INVESTING IN HOME OWNERSHIP
Meeting with a mortgage specialist is an important step in learning about the true costs involved
When planning the plunge into homeownership, most people tend to focus on the cost of their prospective mortgage. But experts urge would-be buyers to have a broader understanding of the true costs of homeownership before buying property. That’s why an essential step is meeting with a mortgage specialist, who can help you build out a budget to determine what you can afford and if now is really the right time to buy, based on your individual situation and goals.
“Not going to see their bank is a mistake most people make when looking for a property,” said Teddy Kyres, mortgage specialist at BMO Bank of Montreal.
“Clients need to know what they can afford from the bank’s perspective, and understand the full cost of owning property; people see the mortgage payment and think they can afford it, but there’s much more to it.”
According to most banks, the monthly costs people look at when considering mortgage qualifications are the mortgage amount, taxes, heat and electricity, and condo fees if applicable.
That said, there are other costs for them to consider as well — costs included in their personal budget.
“There’s the typical monthly expenses like Internet, television, and so on, and then there’s property insurance, and life or disability insurance, which many people opt to take because they’re borrowing a substantial amount of money and want to be protected,” Kyres said. “We don’t calculate those factors when qualifying a client for a mortgage, but they’re all things that need to be taken into account.”
In addition to these monthly costs, buyers must also have enough money set aside for a down payment, as well as other closing costs.
“Someone may have enough for the five per cent down payment and think that’s sufficient for the purchase, but then there’s the welcome tax, notary fees, and insurance premiums,” Kyres explained. “People often underestimate how much money they will need to buy a home.
“We estimate that a client will need an extra 1.5 per cent of the purchase price, on top of the down payment, to handle the additional closing costs.”
Being prepared for these costs ahead of time can save headaches and avoid financial strain, which can often lead to people becoming overleveraged, or house-poor.
Kyres said he recommends working backwards, in a sense, when determining exactly what you can afford in terms of property.
“I like to work with clients’ existing budget,” he said, “so if they’re renting, we look at what their current budget is and how much they’re saving on a monthly basis — and then we can work from there.
“We go through the costs of everything and come up with a budget that will allow them to maintain their lifestyle and still save, all while owning property.”
Another advantage of visiting your bank before shopping for a home is getting preapproved for a mortgage.
“Getting preapproval is highly recommended because not only does this allow the buyer to know what he or she can afford, but it also makes a buyer’s offer look solid,” said Saguy Elbaz, real-estate broker with Sotheby’s International Realty Québec.
“Sellers take an offer very seriously when it’s accompanied by a preapproval because it takes away all doubt regarding the buyer’s buying power.
“This is especially helpful in cases where there are multiple offers on the table.”
Sitting down with a mortgage broker also helps to control buyers’ expectations. By tightening their search criteria based on their budget, buyers have a better sense of what’s realistic and are less likely to waste time looking at homes they can’t afford.
“This also helps real-estate brokers tremendously, because it allows them to work with qualified buyers who are aware of their financial limits ahead of time,” Elbaz said.
This type of planning before shopping for a home also enables buyers to take their habits and hobbies into account, so that they don’t have to sacrifice what they love in order to buy property.
“Owning a property and not being able to live your life isn’t a good strategy,” Kyres said.
“You want to, and rightfully so, be able to do the things you enjoy, whether it’s travel or dining out or whatever, while owning a home.”
Sometimes, when people are faced with the reality of what they can afford when taking their lifestyle into account, they opt to delay purchasing property.
“And that’s perfectly fine,” Kyres said.
“Sometimes our dealings with clients end with them not buying a property — or we have clients that are preapproved, but decide to wait, based on our conversations — and then they come back a few months or a year later, when they’re truly ready.”
Considering that property is often the largest investment a person will make in his/her lifetime, this type of patient, planned approach is advisable.
“Buying a property has been a good investment historically, but you have to be patient; there’s a strategy and a process and it’s not something to rush into,” Kyres said.
“Ownership is good in the long run under the right circumstances. You just have to approach it in an organized and informed way.”
Someone may have enough for the five per cent down payment and think that’s sufficient for the purchase ... People often underestimate how much money they will need to buy a home.
Getting preapproval is highly recommended because not only does this allow the buyer to know what he or she can afford, but it also makes the buyer’s offer look solid.