The excitement of first-time home ownership
First thing first. Let’s all stand up and give a long-overdue round of applause to honour the moms and dads out there. Because if it were not for them, we’d have even fewer first-time home buyers in British Columbia. It’s not enough to work two jobs, to cut back on expensive coffees, and sell your cast-offs on Facebook Marketplace to save up a down payment. For many first-time homeowners, a down payment gift from mom and dad was also needed. A 2018 BC Notaries Association’s year-end survey discovered that 90 percent of first-time home buyers received financial help from their parents with their down payments.
Despite the challenge of piecing together a down payment, and an ever-dwindling “starter home” inventory – especially in Metro Vancouver – many renters still dream of owning their own digs. There are several reasons for choosing homeownership:
- Security and stability
- Financial investment that builds equity
- Mortgage payments will eventually end, unlike rent
But with first-time home ownership, comes more responsibility and expenses that renters don’t have to worry about:
- Annual property taxes
- Home insurance
- Maintenance and repairs
- Lawn care and landscaping
- Strata/HOA fees
- Mortgage default insurance
First-time home ownership is just not about affordability
For those unsure if they should rent or buy, try using a “rent or buy” calculator to see where you stand. Click here for a calculator. Numbers aren’t the only determining factor. Your lifestyle should also be considered. Right now, the average price for a detached home in Vancouver is $1,259,503. The average price for a one-bedroom townhome is $771,000, and a studio condo is $506,000. If these prices are out-of-range, will your lifestyle and employment situation allow you to move to a region with more affordable home prices? If you have children, how much will they be affected by a move to a new community? The stress of moving has often been equated to the amount of stress one feels during a divorce. Now, imagine having to manage that level of stress while being a 13-year-old. If the timing isn’t right for your family, that’s okay. You can still plan and save.
Purchasing power
Purchasing a home requires research and planning. The biggest question that needs answering is how much can you afford? Logically, the next question will be how much can your mom and dad afford? All kidding aside, try getting a mortgage pre-approval; that way you’ll learn what the maximum amount of mortgage you’ll qualify for, you’ll get an estimate of your mortgage payments, and with that knowledge, you’ll have a targeted price range to adhere to when shopping for your first home.
For first-time buyers shopping for a condo or townhome, you’ll also need to include HOA fees, also known as strata fees, when calculating your expenses. The advantage of condo/townhome living is all owners share the expenses of maintaining the common areas of the property without having to do all the work, unlike their single-detached home counterparts. But this can also can be problematic when majority votes are not achieved when major repairs need to be undertaken.
Having to keep up a lawn, clean gutters, and maintain an entire detached home’s exterior could be a daunting prospect for a first-time homeowner. Does your current work schedule even allow for time to do regular home maintenance? If you think home maintenance might also cut into your time for beloved hobbies and interests, affecting your overall happiness, perhaps a low-maintenance condo or townhome will be better suited, and more within reach financially.
Minimum down payments
Not everyone has a mom and dad able to help with a down payment. In Canada, homeowners can put less than a 20 percent down payment on their home, but they are required to carry default mortgage insurance. Canada’s national housing agency, The Canadian Mortgage and Housing Corporation will allow you to mortgage up to 95 percent of the cost of the home with the following guidelines:
- If the home costs $500,000 or less, you’ll need a minimum down payment of 5%.
- If the home costs more than $500,000, you’ll need a minimum of 5% down on the first $500,000 and 10% on the remainder.
- If the home costs $1,000,000 or more, mortgage loan insurance is not available.
- And yes, there is a calculator for CMHC insurance…click here
And as of June 2021, homebuyers will face more stringent mortgage stress test, which makes it even harder for first-time home owners to get into the market.
First-time home ownership buyer perks
The Government of British Columbia offers a program for Canadian citizens and/or permanent residents that eliminates the amount of property transfer tax you pay when you purchase your first home, which has to be your principal residence, have a fair market value of $500,000 or less and be 0.5 hectares or smaller (exemptions may be made for properties larger than 0.5 hectares). If your first home is considered a newly built home, you may qualify for the Newly Built Home Exemption.
First-time buyer beware
Announced in early April, Canada’s federal banking regulator is proposing to tighten the qualifiers for uninsured mortgages. This will affect first-time home buyers that are really stretching their finances to achieve the dream; they will have to prove they can afford their mortgage if the rate were to increase by two percent if their down payment is less than one-fifth of the purchase price. The proposal sets the qualifying rate for uninsured mortgages at the contracted rate plus two percentage points or 5.25 percent, whichever is higher. When the going gets tough, the tough get…saving.
Budget budget budget
Saving money for your first home becomes easier once you create a budget: first, to see where your money goes, and second: to redirect it into savings. And, if mom and dad taught us anything; we should already know the difference between want and need which will also help with saving money. Not only do you need to budget to save for the down payment for your first home, you’ll also need to set aside money to cover expected expenses like annual property taxes, and unexpected expenses like replacing a roof, which can cost upwards of $6000, or removal of a dead tree before storm season approaches; the list goes on and on. Some say setting aside one percent of the home’s purchase price as a guideline for covering one year’s worth of maintenance. You probably can get away with taking your laundry to mom and dad’s if the washing machine breaks down, but asking them to spring for a new foundation might be pushing it.
Adding insurance protection is a must
Whether you rent or own, you will need to obtain insurance. Most landlords require proof of a tenants’ insurance policy, and lenders also require proof of a home insurance policy when you purchase your first home. As you make plans to move into your new home, consult with your insurance broker for the right coverage for your investment and to ensure your belongings are covered while they are in transit on a moving truck.
As a reminder, Mother’s Day is Sunday, May 9th, and Father’s Day is Sunday, June 20th, so pick your time wisely if you are thinking of asking them for a down payment gift. And whatever you do, follow your lender’s guidelines for gifted down payments to a tee with proper documentation. The last thing you want is to have mom and dad or you investigated for money laundering!
Resources for first time home ownership
BC Notaries Association
Moving blues: Kids health
First-time buyers program
City News 1130: Federal Bank Regulator proposal
CMHC mortgage loan insurance
Reliance Insurance: homeowner policies – Homeprotect
Reliance Insurance: condo insurance
How to gift a down payment
