think it’s a good investment: It might not be. Buy a home because it’s where you want to live.
You’re still in? And you want Toronto, even though it’s way pricier than Pickering or Guelph? Okay, then—we’re here to guide you.
*Refilling the mortar between bricks as it wears down over time. Super boring!
No. 2: And a house, right? Not a condo
Starter condos come much cheaper than starter houses, and you can probably afford one much closer to downtown. Maintenance fees are a pain, it’s true, but they mean that, typically, if something breaks in a condo, you’re not the one who has to fix it. You’ll never have to shovel snow or teeter on a ladder to clean the outside of upstairs windows. Some people really like that.
So why buy a house? Many economist types think the condo market is riskier than the house market—such a ridiculous number of units have been built in the past decade that there’s far more out there to attract buyers—and a house is a safer place to put your life savings. A house also allows you to run the finances yourself, not pay attention to how a board does it, and it lets you have an enormous dog. Generally, a house is more work, and gives you way more autonomy.
No. 3: How much cash do I have to pony up?
The lowest allowable down payment in Canada is five per cent of a home’s total purchase price—so: $25,000 on a $500,000 home. Of course, if you can, put down more than that. “It makes your mortgage lower, your monthly payments lower, and the interest you pay lower,” says Alyssa Richard, CEO of RateHub.ca, whose thoroughly useful website offers a bunch of free financial tools for homebuyers.
To encourage banks and other lenders to work with higher-risk buyers, the Canada Mortgage and Housing Corporation (CMHC, an arm of the government) insures high-ratio mortgages. This is why down payments under 20 per cent end up costing more in the long run: First, the cost of that insurance gets folded into your total mortgage; then, the insurance’s PST is an upfront closing cost.
If you’ve been contributing to RRSPs, consider drawing some of your down payment from the RRSP-based Home Buyer’s Plan. First-time buyers are allowed to take out as much as $25,000 from their RSPs to finance a property, up to a year before (or 30 days after) a purchase. This is awesome, just don’t forget about it—it’s an interest-free loan to yourself, but you have to pay it back. Two years after you buy, the feds demand you start reimbursing your RSP at tax time, and you’ve got 15 years to get it all settled. “Budgeting to pay back your RRSP needs to factor in when you’re asking yourself, ‘Can I buy this house?’” says Richard.*
No. 4: And how do I get the rest of the money?
After saving up a down payment, it’s time to ask someone to lend you the rest. A mortgage pre-approval is when you bare your financial soul to a bank or other lender to learn how much money you can borrow, at what interest rate, and for how long. Remember, your monthly costs include not just the base mortgage, but insurance, property taxes, and utilities. If you’re stretched to the limit, a lost job or a rise in interest rates could mean losing your house.
Definitely get a pre-approval from your home bank, but please, don’t just accept whatever interest rate is posted on its website today. You’re far more loyal to your bank than it is to you, and promiscuous deal-hunters get way better rates—up to 9 basis points, or 0.09 per cent, says the Bank of Canada. That sounds small, until you look at the monetary difference over a mortgage term.
“What really bothers me about the banks is that they play a price-discounting game that’s all predicated on coming into the branch and talking,” says RateHub’s Richard. She’s a big fan of mortgage brokers, and her site posts the absolute lowest interest rates being reported by brokers across Canada, every day.
What a mortgage broker does is negotiate and shop around for you. Brokers are paid by the lender you ultimately choose, so using one is free. Lenders often give brokers a discount the more buyers they deliver. “It’s important that your broker has done a lot of volume,” says Richard, who notes that Canada Mortgage Professionals publishes an annual list of the 50 highest-volume brokers. Ensure that your broker has been in the business at least two years, and that he or she works regularly with a slate of lenders, not just the same two over and over again.
If you are going to secure the mortgage yourself, stay strong. “Even if you really want to stick with your bank, force yourself to drop into two others,” says Richard. Along with your bank-account statement and proof of income, bring a printout from RateHub to your pre-approval meeting, to show you know lower rates exist. Negotiating is a must.
No. 5: Where can I scrounge up a realtor?
Using a real-estate agent isn’t mandatory, but most buyers enjoy the expertise and quick access to listings they provide. Cost shouldn’t be a factor, since agents are (almost always) paid a percentage of the purchase price by the seller, and most are found by word of mouth. That’s a totally decent method, as long as you’re not working with your cousin’s friend who never leaves Mississauga when you want a nice little place in North York. Talk to two or three people, even if you end up going with your first choice.
“You want somebody who is willing to take the time to explain the process to you, especially if you’re a first-time buyer,” says John MacEwen, a sales representative with Sage Real Estate. Choose a full-time realtor with up-to-date observations on how homes within your budget and in your preferred neighbourhoods are selling right now—as in news from yesterday and last week, not last month or 2012. Your agent should return your calls and emails, send you listings every day (or more often), and drive you to showings, if you need it. They should never, ever pressure you to buy a house that you’re iffy about.
Once you choose an agent, you’ll sign a buyer representation agreement. It outlines the type of property you’re looking for, and in what part of the city. It also specifies how long you’ll work with that agent (probably three or four months) and conditions for breaking up if the relationship isn’t working out. You can’t just walk away from someone you don’t like—your ex-agent can try to get a percentage of the selling price from whatever place you do eventually buy. Messy.
No. 6: Where Should I Look?
“Sit down with your agent and do a needs-versus-wants analysis,” says MacEwen. “Think about what’s mandatory, and what would just be nice.” Consider how many bedrooms you require, and how far of a commute you’re willing to make. Think about the next five years of your life—if kids are a possibility, look at nearby schools.
One fun toy is the Neighbourhood Match tool on Realosophy.com. “I like to call that tool ‘eHarmony for neighbourhoods,’” says John Pasalis, president of Realosophy realty, a brokerage specializing in real-estate analytics. Users fill in a bunch of home basics, like price and number of bedrooms. They rate the importance of schools, walkability, and coffee shops, and choose between semis, detached homes, and townhouses.
That search produces a first tier of results, then allows for further sifting. Sure, you can still get something for $500,000 in Leslieville, but it’ll be a fixer-upper or on a busy street. Off the east part of Danforth, that same price could get you a bigger lot, more privacy, or more rooms. “The area’s not as cool, because commercially it’s not there yet,” says Pasalis. “But it’s right on the subway line, and a Red Rocket Coffee just opened.”
Chances are exceedingly good that your search will be guided by budget. “Most first-time buyers are going east and west,” says MacEwen. It would be nice if east and west meant Riverside or Parkdale, but think East York, Wallace Emerson, and Brockton Village. Also hot: the Junction, New Toronto, and Victoria Park Village, for those who can handle a longer commute. (Don’t forget, we’re talking a Monday morning stress commute, not a Saturday afternoon house-hunting and latte-grabbing commute).
No. 7: But How Do I Pick a House?
First impressions mean almost nothing during a house hunt—your goal is to move beyond aesthetics. Consider the possibilities in a dumpy place that hasn’t seen new paint since the ’80s, and don’t get sucked in by fresh flowers in a highly staged home. What you care about are a house’s bones: the foundation, the appliances, the wiring. Even if you know nothing about that stuff, you can keep your eye out for red flags.
“Research the basic terms of residential home construction,” says Mark Benerowski, owner of The Inspection Consultants Inc. “Then you’ll be more prepared to spot a home that’s been neglected.” Benerowski, an inspector for a decade, advises that you check out where the downspouts deposit rainwater. Depressions in the soil mean poor absorption and drainage, which could be a problem for your foundation. Look up at the roof’s shingles, too: The wider the spaces between them, the sooner the whole thing must be redone.
Judge whether a recent renovation was executed well. “Look in the corners of a floor, or where cabinets attach to a wall, where the fine finishing comes into play,” says sales representative John MacEwen, who has a background in engineering. “It can look pretty, but you need to gauge the workmanship and see if it was done by a professional or an amateur.” He advises carrying a checklist of musts (you need office space and two bathrooms, for example) and deal-breakers. (If a house has knob and tube wiring, your insurance provider will insist you replace it within two months, at a cost of about $15,000.) Refer to that list regularly, so the slate flooring in the bathroom won’t distract you from your needs.
There’s no time frame for how long a house hunt will take. Some people nail it on their first try; some spend months before they find a place. In a competitive market like Toronto, that also means there isn’t much time to mull over a decent house. Pasalis updates the new listings on Realsophy.com every hour (MLS.ca only does one public update a day), and he encourages his clients to check it as often as that. “A smart client is ready to rush out at lunch hour and make an offer before anyone else gets to see the house,” he says. “You have to avoid competing with five people. That’s the speed of the market.”
No. 8: I Found the House! Now How Do I Get It?
Once you’ve ducked out on your lunch break, found a decent house, and are ready to make that lightning-fast offer, your agent will compile a list of sales from the past six months of similar homes in the neighbourhood. Those will help you figure out a reasonable purchase price, which doesn’t have to be the same as the seller’s asking price.
Along with an actual price, your offer includes a promise to give the seller an immediate deposit: It’s usually about five per cent of the purchase price. You decide whether to impose any conditions, like a chance to walk through the house with a home inspector (seriously, do this), or to ensure that your lender will finance this particular property (you may think it’s worth a mil, but will they?). You’ll set a closing date, probably 30 to 90 days, at which point the house would actually become yours. You also need at least one more visit to the property, in the week before closing, to make sure there aren’t any surprises.
“I had one client who realized that the seller had painted around all of the furniture, leaving big blank spots on the wall,” says real-estate lawyer Shadi Nasseri.
First thing on offer day, you’ll be at your bank, getting a certified cheque for the deposit amount. (Have ID, and be thankful if the teller wants to verify it before releasing tens of thousands of dollars.) Meanwhile, your agent will notify the seller’s agent that you’ll be making an offer. Sometime in the afternoon or evening, you’ll all meet somewhere, maybe at the home or in the selling agent’s office. Your agent will take your offer to the seller’s agent (you get to wait in the car), who will discuss it with the seller. It might be accepted or rejected right away or, most likely, you’ll head into negotiations.
Price is crucial, but it’s not everything. Timing is important: Often, sellers have bought a new place already and are worried they’ll get stuck paying two mortgages at once. Getting a home inspection in three days instead of seven, or closing in one month instead of two, could be the difference in making the deal. If the seller accepts your offer, congratulations—you’ve bought yourself a house.
So you’ve entered a bidding war: The official name for a bidding war is a “multiple-offer scenario,” and what it means is that other people want the same house that you do. If a house seems priced below what it’s worth, or offers are only being accepted on a certain day, chances are the seller is hoping to force two or more buyers to compete.
“You can’t be a cowboy, overbidding on everything,” says John Pasalis, who expects bidding wars to be less insane in 2013 than last year, but still pretty insane.
He says first-time buyers often don’t realize that a pre-approval is just a figure based on your income; a full approval also factors in the value of the specific home you buy. When you make an offer for a certain address, the bank calls in a real-estate appraiser—and if he or she doesn’t think the house is worth what you’ve offered, the conditions of your original pre-approval don’t apply. You could be stuck with a higher interest rate or smaller loan, leaving you to scare up the shortfall.
One way to handle an expected bidding war is to get a solid approval for that particular property before you head in. You’ll know exactly how large a loan you can get, and you can waive the financing condition on your offer. It also helps to get a home inspection in advance—only fools bid on a house without one, even if the seller has left out a binder from her own inspector to flip through. Then you can drop that condition, too, and not worry about a house’s mysteries.
“Try to treat it like a business decision,” says John MacEwen. Don’t let the actual value of the house get obscured by stress, drama, or a need to win—which can become extra-tempting if you’ve already lost a couple of bidding wars. MacEwen recently advised a woman against increasing her initial offer price by $115,000 on a house he believed cost too much. “It was in horror-film condition, and a suicide occurred in the home,” he says. She went ahead anyway and beat out six other offers, but only after removing all her conditions. “There will likely be surprises when renovating,” says MacEwen. “If you get wrapped up in emotions, it could cost you a lot of money down the road.”
No. 9: What Do I Need From My Home Inspection?
Benerowski recommends finding someone who is registered with the Ontario Association of Home Inspectors, meaning they’ve done at least 200 inspections. The cost should be $500, give or take $50. Try to shop around before the offer stage, because, yeah, the actual buying moves pretty fast.
Home inspections are interactive: The inspector should walk you through everything he’s looking at, tell you what he’s thinking, and answer your questions patiently. “I can’t see a client getting their money’s worth in less than four hours; my full report will be 45 to 80 pages long,” Benerowski says. The goal of an inspection is to provide you with an assessment of the property’s condition. That means ballparking when—not if—you’ll need to pay for a new furnace or a new roof. The inspector will not tell you whether or not to buy the house; only you can decide how this information will affect your asking price, or how long to keep bidding in a war.
No. 10: How do I get the keys to that house in my hot little hand?
Your lawyer is the main player on closing day, so, again: Take referrals only from people you really trust, and do a quick phone interview before you choose one. Ask the lawyer how long she’s been working, how many transactions she’s handled, and whether she specializes in houses or condos.
“The lawyer brings everybody together,” says Shadi Nasseri. It’s her job is to make sure that everyone—you, the seller, both agents, your insurance provider, your lender, and the seller’s bank—has their business in order, then make it all legal.
You’ll hand your lawyer a bank draft for the full amount of your closing costs, as well as proof that you’ve purchased home insurance. She’ll already have determined that the seller has the right to actually sell the property, and that there are no debts against it that’ll become your problem. Next, you’ll sign the huge mortgage agreement and make idle chit-chat while you wait for your lender to approve your documents, then transfer the full price of the house into the seller’s account. The seller’s lawyer will release the deed to your home, and your lawyer will fill out a new deed for you.
After that—after all that—your lawyer will give you the keys to your house.
I HAVE TO PAY WHAT?
Too many innocent first-timers don’t realize just how pricey closing day will be. Here’s where that precious cash goes.
› Home insurance: Your lender will require it. Cost depends on the size and age of your house and how detailed your coverage is. You’ll have to pay the first month on closing day.
Lawyer: Nasseri charges between $850 and $2,000, depending on the size of the house and how complicated the deal is. You’ll have to reimburse your lawyer for searches and legal transactions (called disbursements), so be clear if those costs are included in, or on top of, any quote that you get.
› Title insurance: It’s not mandatory, but protects you from someone else saying they own your house (it happens). It’ll run you about $300.
› Adjustments: If the seller has pre-paid property taxes or utilities, you have to pay them back.
› Land Transfer Tax: Here in Toronto, we pay LTT to both the province and the city. First-time buyers can then apply for a rebate of all or some of their portion.
› PST on mortgage insurance: If your down payment is less than 20 per cent, Canada Mortgage and Housing Corporation insures your mortgage for the bank. The cost is added onto your monthly payment, but you must pay the sales tax now.
› Oh, and your down payment—minus the deposit you gave the seller when you made an offer.
We know, it hurts. We’re sorry. But hey: You’re a home owner now!
NEXT PAGE: Tough-love advice from our real-estate columnist (and realtor) David Fleming and other first-time home buyers; a glossary of need-to-know terminology; and tips for acquiring an income property to help pay down your mortgage.
CORRECTION, MARCH 14, 2013: The original version of this article—as it appeared here and in the March 14, 2013 print edition of The Grid—misidentified RRSPs as RSPs, and claimed the payback period begins after three years, when it is in fact two years.