Getting Your Foot In the Door - Amazon S3 · How to Buy Your First Home in Canada. Kyle Prevost...

Getting Your Foot In the DoorHow to Buy Your First Home in Canada

Kyle Prevost & Justin BouchardYoungAndThrifty.ca

Getting Your Foot In the Door - How to Buy Your First Home in Canada

Kyle Prevost & Justin Bouchard - YoungAndThrifty.ca

Introduction ...................................................... 1

So You Think You Want to Buy a House? ......... 5

The Nuts and Bolts of House Buying .............. 13

What Can You Afford? .................................... 27

Closing Costs – Surprise! ............................... 32

Executing Your Game Plan ............................. 36

Building Your Dream Team .............................. 43

Saving Up Your Down Payment ...................... 54

Investing Your Way Into Your First Home ......... 59

Finding Your Dream Home .............................. 61

Checklist ........................................................ 65

Conclusion ..................................................... 66

Table of contents


Kyle Prevost & Justin Bouchard - YoungAndThrifty.ca 1

IntroductionSeven years ago I decided to buy a house. I

had no logical reason to become a homeowner

– other than it was expected of me as a middle-

class Canadian. Looking back, I’m not sure I

would advise my younger self that this whole

house-buying experience was a good idea, but

luckily it worked out pretty well in my case.

At the time, I was just starting a shiny new job as

a teacher in a small community. It soon became

obvious that not only did I have no idea how to

buy a house (or even a clue about what a large

undertaking it was), but I didn’t understand much

about personal finance in general. I couldn’t tell

you what an RRSP was, the difference between

a stock and bond, or even how interest rates

worked. Pretty much the only thing I knew about

money was that debt wasn’t good and that

credit card debt

was very, very bad.

(Mind you, if you’re

only going to know

two things about

finance, those

aren’t bad places

to start.)

The research and execution involved in buying

a home without a real estate agent (neither I,

nor the seller used one) was empowering. It led

to dozens of books being read, hundreds of

hours of surfing financial blogs, and many more

financial adventures. Today I can proudly say



I’ve written about financial matters in The Globe

and Mail, National Post, Metro News, Canadian

MoneySaver Magazine, and the Toronto Star

amongst others. My partner-in-crime and I co-

wrote a book for young Canadians called More

Money for Beer and Textbooks – A Financial

Guide for Today’s Canadian Student and then

put together a podcast by the same name.

Hopefully this free guide to buying your first home

in Canada will similarly empower you.

This eBook is written

for young Canadians

by a young

Canadian. It is not

the be-all and end-

all guide to choosing

the perfect home for

you, or a book that claims to hold the magic key

to real estate wealth. Instead, it is meant to be a

primer on how to get into your first home without

falling flat on your face. Please feel free to make

use of the lessons I’ve learned the hard way.

Given individual needs and the vast range

of housing markets across Canada, I won’t

presume to tell you which house to buy or give

my uneducated opinion on if it’s a good time to

hop into the housing market. Instead, you will

find information on topics such as how to best

save for a down payment, what CMHC mortgage

insurance is, the types of closing costs you can

expect before you move into the house you just

bought (a huge shock for me), what types of

professional advice you’ll need, and many other

little nuggets of info I wish I had seven years ago.



My goal is to provide folks with this information

in a way that doesn’t suck, and with writing that

doesn’t remind you of a soulless government

document.

If you have any questions or comments (or

just want to say hi!) please drop us a line using

our Contact Us Page, or through Twitter and

Facebook.

Disclaimer:

Before we get too far, I should remind you that I

am not a certified expert in the field of real estate.

I do not have any real estate-related credentials,

nor do I have a degree or diploma in a financial

field. The information that I’ve presented in

the following pages has been researched from

dozens of reputable Canadian publications. Any

errors that remain are entirely my responsibility.

This eBook is not intended to replace full-service

professional advice. If you are not comfortable

purchasing or selling a home by yourself, please

contact professional help.

I have decided not to charge anyone for this

eBook and subsequently ask that people accept

http://youngandthrifty.ca/contact/

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that there are a few affiliate links included within

these pages. I personally stand behind and

recommend the resources that I reference in this

eBook and believe you’ll find that the companies

involved have great track records if you look

through their online reviews. I recommend these

same resources to my family and friends when

they ask me where to look for information on

buying homes, renewing mortgages, or other

housing-related topics.

I have asked for your email so that I might

send you future special offers for eBooks that I

produce, and also to ask for your feedback on

what you might like to read going forward.

Thank you for your support. I hope the effort I

have put into making this book will arm you with

useful knowledge to help empower you during

the home-buying process. I wish I had read

something like this years ago. If it accomplishes

these goals, feel free to share it with your friends.



So You Think You Want to Buy a House?If you are a young person in Canada, there’s a

good chance you should not be a homeowner.

Yes, you read that correctly. I know, it’s a bit of an

odd way to start a guide about buying a home

but hear me out. This might be the only chapter

of the book you’ll need!

Canadians (and Americans for that matter) have

a weird obsession with home ownership. Don’t

get me wrong, owning a home can be wonderful,

but is it nicer than retiring with $2 million in the

bank? Maybe it is. Only you can make that

personal value decision.

Most Canadians, however, are not aware of all

the facts in the rent vs. buy debate. Because

we are unaware of the facts, we have this weird

home ownership cult that has developed over

decades. Most Canadians today simply default

to buying a home. It’s almost pencilled in as a



rite of passage for the middle class, or generally

accepted as a life milestone. Given the way

Canadian home prices have risen over the past

20-plus years (I’m not going to get into the

endless debate on whether home prices will stay

this high), this innate drive to own a home – one

that was likely embedded in us unconsciously at

a very young age – is likely the wrong decision for

a lot of folks from a wealth-building standpoint.

Now, I could go through the various aspects

of renting versus buying in a Canadian context

and sound intelligent while quoting studies,

percentages and statistics. Truthfully though, I’d

just be doing a pale imitation of a guy named

Preet Banerjee. If you don’t know Preet, he’s one

of Canada’s leading voices in personal finance –

as well as a neurosurgeon and race car driver.

Preet has attracted some skeptics over the last

few years by defending his personal decision

to rent a home instead of buy one. It’s not as if

Preet couldn’t afford a down payment. He just

consciously chooses to rent, for a variety of

logical reasons.

In defending his rationale, Preet developed

two essential resources you should seek out if

you’re considering taking the plunge on a home

purchase: a superb whiteboard video that clearly

illustrates the factors involved with renting vs.

buying (and why traditional attitudes don’t always

come out on top), as well as an excellent rent-

vs.-buy excel calculator. Check them both out

here.

http://wheredoesallmymoneygo.com/rent-versus-buy-calculator/

http://wheredoesallmymoneygo.com/rent-versus-buy-calculator/



If you need a quick rundown or reminder of

Preet’s rental considerations, or were too lazy

to click the link and watch his videos, here’s a

summary.

1) Renting a place to live = renting space,

whereas a mortgage = renting money (both are

forms of rent).

2) Transactional costs (such as Realtor

commissions) are MASSIVE over the course of a

lifetime of buying and selling properties.

3) One of the reasons that home ownership is

so effective at building wealth is that it forces

you to make that monthly mortgage payment

every month. As a renter, it’s a lot easier to

spend the extra money you should have as a

result of renting instead of buying. But, if you can

stay disciplined and invest that difference, it is

quite likely that the renter will come out ahead

– especially in some of Canada’s largest urban

markets.

4) Homes can be sold for a tax-free profit. BUT,

ask yourself this. When do you intend to sell your

home, cash in that profit, and rent? If you don’t

ever intend to sell and/or downsize later in life

as part of a retirement plan, then that profit will

never be realized.

5) There are taxes on investment gains if they are

invested outside of a tax-advantaged account.

With the new TFSA limits, it is entirely possible

a person will not owe any taxes on investment

gains. (Preet is conservative in his calculations –



probably so the home ownership crowd doesn’t

spit vitriol at him.)

6) Remember that when you purchase a home,

the added costs are just beginning. Buying might

still be a great deal, but you should make that

decision with both eyes wide open, not on the

basis of some platitude your parents like to say.

What Builds Wealth Faster – Real

Estate or an Investing Portfolio?

“My house is the best investment I ever made!”

– Every middle-class dad in Canada

The statement above might be technically true

in a lot of cases – but only because the average

Canadian makes really bad investments.

As Preet points out in his video, the idea that a

dollar invested in Canadian real estate is better

than a dollar invested in a diversified long-term

investing portfolio is simply false. The overall

returns are not even close.

The myths surrounding real estate

outperformance have traditionally rested on three

pillars:



1) You can touch and feel real estate/buildings,

so that tangibility makes it better.

2) You can borrow 19x the amount of money

you have in the bank to buy a home and no one

blinks an eye (that’s called a 5% down mortgage

after all). But if you ever borrowed 19x your

savings to invest in a portfolio, conventional

wisdom would label you a risky gambler.

In fact if you borrowed even half the amount of

money you already have, you’d likely be amongst

the more risky investors in Canada.

Borrowing money in order to invest is called

leverage, and leverage is much more easily

applied in the world of real estate. It allows

aggressive landlord investors to do quite well

with real estate investments, but that doesn’t

necessarily make it any less risky than other

types of investing – just more common.

3) Canada has a massive real estate sales

industry with a very strong interest in convincing

you that buying and selling homes is a good way

to make money and that the Canadian dream

should be to move into a bigger/better home

every 8-10 years.

Again, I’m not saying owning a home is bad. I’m

about to spend thousands of words explaining

how to go about owning a home. Moreover, my

wife and I own a home; it likes us and we like it.

What I’m saying is, if you never plan to sell your

house to fund your retirement or lifestyle, then



it is NOT an investment. If you do plan to sell at

some point, you should realize that historically

speaking, Canada’s housing market has been

on an unprecedented tear over the last 20 years.

Most likely, the value of your home won’t grow as

quickly as the value of your investment portfolio.

Career Flexibility

As a young Canadian, there is one final

consideration you must make before deciding to

make the leap – your J.O.B.

If you happen to be one of those lucky persons

with a great gig that pays well, is stable and

fulfilling, then congratulations, you are one of

roughly 17 Canadians from coast-to-coast

to enjoy such a luxury. The average young

Canadian scouring the job market and trying to

piece together the post-secondary credentials

that might get them a second look, knows that

it likely won’t be easy getting a job where they

grew up or went to school.

It’s pretty easy to argue that being geographically

flexible and able to move to where the jobs are, is

more important than ever before. Once you land

something with a company you like, doing a job

you enjoy, moving might be essential to climbing

up the ladder or pursuing a lucrative opportunity.

There are countless stories of people purchasing

homes on the high end of their budgets, only

to pay all the same transaction costs again two

years later when they moved. Some people

let those same considerations keep them from

taking a new promotion. The fact that they had



now bought a house and “put down roots” had

limited their upward mobility.

Remember, rental contracts are almost always

cheaper and easier to get out of than a home

that needs to be sold – often by a considerable

margin.

The Good Stuff

Now that I’ve scared some of you away from

buying a house, let’s quickly review the pros of

home ownership.

The reason I slanted a bit while explaining home

buying concerns was to try to counter the huge

cultural bias we have towards home ownership.

It’s important for folks to see both sides of the

ledger. In turn, I think it’s necessary to present a

rock-solid argument that likely hasn’t been heard

before.

Most Canadians are much more familiar with the

points in favour of homeownership.

1) It is fun to take pride in homeownership and

“make something your own”. What else is there



to talk about at middle-class Canadian dinner

parties after all?

2) Forcing yourself to build net worth through

a mortgage payment is more realistic for most

people than building an investment portfolio with

whatever cash is left at month-end.

3) You can build “sweat equity” by pouring your

own time and energy into renovations that make

your property more valuable (despite the fact

that most people overvalue how much more their

home is worth as a result of renovations).

4) Owning gives you the peace of mind that no

one can force you to pick up and move (as long

as you pay your mortgage and property taxes).

So, you’ve used Preet’s fancy calculator, weighed

the pros and cons for your specific situation,

and decided that you’re ready to join the 70% of

Canadians who own their home. Now what?

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The Nuts and Bolts of House BuyingBefore we get to the fun stuff — like looking at

how much you can afford — we need to get a

little more familiar with housing jargon. After all,

if you don’t know what these terms mean, how

are you going to negotiate the best deal and

understand all the contracts you’ll sign? Let’s

start with the mortgage paperwork.

My mortgage contract was 30 pages long and

it was about as simple as they come. I know

this stuff isn’t the most scintillating literature,

but when you consider that your house is likely

the largest purchase you’ll ever make, I think it’s

pretty important to understand the details.

What’s In a Mortgage Anyway?

A mortgage is basically a loan used almost

exclusively for real estate transactions in which

the property is

essentially collateral

for the loan. If you

don’t make the

payments, the

bank/lender can

seize ownership of the property.

Because mortgages entail a large amount of

money and are backed by a physical asset, they

allow most people to borrow money at



a relatively low interest rate and pay it off over

several (usually 25) years.

Mortgages aren’t like any other loan. They have

some pretty specific characteristics, including

the…

Down Payment

In order to get a mortgage loan, you need to

pay a certain percentage of the purchase price

upfront. In other words, you can’t borrow 100%

of what the house costs.

There was a brief period of time when borrowing

100% of the purchase price was allowed and it

was referred to as a “zero-down” mortgage. This

is no longer doable. To buy a house in Canada

you need to come up with at least 5% of the

agreed upon price upfront.

Alternatively, to avoid paying CMHC insurance,

you need to pay 20% of the purchase price

upfront. Then you can mortgage the remaining

80%. Once you’re able to commit to a 20%

down payment, your mortgage will be referred

to as a conventional mortgage. If you purchase

a house with 5%-19.99% down, then you’ll

be signing up for a high-ratio mortgage. Many

people recommend coming up with a 20% down

payment no matter what, as it gives you financial

breathing room.

CMHC Insurance

Many people are confused about what CMHC



insurance actually is. They believe it is some type

of home insurance that will protect them in case

something bad happens (like most other kinds

of insurance). That isn’t the case. CMHC stands

for Canadian Mortgage and Housing Corporation

and its insurance which the government

essentially forces you to buy. It doesn’t protect

you – it protects the lender (your financial

institution).

The government promotes this “default

insurance” to prevent a sudden surge in home

foreclosures from destroying the Canadian

economy. When you think about what a 5%

down payment actually means – that you’ve

borrowed 19x the amount of money you had –

you can see why banks need to be protected

from that sort of risk.

The insurance premium for this mandatory

CMHC insurance is added on to your mortgage.

You can figure out how much will get tacked on

by using their calculator. The amount is based on

what percentage of the purchase price you put

down.

While the insurance cost itself is usually rolled

into your mortgage payments, if you live in

Manitoba, Ontario, or Quebec, the provincial

taxes on that insurance premium are due upon

closing the property. This can be a real surprise

at a time when money is already likely to be tight.

For example, if you purchase a home for

$300,000 and make a 10% down payment, a

$6,480 insurance premium will be added to your

mortgage. Then, if you live in Ontario where PST

http://www.cmhc-schl.gc.ca/en/co/buho/buho_023.cfm



is 8%, a further $518.40 will be due in cash,

before you get the keys to your palace.

Amortization

Here’s a confusing term that few laypeople truly

understand. Albeit, many pretend that they do so

that they don’t look “silly”. Classic Emperor-has-

no-clothes type of stuff.

Amortization refers to the process of making

periodic payments to decrease loan principal

over time. An amortization schedule tells you

how long you’ll be paying off a mortgage loan.

The most common initial amortization is 25 years

in Canada. You can change your amortization

period on the fly if you want to, simply by making

bigger payments. The more you pay on each

payment, the quicker you’ll pay down the loan.

Mortgage Term

Some first-time homebuyers mistakenly think

their mortgage loan is locked in for the entire

length of the initial amortization. In other words,

they believe that if they go to Bank X and take

out a 25-year mortgage, that mortgage needs to

be held by that institution for the next 25 years.

This is fortunately not the case.

Mortgages get broken up into chunks of time

called terms. Terms can be for almost any length

of time but are usually in increments of one year.

The most popular length of time in Canada is five

years. But this doesn’t mean that five-year terms

are the best. Indeed, many experts recommend



one-year terms, for example. Others believe

in trying to “time the market” and lock into a

10-year term when interest rates are low. This

rarely works since people are generally poor at

predicting interest rates.

At the end of each term (i.e., “maturity”) the

holder of the mortgage can move the mortgage

loan over to another lender and/or renegotiate

any items they wish to change in the mortgage

contract. In fact, studies show that people who

are willing to change lenders as their term ends

often end up paying less over the course of their

mortgage. That’s because companies are betting

that if they offer you a great deal to transfer

your mortgage to them, inertia will take over,

your life will get busy, and when the term ends

you’ll simply renew with them. Statistics back up

this idea, with more than 3 out of 4 Canadians

sticking with their mortgage providers at maturity.

Consumers should remember that at the end of

each term they hold a fair amount of negotiating

leverage. Never be afraid to try and negotiate for

more favourable terms.

Closed vs. Open Mortgages

There are two main considerations when

comparing mortgage terms. One is whether to

go with an open or a closed mortgage.

The terms “open” and “closed” basically refer

to whether a person can pay off their entire

mortgage (or a very large chunk of it) early with

no penalty. You can have either an open or a

closed mortgage with either a variable or fixed



interest rate. The choices are independent of one

another.

Keeping It Simple (The Closed

Mortgage)

Most Canadians prefer the simplicity of a basic

closed mortgage with fixed interest payments.

They are easy to understand and there are no

surprises; however, closed mortgages cannot

be fully paid before the end of their term. Most

lenders allow limited pre-payment privileges (i.e.,

extra payments over and above your normal

mortgage payment). These privileges allow

you to pay a certain percentage of the original

mortgage amount with no penalty, but full payoff

requires that you pay a penalty - unless you wait

for your maturity date.

The vast majority of Canadians don’t have the

means to pay their mortgage off all at once

or at an extremely accelerated rate; therefore,

most aren’t worried about the fact that they

are “locked in” for the length of their term. In

exchange for sacrificing some flexibility with a

closed mortgage, lenders will usually reward you

with a significantly lower interest rate compared

to an open mortgage. Typically, the majority of

rates you see displayed on rate comparison

sites or bank advertisements are for closed

mortgages.



Staying Limber (The Open

Mortgage)

An open mortgage is appropriate for people

who want flexibility built into their mortgage. You

can typically pay off an open mortgage at any

time without penalty or convert it to a closed

mortgage. Some people like this flexibility if they

expect to sell their home relatively soon, or come

into a large sum of money, which they can use to

pay off their entire mortgage.

Rates of Interest – Variable vs.

Fixed

One of the most important decisions you’ll have

to make when looking at what sort of mortgage

to pursue is your rate of interest. There are two

main types of ways to choose to pay interest

when it comes to mortgages and they are

broadly known as variable and fixed. There’s also

a niche option called a hybrid where you can

actually have each: part fixed and part variable.

But for simplicity’s sake, few people go this

route.

The terms “variable” and “fixed” refer to whether

your mortgage rate can change during the term.

As the names would imply:




• avariableinterestratewillgoupordownas

the prime rate changes over the course of a

mortgage term,

• afixedinterestratewillstaythesameforthe

length of your mortgage term no matter what

happens to the prime rate of interest.

A prime rate of interest is the interest rate that

a bank gives its “most trusted” or credit-worthy

customers. It’s influenced by the Bank of

Canada’s overnight rate (a.k.a. key interest rate).

When you hear that the Bank of Canada

lowered the key interest rate, this means that

you should be able to borrow money at a lower

rate of interest going forward. Most big financial

institutions will have the same prime interest

rate, but it doesn’t hurt to double check your

lender, especially if the Bank of Canada has just

changed the key interest rate.

When you are comparing mortgages, finding the

best interest rate could save you hundreds or

even thousands of dollars over the course of your

term. That’s why it’s important to “compare apples

to apples”. Most places will list their current

mortgage rates as Prime + X (almost always listing

the closed mortgage rates due to the relatively low

number of people that request open mortgages).

These days, if you have a long relationship with

a lender and/or you are considered quite a safe

risk (see our article on credit scores for more

information), you can negotiate a mortgage

interest rate down to Prime -.80% or lower. For

example, if I go to my local credit union and I see

their prime interest rate is 3%, then I would try

negotiating down to 2.2% (a.k.a. Prime -.8%).

http://youngandthrifty.ca/how-canadian-credit-scoring-works/

http://youngandthrifty.ca/how-canadian-credit-scoring-works/



If you don’t have an enviable relationship with a

financial institution you can still ask for this sort of

discount and negotiate from there. Alternatively,

you can go online and, in seconds, see what

sort of rates lenders from around the country are

offering. You will see that mortgage rates are

categorized by length of the mortgage term and

whether the rate is fixed or variable. The biggest

discounts are provided to those willing to take on

the uncertainty of a closed variable mortgage.

I have no way of knowing which type of

mortgage is best for your specific situation;

however, many long-term studies that looked at

decades-worth of data have concluded that the

majority of people would pay the least amount

of money over the course of their mortgage by

steadily using short-term, variable mortgage

rates, and renegotiating frequently.

For many folks, however, paying the very rock

bottom amount of interest over the course

of their mortgage is not the only relevant

consideration. Some are afraid of not being

able to make the monthly or weekly payments if

interest rates go up. Others hate the rigmarole

of negotiating a new mortgage term every year

or so. (Even though with internet comparison

shopping this process is now easier than ever

before).

If you can afford a bit of a bump in interest rates

over the term of your mortgage, then negotiating

a good discounted variable is often the best way

to go. But you need to decide if you can live with

the risk of higher interest costs. Remember that





no one really knows what the prime interest rate

(and consequently what variable rate mortgages)

will do over the long term. It’s impossible to tell

where rates are headed six months out, never

mind over five-to-ten years.

Here’s a graph that will give you some historical

context on interest rates (it should not be

depended upon to predict the future).

Prepayment Terms

Down payments and interest rates are

important, but they aren’t the only key items in

your mortgage contract. There are a few other

important elements as well. Most people largely

ignore them as they’re blinded by the enthusiasm

to get into their new home. One is your ability to

make extra principal payments (over and above

the minimum that you agreed to pay).

You might think that, like many other loans, if

you run into some cash through a promotion or

inheritance you can simply pay off your mortgage

and celebrate. That isn’t the case with closed

mortgages. Lenders carefully manage the speed

at which you pay back your loan. Their goal is

obviously to keep your repayments relatively

slow in order to collect the maximum amount

of interest. As a result, most closed mortgage



contracts only allow you to pre-pay 10% to

20% of your mortgage each year before a

penalty kicks in. For some people, prepayment

size doesn’t matter at all as they don’t plan on

making any extra payments on their mortgage,

but for others it could be a major factor.

Breaking Your Mortgage

“Man, interest rates are going through the

basement and that new credit union has a

great rate if I transfer over – but how do I get

out of my current mortgage?”

Unlike diamonds, mortgages aren’t forever. Most

people simply wait until their mortgage term is

up before switching institutions or trying to get

a lower interest rate. Alternatively, some lenders

let you “blend” your old interest rate with a

new lower one if you extend the length of your

mortgage with them.

If these options don’t sound great to you, there

are usually built-in ways to get out of (“break”)

your closed mortgage contract. Traditionally,

most lenders charge the equivalent of three

months’ worth of interest in order to get out of

a contract; however, now there are all manner

of ways to calculate penalties for terminating a



mortgage early. One is based upon a concept

called the Interest Rate Differential (IRD). I’m not

even sure I could describe some of the weird

calculus banks use in these instances, so make

sure your lender explains it before you sign on

the dotted line.

Weekly, Bi-weekly, or Monthly

Payments

How money comes out of your account to

make periodic mortgage payments is also

something you’ll have to decide on. Many people

recommend going with a more frequent rate

such as weekly or bi-weekly. That’s because as

you pay your mortgage down quicker, you pay

substantially less interest over the course of the

loan.

Other folks like to schedule their mortgage

payment to be withdrawn from their account the

day after payday (or the Monday after). Since the

mortgage is their largest payment, it makes it

easier to budget for the rest of the pay period.

Construction or Building

Mortgages

If you’re looking to build your own house right off

the bat, you are in a somewhat unique position.

New-build mortgages are sort of a separate

category altogether. Most of the time lenders

will release parts of the loan – or “draws” – at

various agreed-upon stages of completion. Often



these stages will include the land purchase, lock

up (windows and doors are installed), drywall

installation, and occupancy (with occupancy

permits being issued). The process of getting

your mortgage funds released can be somewhat

confusing. You have to have enough of your own

funds to reach certain stages before the next

level of funding kicks in.

The reason for all these rules is the relatively high

level of risk that a new construction mortgage

presents for a lender. If you decide to abandon

the project as it’s being built and default on the

mortgage payments (at a massive hit to your

credit score), the bank would be left with a half-

finished building – not exactly an ideal situation.

New construction mortgages will typically only

lend up to 75% to 80% of the appraised value of

your finished home (as defined by an appraiser

and cost estimates from your builder). This

means that, as the buyer, you may need 20% to

25% of the value of the finished house in order to

secure this type of mortgage. That makes draw

mortgages less accessible for most first-time

homebuyers.

Rent-to-Own Mortgages

Another niche strategy for getting into a home

is using a rent-to-own option. These mortgages

are most often used by people who cannot get

a conventional or high-ratio mortgage for the

time being, but are hoping that after a period of

renting they will qualify.

Some experts claim that renting to own is never

a great option. Others think that for people in a



very small percentage of situations (such as a

recent divorcee), it makes some sense.

The basic idea is that if a buyer finds a home

they like, they pre-negotiate a deal with the seller

whereby they will rent the home for a certain

amount of time. Sellers sometimes use a deal

like this as a “carrot-on-the-stick” incentive to

get people into their house. Most of the time

buyers will pay an upfront fee of 2% the house’s

appraised value +/-, in order to give themselves

the “option to purchase” at the end of the

agreement.

Sometimes an extra premium is also added

into the monthly rent. That goes towards the

prospective buyer’s down payment at the

end of the agreement. The main reason these

mortgages are controversial is that if a buyer still

does not qualify for a mortgage at the end of the

agreement (and sometimes the appraised value

of the house has gone up substantially during

the rental period), then they lose the amount they

paid at the beginning in order to have an option

to purchase, as well as their monthly premiums.

Most experts agree that if you can qualify for

a conventional or high-ratio mortgage on your

own, you should go that route instead of renting

to own.



What Can You Afford?You’re saving up your 20% down

payment, you know what to look for

in a mortgage contract, and you are

ready to start looking for the house

of your dreams. The only problem

is, you’re not sure how much you

should spend.

After all, your parents and

grandparents might have told you

something like, “Buy as much home

as you can comfortably afford, and

then you can grow into it.” This



might have worked out ok for some of the past

generations, but I’m fairly certain it’s not too

brilliant going forward. Breaking the bank every

month to squeeze out a mortgage payment

is a quick way to cripple your overall financial

plan and lower your standard of living (Google:

“House Poor”).

When you look for your new place, don’t do

things “HGTV-style”. That’s where you say you’re

looking for something in the $200,000-$225,000

range and then fall in love with a $250,000

home. (But it’s ok, because you negotiated down

to $242,000. Heck, you basically made money

right?)

Rules of Thumb

Before going house shopping, you need to

know how much the bank will lend you (we’ll

get into something called “pre-approval” a little

later) and how much you should actually spend.

You should know that banks love mortgages.

Long mortgages are best since you’ll pay lots of

interest.

Consequently, lenders of all types will often

bend over backwards to get you into a home

that will take a sizable bite out of your monthly

budget.

There are two main ratios and/or rules of thumb

most lenders use to determine just how large a

mortgage you’ll be eligible for.





PITH and the Gross Debt Service

Ratio (GDSR)

This pithy acronym refers to Principal, Interest,

Taxes, and Heating costs – in short, the costs of

owning your home. Fifty percent of condo fees

are also often added to this equation. To figure

out our GDSR, we will take the household’s

gross income (how much money you make from

all income sources before any taxes are taken off)

and divide our PITH figure by that number. Most

lenders want your GDSR to be at or under 32%.

Well-qualified clients can go up to 39%.

For example, if I am looking to get a $1,000-per-

month mortgage payment (this would get me

something in the neighborhood of a $250,000

home on a 25-year mortgage), and my heating

bill is $3,600 per year, while I pay $3,000 in

taxes, then my total PITH number is $18,600. My

wife and I would have to earn at least $58,125

in order for lenders to consider us for this

hypothetical home under most circumstances.

Total Debt Service Ratio (TDSR)

The second rule of thumb is that your entire

monthly debt load should not be more than 40%

of your gross monthly income. Basically, the

lender will take the number you used when you

figured out your annual housing costs (PITH) and

add any other debt that you have. This includes

any car loans, credit card debt, alimony, child

support, and any other loans.



To continue my example, if I want to buy the

same house as above, the lender will take

into consideration that I have $2,000 in credit

card debt and a $300 monthly car payment.

My relevant TDSR figure is $24,200 for the

year. Most lenders will allow 40% of your gross

income; therefore, by this ratio, my wife and I

would likely be approved for our hypothetical

$250,000 mortgage if we had a gross income of

$60,500.

Just Because You Can, Doesn’t

Mean You Should

If you spend 32% of your gross income on

housing costs, you will have to sacrifice in a lot

of other areas in your life. It’s just basic math. If

you and your partner make $80,000 before tax,

you’re likely down into the $60,000-$65,000

range in terms of your net income before you

even see your paycheque. If your mortgage size

required the maximum 32% GDS ratio, that’s

another $25,600 gone. Now you’re left with only

about $40,000 a year to pay for basic necessities

such as food, phone bills, vehicle maintenance,

gas, child-related expenses, insurance, etc. You

likely won’t have much breathing room to throw

at worthwhile goals like retirement savings, RESP

contributions, vacations, or small luxuries. (This

isn’t even accounting for higher interest rates or

unexpected job loss.)

Some Canadians will actually borrow even more

than what the standard debt ratios recommend.

They do this by going to a “B” or “second-tier”



mortgage lender. I wouldn’t recommend that

approach at all. Give yourself some breathing

room and don’t tempt yourself by shopping for

homes outside of your true affordability range.




Closing Costs – Surprise!The size of my closing costs were the largest

surprise to me when I purchased my home.

To have that burden hit me on top of scraping

together my down payment was not something

I was properly prepared for. After talking to

several of my friends about their home-buying

experiences, I learned that I wasn’t alone. I was

getting buried in an avalanche of paperwork that

seemed to cost me more money every time I

turned around.

Only after buying the house did I learn that in

order to make sure everything goes smoothly,

you should have somewhere in the range of

1.5% to 4% of the cost of the house on hand –

on top of your down payment. Closing costs can

add up in a hurry. Three percent of a $250,000

home is $7,500 after all. That’s not exactly

chump change for most young Canadians.

Saving this money can be a frustrating

experience. You’ve already worked hard to make

sure you have a solid down payment. It can start

to feel like you’ll never get into your new home.

But, it’s better to be properly prepared than to be

scrambling to cover fees at the last minute.

Closing costs are also one of the main reasons

that moving every few years is incredibly

expensive. Here’s a list of where you’ll be

sending cheques before you reach the light at

the end of tunnel:



• HomeInspectionFee–Thisisn’ta“must-

have” in some cases. Lenders generally

don’t force you to do a home inspection

before completing a mortgage. But it’s

highly recommended nonetheless. HGTV

has roughly 17 shows all based around the

concept of inadequate home inspections

requiring major renovations. Again, this will

likely be the largest purchase you ever make.

Wouldn’t you rather spend a few extra bucks

and sleep well at night?

• LegalFees–Whilesomepeopletryto

complete paperwork alone, lenders often

require the use of a lawyer or notary to

process the mortgage closing. Mine came in

around the $1,000 mark (and that’s cheaper

than the average)… ouch!

• LandTransferTax–Youthoughtyoucould

buy a house without paying taxes? Guess

again, every time a property changes hands

your provincial government makes sure it

gets its share. Some cities, like Toronto,

have a municipal land transfer tax as well.

This tax is calculated as a percentage of the

property’s value. For example, a $400,000

house in Toronto will see you pay $4,475

to the Ontario Government, and a further

$3,725 to the City of Toronto. I feel your pain.

• PropertyInsurance/homeinsurance–

Lenders often won’t let you take possession

of a property before it is insured. Get ready

to pony up $100 per month or so to protect

your new purchase from all manner of

potential disasters.



• TitleInsurance–Yourproperty/home

insurance won’t protect you from weird

occurrences like title fraud, disputes over

property lines, or anything that threatens your

legal ownership of the property. Chalk up

another $200-plus.

• PropertyTaxes–Whenyouwererenting

before purchasing your first home, you

likely escaped property taxation. This is a

municipal tax and is generally calculated as a

percentage of your home (with a few caveats

depending where in Canada you live). Most

cities will have you forking over anywhere

from $2,000 - $4,000 annually on the typical

starter home. Check with your lawyer on

the taxes due when you take over your new

home.

• CondoFees–Ifyou’relikemanyyoung

Canadians and looking to purchase a

condominium as your first step on the

housing ladder, you need to become familiar

with condo fees. These monthly payments

go to pay for maintenance and management

around the facility and can vary substantially

from $100 to more than $600 per month.

• MovingCosts–Ifyouhavealotoffriends

that owe you one – and you don’t mind

investing in some pizza and adult beverages

– you might be able to cut down on your

moving costs a lot. All the same, moving

trucks and the gas that goes in them aren’t

free. If you’re changing cities, don’t forget

to factor in meals on the road, sleeping

accommodations, driving multiple vehicles,



storage and several other little costs that can

really add up.

• ProvincialTaxesonCMHCInsurance–In

case you forgot, our old friend CMHC is

back to remind you that you owe tax on this

insurance that protects someone else – but

that you’re forced to pay. Come up with a

20% down payment and you don’t have to

worry about this one.

• MakingtheHouseYours–Mostpeople

recommend changing the locks when you

move into a new place for obvious reasons.

You may also want to do some painting and/

or cleaning before moving all of your stuff in.

There is no better time to make sure you get

into every nook and cranny.



Executing Your Game PlanI don’t know what I thought buying a house

would look like, but I know I was shocked at just

how complicated the transaction was. Maybe

it’s because I was using my vehicle purchase

as a reference point. After all, for most people,

buying a vehicle is the second-largest consumer

purchase they’ll ever make. Car shopping is

comparatively easy. You simply look up a few

things online, go to a dealership (or decide on

a private sale), maybe get a mechanic’s opinion

if you want to be super thorough, and then

negotiate the price and/or features. Obviously

you could break those steps down a little more,

but the point is that it’s all pretty straightforward.

People buy vehicles on whims, you watch

them do it in movies, and it is relatively painless

compared to the marathon of buying a house.

No one ever made a movie where you watch

someone look badass while filling out some pre-

approval paperwork, and then three months later

they submit an offer to purchase, etc. There

is no “I’ll take it” and you roll off the parking lot

feeling good about life in the house-buying world.

So, if it’s not like buying a car, and you don’t

just see a price written on the window in yellow

marker - how do you pay for a house? What

steps do you need to take to get your name on a

piece of paper saying you now own it?



1) Pre-qualified, Pre-approved,

Pre-pared

Get pre-approved about 91 months before you

actually think you might want to buy a house.

Okay, that might be a slight exaggeration, but

seriously, start talking to your preferred lender

early in the process.

Even better, get pre-approved from a couple

of different places. Pre-approved means you’re

conditionally approved for a mortgage – up to

a certain limit – in advance of actually buying a

house. It speeds up the process substantially

once you find the home you’ve always wanted.

Basically, the idea is that the lender gets all of

your paperwork in order and assesses your risk

level in advance. That way, nothing is rushed

when you start making offers.

Any piece of paper you have ever created in

your life will want to be looked at by your lender,

especially if you’re young, and especially if you

haven’t had a super stable job with a large

employer for several decades. I think my lender

even requested my 7th grade report card at

some point.

As part of the pre-approval process, many

lenders will want to do a hard inquiry of your

credit score. If you plan on comparing the

offerings of several different lenders (a smart

move) you may want to ask for a pre-qualification

instead of a pre-approval. I know this sounds

confusing, but the reason for this extra step is



that hard inquiries on your credit score in a very

short period of time it can negatively affect how

lenders see your credit worthiness. Asking for

a pre-qualification is a great way to get the ball

rolling without a broker or lender pulling your

credit.

Start early so that you’re not rushed into an

unfavourable rate and product. The home-buying

process can take several months from start to

finish—or as little as a few weeks if you’re lucky,

want to rush it and everyone cooperates. I’ve

seen many a buyer go through open house after

open house, only to have their hearts broken

when their financing or paperwork fell through

due to a time crunch.

If you are self-employed, receive much of your

income from commissions, or do a lot of contract

work, then everything in the previous paragraph

is exponentially true. Lenders love boring people

like me – a teacher with an income that can be

easily verified with an employer call and a couple

of pay stubs. If you instead earn money that’s not

easily-provable, expect more paperwork in your

future.

2) Offer to Purchase (OTP)

Buying isn’t easy. You don’t simply agree to pay




the asking price, tell your bank to send your

mortgage money and then walk away with the

keys. It is the buyer who starts the dance of

house buying by submitting an Offer to Purchase

(a.k.a. Offer to Buy or Agreement of Purchase

and Sale).

In my experience, Offers to Purchase (OTPs)

are relatively simple to prepare yourself in

certain cases – but in some instances the deal

in question is more complicated. A while back,

I got a template from a friend’s lawyer, filled it

out, had him look it over quickly, and we were

all satisfied with the document. That being said,

many people recommend getting a Realtor or

lawyer to look over the offer. After all, it is a legal

document and will dictate the specifics of your

house purchase.

3) Negotiation and Counter Offers

You or your agent will submit your OTP to the

seller/vendor and cross your fingers. In a perfect

world, the seller accepts your offer and you’re off

to the races. More often, the seller will now make

a counter offer. A counter offer can include any

number of items in addition to the price. It usually

includes a time limit on how long you have to

accept, or is contingent on the buyer providing

specific paperwork. The

counter offer can also

include specific repairs to be

completed before a certain

date and a list of appliances

and chattels that form part

of the deal. You as the buyer

can simply:



• signthecounterofferandmoveon

from there

• rejectthecounterofferoutright,or

• amendtheofferandsenditback.

This is how official negotiation takes place during

the house-buying process. Naturally, the seller

can also reject the offer at any point and stop the

transaction from moving forward.

If the seller accepts your OTP or counter-to-

their-counter offer at any point in the process,

then you (the buyer) are legally obligated to

go through with the transaction; therefore, it is

crucial that you understand all the terms in the

OTP document.

4) Inspections and Walkthroughs

Once the buyer’s offer is officially accepted, and

before the settlement date, all inspections and

walk-throughs by the buyer must take place.

Sometimes a mortgage lender will stipulate that a

home inspection must be done, but usually it’s at

the borrower’s option. Any issues and resolutions

that arise at this point should be negotiated and

included in an OTP amendment signed by both

parties. For example, if new flooring was part

of the offer, then this should be completed prior

to the settlement date. The time between the

acceptance of the offer and the settlement date

is commonly referred to as the closing period

and is usually 40-50 days.



5) Closing and Lawyers

Before you get to your closing day celebration,

the closing process must be completed and

a goat sacrificed to the deity of lawyers and

paper shufflers everywhere. As part of an OTP, a

deposit is usually required. This deposit can be in

the form of a personal cheque or it might need to

be a certified cheque. This money will eventually

go towards your down payment, but for the time

being it will rest with a neutral third party. This

third party will juggle the relevant documents

from both parties and complete the transaction

once all conditions have been met. This whole

process is generally referred to as the escrow

process or something “being held in escrow”.

There may be a few other expenses relating to

insurance and taxes that can be required to be

part of the escrow process as well.

6) Closing Day – Welcome to Your

New Home!

Closing Day (a.k.a. settlement) is the grand finale

to the whole deal. If everything goes according to

plan you will take legal possession of your home

on this day. The vast majority of the paperwork

should be taken care of long before this point.

On the closing date, your lender should release

the money backed by your mortgage loan to

your lawyer. You will provide the balance of your

down payment (some of it will already be sitting

in escrow from your deposit) and the relevant

closing costs to your lawyer. At this point, the

lawyer(s) handling everything finally earn their pay



and send your down payment and the mortgage

cash to the seller (minus commissions, which are

sent to your real estate agents – if applicable).

Your lawyer then completes the legal title work,

registers the house in your name, and FINALLY

hands you the keys to your new home. Yay!



Building Your Dream TeamIf you’re feeling somewhat intimidated by the

complexity of home buying, join the club. It’s a

lot to take in, and most of us have no sense for

the steps involved until we find the home of our

dreams and actually start the process.

The good news is that there’s plenty of help out

there for you to lean on as you go through the

home-buying process. The not-so-good news is

that all of this help comes with a price tag. I’m a

big fan of the DIY approach in many cases, but

before we get into that cash-saving idea, let’s look

at building a team that can help ease your load.

Your Lawyer

One could argue that this is the only non-

replaceable position on your team. Lawyers are

clearly the MVP of most home-buying squads

(unlike Realtors who take all the glory and puts

their faces on bus benches).

Your lawyer has a lot of responsibility and if you

choose to take the field without a real estate

agent, they will be even more valuable to you.

Choose this franchise player wisely. They can

save you a lot of headaches down the road. The

best part about having a lawyer work for you is

that, even though they aren’t cheap, they don’t

work on commission. We’ll explain why this is

important when we get to real estate agents in

a moment. For the time being, just think about



paying $2,000-$3,000 for a great lawyer as

opposed to 3% of a home’s purchase price.

There can be a big difference between a flat-fee

and a variable commission.

Your lawyer will make sure the property you want

to buy is in good legal standing and doesn’t have

any liens, penalties, clean-up orders, or other

complications. The most important thing your

lawyer should do for you is review all contracts

before you sign them and answer any questions

you might have. As a buyer, this is especially

important when it comes to the OTP. If that

document is accepted by the seller, the process

is done and nothing more must be added unless

both parties agree. Your lawyer will also explain

and handle the actual transaction of money

during the escrow period. If you choose not to

go with a real estate agent, the lawyer can also

handle some of the agent’s responsibilities.

When choosing a lawyer, try to find one that

specializes in real estate transactions. Finding a

specialist can save you on legal fees and ensure

you get the best advice.

Lender

This teammate will make sure your mortgage

is in place prior to all of the other razzle-dazzle

stuff. Remember when we talked about getting




pre-approved? That’s what these guys are

going to do, among other things. In addition,

the lender will work with your lawyer to transfer

the mortgage loan money in order to actually

complete the transaction. A lender could be any

bank, credit union trust, insurance company or

wholesale mortgage provider.

Mortgage Broker

If you don’t want to deal with lenders one-on-

one, a mortgage broker can help negotiate a

good deal on your behalf. Mortgage brokers

can give advice on which mortgage fits your

needs best, and often provide access to lower

unpublished rates. That said, there is some

controversy over whether using a mortgage

broker is ultimately in a person’s best interests.

That’s because their pay comes from a lender’s

commission. Moreover, there are sometimes

vague financial incentives earned by brokers

to funnel clients to specific lenders. In the last

few years, online mortgage brokers and rate

comparison sites have sprouted up to add

transparency to the financing game. They are

a growing force when it comes to comparing

mortgage rates and providing quotes.




Realtor/Real Estate Agent/Real

Estate Salesperson

Before I get into helping you navigate this

labyrinth of terminology and hidden costs, I need

to be upfront with my biases. I’m really not a

fan of the current real estate business model in

Canada. I think it’s ridiculous that we still work on

a commission-based system. (Does a real estate

agent work twice as hard to sell a $500,000

house as they do a $250,000 house? No? Well,

why do they get paid twice as much?) This is a

heated debate that I’ll delve into a little more at

the end of this chapter, but I wanted to be clear

about my stance from the get-go.

If you tell someone you are looking to purchase

a home, they will likely ask you who your

real estate agent is. This term is rife with

misconceptions and technicalities. The term “real

estate agent” refers to someone who is licensed

to deal in real estate. It is a basic qualifier when

it comes to real estate transactions. But it is not

a great descriptor – despite its widespread use.

Confused yet? Stay with me.

The term “real estate agent” is usually referring

to someone who works on behalf of a real estate

broker. They are also sometimes referred to as

“real estate salespeople”, which is probably the

most accurate job title of the bunch.

Now, just to make things even more confusing,

the term “Realtor” (that is often used

interchangeably with real estate agent and real



estate salesperson) is a trademarked term that

denotes an individual that has met certain levels

of education and has agreed to a specific set

of professional standards. All Realtors are real

estate agents, but not all real estate agents are

Realtors.

Realtors are most notable for the fact that they

can list properties on the Multiple Listings Service

(MLS). This is quite an advantage if you’re selling

a house.

To make a long story short still pretty long, your

real estate agent/Realtor/real estate salesperson/

real estate broker exists to help smooth out

all the technicalities involved in a real estate

transaction. In the buyer’s case, they give

advice on properties that best fit the buyer’s

stated needs. Agents can also coordinate

between the other members of your team,

recommend professionals to fill the other roles,

make phone calls on your behalf, and make

sure all documentation is completed properly. In

exchange for those services, enlisting the help

of one of these individuals will usually cost the

buyer 2.5-3% of the value of the home they are

buying.

Many people will immediately claim this is not

true and that the seller pays the cost of the

commissions for both the buyer’s agent and

the seller’s agent. Well, here’s the deal – both

camps aren’t technically wrong. No money

comes directly out of the buyer’s pocket to pay

an agent, BUT the total commission paid to the

seller’s agent (if they use one) is then divided



between the two agents. Guess who pays for

that commission? The person that is buying the

house pays the price, and then the seller hands

over the commission percentage. So you tell me

who is actually paying.

All I know is that if I buy a house without using an

agent, I’m asking for a 3% reduction in the price.

We have a great article here that discusses this

commission terminology debate. It’s one of the

most popular on our site. Skip to the end of this

chapter for more on the DIY approach vs. using

an agent.

Insurance Broker

You need to get your house insurance in place

before you get the keys. That’s where these

folks come in. They’ll explain the various types

of scenarios that you need to be insured for, and

work with you to find a package that fits your

needs. The insurance broker’s costs are almost

always included in the insurance they provide.

Home Inspector

As a buyer, you can’t put enough emphasis on

this position. While you don’t technically need a

home inspector in some cases, it’s my opinion

that one can never be too careful when making

such a large and important purchase. Check

around, get references, make sure you get

someone who is knowledgeable and professional

– not someone who is simply there to sign off

and collect a quick cheque. Unless you’re a

construction expert, this member of your team

http://youngandthrifty.ca/real-estate-agent-commissions-decoded/




will be your eyes and ears when it comes to

looking at the most important stuff (no, not the

granite countertops and walk-in closets). I’m

talking about whether the foundation is stable,

what (if any) repairs need to

be done, and if there were

problems in the past.

A home inspector conducts

a visual inspection where

they walk through the house

and take a look at everything

from plumbing and electrical, to looking at what

problems the drainage pattern of a property could

present. A real professional will even be able to

give you an educated guess on when certain parts

of a building will likely need to be replaced.

Often, homebuyers fall in love with a new paint

job and hardwood floors right away (I love new

paint jobs and hardwood floors too – no worries!).

Unfortunately, their souls are sometimes crushed

when they find out that $30,000 in repairs

are needed just to keep the

basement from collapsing, or

to keep water from pouring in

during the next heavy rain. A

decent home inspection should

cost around $500, depending

on your region, and it’s worth

every penny.

Appraiser

As one might expect, an appraiser appraises

the value of a property (a.k.a. tells you what it’s

worth). You might want this for your own benefit



– but comparing on the internet can sometimes

give you very similar results.

In practice, your lender may actually require you

to have a property appraised before completing

your mortgage. The appraiser will carefully

examine all of the home’s characteristics before

comparing it to other recent sales in your area.

Appraisals range from $250 to $500 or more for

outlying areas or unique properties.

Land Surveyor

You may not need a land surveyor, but if the

property does not have a current survey, you

will generally need title insurance to make the

purchase. A land survey will carefully document

exactly what the physical dimensions of the

property are and where the property lines are

relative to other land and highways. They are

done when a property is initially purchased and

a home built, but are often lost. In combination

with title insurance, a land survey can protect you

against misunderstandings and disagreements

such as who owns the property that a fence is

on, or if your driveway is completely on your land.

Land surveys vary depending on the complexity

of the property, but should range in the $500 -

$2,000 territory.

DIY vs. Paid Professional

In many cases the number of positions on your

team that need to be filled aren’t decided by

you. Oftentimes your lender will decide if a home

inspection, land survey, or appraisal needs to



be done. The position that is most expensive,

however, is purely optional: your real estate

agent/real estate salesperson/Realtor (hereby

referred to as “agent” for simplicity’s sake).

So, if you didn’t click through to our article on

how real estate commissions are calculated

and how your agent gets paid, here’s the short

and sweet. You can negotiate a flat fee for your

agent’s time (a good idea in my books) or you

can pay a commission. The average commission

that is usually split between the seller’s agent and

the buyer’s agent is 5-6%. That’s a lot of money!

I often wonder if most people understand just

how much money that is. On a $300,000 home,

6% is $18,000. If half of that share is yours, how

many hours do you have work to earn $9,000

in after-tax income?! The services you receive

had better be excellent in order to get that level

of value. For me, that level of service doesn’t

exist, but everyone values time and expertise

differently.

Most of the time the decision on whether or not

to use an agent happens on the other side of

the home-buying transaction. You’ll find a lot

of articles talking about saving money by not

using an agent when you sell a home. There

are now many different levels of service and

value propositions available if you wish to do

some of the work of selling your home yourself.

There isn’t much out there on using an agent to

buy your home though. This is the result of the

misunderstanding we talked about earlier, with

respect to who pays for what when someone

buys a house. This debate often leaves both




myself and the person that disagrees with me

quite frustrated. Once again, all I know is this: if

I’m not paying an agent, I’m getting that house

for 2.5%-3% cheaper every time.

If you’re thinking about using an agent to sell

a home, I suggest you read the chapter of the

bestseller Freakonomics that talks about the

incentives that agents have for selling your home.

**Spoiler Alert** - they’re not getting you the

same value as they get themselves! The authors

of that book have no “dog in the fight” when it

comes to selling your house. They don’t have

any interest one way or the other, so why would

they present such a compelling case against

agents? Subsequent studies have confirmed

their conclusions.

Agents have a huge incentive to convince

you, the buyer, to make a quick purchase.

I’m not saying agents are bad people, I (like

Freakonomics authors Dubner and Levitt) am

saying that agents are human. If you give a

group of people a large financial incentive to get

a deal done quickly, on average that deal will get

done more quickly. Depending on what buttons

they want to push, agents can create a sense

of urgency for a buyer that doesn’t necessarily

exist. This is especially true when the same

agency/broker is handling the transaction on

behalf of the buyer and the seller. Think about

how much of an incentive there is to get a deal

done when you get to make profit on both sides

of the equation!

To be brutally honest, I didn’t use an agent when

http://youngandthrifty.ca/recommends/freakonomics



I purchased a home and I fully plan on never

using one. Yes, agents can provide good advice

and smooth out any potential problems with the

transaction. For some people, that can be worth

thousands of dollars. For me, it’s not. I have

my lawyer to make sure all the paper work is

completed correctly, my home inspector to make

sure the house is in good shape, my Google-

fu skills to determine what my purchase price

should be, and my own best interests at heart to

guarantee I negotiate correctly. That’s worth 3%

for me. In order to put some limits on my biases,

I will allow that it might not be worth it for you.



Saving Up Your Down PaymentIf you’re looking at purchasing a home, you

might have already saved up a down payment.

In that case, you can likely skip this chapter. On

the other hand, with fewer and fewer Canadians

able to put down 20% of the purchase price of

the home, a little more saving might be a good

thing.

A lot of young folks won’t want to hear this,

but it’s probably a good idea to pay off your

consumer debt before looking at buying a home.

Some experts feel that you should have your

student debt and vehicle loan also paid off before

you start climbing that down payment mountain.

I’m not as strict and cautious as that. Ideally, yes,

you would be debt free and have a nice chunk

saved up as a rainy day emergency fund before

worrying about a house. On the other hand, if

you believe owning a house will really raise your

standard of living, I’m of the belief that one can

handle having a couple different sources of debt,

provided that they live within their means. That

means not borrowing the maximum mortgage

the lender will give you and keeping your interest

costs low. If you have credit card debt or store

payment plan debt, there is really no debating

that this should be paid off immediately. The

interest rates are just too high and it will never

make sense to have a dollar waiting in a GIC or

High Interest Savings Account (HISA) when it

could be paying off debt at 20% interest.



Once you have paid off your high-interest debt

and made a budget for how much you can

afford to be saving each month, the next step is

determining the best way to save up. The good

news is that governments want to help you buy

a house. In addition to all sorts of federal and

provincial tax credits, there are even municipal

first-time homebuyer grants available in some

cities. This is where your province or city simply

gives you money in order to buy a home there —

typically with a few conditions. There is also tons

of eco-specific cash available if you purchase an

energy-efficient home. In addition to all of that,

the government will let you borrow money from

your Registered Retirement Savings Plan (RRSP)

in order to put a down payment on a house.

Home Buyer’s Plan

This ability to borrow from your RRSP is called

the Home Buyer’s Plan, and it’s the quickest way

to save for a down payment if done properly.

Some feel that it’s best to leave your retirement

savings alone, and save for a down payment

separately. In a perfect world, everyone would

have both a growing retirement account and be

able to save efficiently for a down payment. Very

few young Canadians live in a perfect world,

though. The reason borrowing from your RRSP is

so effective, is that you can purchase your house

with pre-tax dollars instead of after-tax dollars.

What I mean by that, is when you put money into

your RRSP you usually get a tax refund, right?

That tax refund is your tax money that got taken

off of your paycheque before it was deposited in



your bank account. It is now being given back to

you (don’t worry, the government will still get their

cut when you retire and take money out of your

RRSP).

If you take that refund and buy a big screen TV,

you are no further ahead than if you just stuck

your after-tax money in your mattress. If, however,

you take that refund and put it right back into

your RRSP (thus generating a tax refund for the

following year) you will supercharge your savings

habit.

Besides that tax refund getting you to the finish line

quicker, the other nice thing about saving a down

payment in an RRSP is that any interest or gains

made within the account are tax-free. We’ll get

to why that’s beneficial in just a second, because

the same rules apply to the other great savings

vehicle: the Tax-Free Savings Account (TFSA).

This plan does have its limitations. First, at the

moment you can only withdraw $25,000 from your

RRSP for the down payment. (There’s talk of this

limit being raised.) So, if both you and your partner

are both purchasing a home for the first time, you

can each access $25,000, for a total of $50,000.

This money isn’t falling from the sky, however.

With the Home Buyer’s Plan (HBP), what you’re

basically doing is lending yourself money from your

RRSP. You’re required to pay it back in instalments

over the next 15 years, or face tax consequences.

You’ll also want to pay it back just to catch up on

your retirement savings. For more information on

the Home Buyer’s Plan check out our in-depth

article.

http://youngandthrifty.ca/how-to-use-the-home-buyers-plan/

http://youngandthrifty.ca/how-to-use-the-home-buyers-plan/



Using a TFSA

Many people either want to use their RRSP

room for other things, or they require more than

$25,000 for a down payment. This is where the

TFSA comes into play. You might have recently

heard that the federal government has boosted

the TFSA contribution limit to $10,000 each year.

You also might be aware that, unlike its RRSP

cousin, the TFSA is much more flexible. It lets

you to put money in and take money out without

penalties (as long as you never contribute more

than you’re allowed in any single year). This

makes the TFSA another superb option for

growing your down payment.

While the TFSA and RRSP have some things in

common, a nice tax refund is not one of them.

While RRSP contributions are done with pre-tax

income (which defers taxes on your contribution

amount), TFSA contributions are done with after-

tax income. In other words, you pay tax on your

income first, and then invest with it. The benefit

is that you won’t owe the provincial or federal

governments a dime when the money comes out

of your TFSA.

One might reasonably ask, “Why go through

the bother of opening a TFSA if you have to

pay taxes anyway? What is the advantage in




using a TFSA over a simple savings or chequing

account?” A key advantage in both the TFSA

and RRSP is the fact that any income earned

within the accounts is tax-deferred. From a

retirement savings standpoint, this can be very

powerful over the long-term

Let’s consider an example to illustrate. Suppose

you have a three-year plan for saving a down

payment. You might want to save your initial

contributions in a three-year GIC. That way, your

money would come due right when you wanted

to purchase a house.

If you invested that three-year GIC (currently

paying 2% interest) in a non-registered account,

you would have to pay tax on the gain. That

means your interest is only compounding at

1.4% or so (depending

on your tax bracket)

because you have to

share some of your

earnings with the tax

man. Within a TFSA you

get to keep the full 2%

return. Within an RRSP

you can also use the full 2% gain towards your

down payment, assuming you use the HBP.

Any money you take out of a TFSA will be added

to your contribution room for the following year.

Consequently, you can always catch up again

if you want to use your TFSA for retirement

savings. You never sacrifice contribution room

when you save for a down payment in a TFSA.



Investing Your Way Into Your First HomeThere are folks out there who believe that if they

use their best friend’s uncle’s stock trading tips,

they’ll build their down payment nest egg a lot

quicker. While theoretically possible, I wouldn’t

recommend it. Anyone who tells you they know

where the stock market will be five years from

now is lying or has convinced themselves of a

falsehood. If you need your money in the next

five years it should not be in the stock market.

That includes ETFs and stock mutual funds as

well.

If you are saving a down payment you will likely

want that money in the next one to five years.

Therefore, your best bet is a nice safe investment

that will allow your money to grow conservatively

without the short-term risk of stocks or

commodities. GICs, government bonds, or high-

interest savings accounts held within your RRSP

and/or TFSA are a great option.

Don’t Back Yourself Into a Corner

A quick note about saving for a down payment:

don’t forget about those pesky closing costs. I

was put in a pinch when I purchased my house

because the closing costs added up faster than I

had anticipated. There are many seemingly small

expenses that come from all directions when

you purchase your first home, but they can sure



swallow up your budget in a hurry. Make sure

they don’t sneak up on you by saving a little

more than you think you will need.



Finding Your Dream Home

It’s probably worth reiterating at this point that I

am not a real estate expert – although my wife

does make me watch a lot of HGTV. What’s

more, I’ve probably hunted for roughly 729

houses at this point – not sure if that gives me

any street cred.

I don’t know you and I don’t know what you

want in a house. I’m sure many of Canada’s

urbanites would look at the home I purchased

and have an inner moment of sympathy for my

seemingly lonely rural existence. On the other

hand, I look at a basic bungalow or a condo in

Vancouver or the GTA and I feel like the walls

are closing in around me. I’d probably suffocate

after three weeks of urban life. All this to say,

different people want different things – and that’s

OK. Consequently, I don’t want to waste time

telling you what kind of house you should get.

I don’t know what will have better resale value

or what house type fits your personality best. I

do, however, know some good questions to ask

when you begin your quest for the perfect home,

and some big picture concepts you might want

to consider.



Location, Location, Location

As someone with way too many episodes of

House Hunters under his belt, I want to scream

at my TV screen when I see people dismiss

houses because of aesthetics such as paint

colours and/or flooring options. You can change

these “personal” elements at any time. You can

also add an addition or change the structure

of your home if you have to. What you can’t

change is the location. There’s a reason why

“location, location, location” is real estate’s most

popular cliché. How will a big commute affect

your lifestyle? What sort of schools and amenities

are nearby? Where you choose to buy will likely

affect your standard of living for years to come

– don’t choose a house because you like the

crown moulding!

Luxurious Trends in Home Buying

My dad is one of the happiest people I know. He

talks fondly about his childhood and loved the

family home that he was born and raised in. My

grandparents’ house was about 1,200 sq. feet

with a finished basement. It had one bathroom

(there was also a “detached bathroom” if you

didn’t mind going outside). I’m sure Grandma

would have laughed at the concept of a marble

countertop. She believed a fireplace was made

to warm the house, not “produce an inviting

feeling of cultural welcoming upon entry”. My

point is, you may want to think about what’s truly

important to you before shelling out hundreds

of thousands of dollars for luxuries you don’t

actually need. So many Canadians are crippling

their ability to save for retirement, travel the



world, or just keep their head above water by

purchasing homes that add little to their overall

happiness. Contrary to modern beliefs, there was

a time when a couple with one child and a dog

could be content with a home under 3,000 sq.

feet with walk-in closets and granite counters.

What Type of Home Best Fits Your

Lifestyle?

If you love the downtown life, perhaps a

detached home doesn’t make sense for you.

On the other hand, if you take great pleasure

in maintaining a vegetable garden, you won’t

want to sacrifice that when home hunting, no

matter what your price range. Before you go

house buying, I recommend becoming familiar

with housing lingo and knowing the differences

between freehold condominium (condo),

townhouse, semi-detached, single detached,

duplex, etc.

Talk to Neighbours in the Area

It might be a socially awkward to walk up to

strangers and ask them if they like where they

live, but that’s a small price to pay for a first-

hand account of the pros and cons of living

somewhere. You can also check with friends (and

friends-of-friends) to try and get a trustworthy

report on the area. You’re going to be spending

a substantial chunk of your life in this place – it’s

important to know what you’re getting into.



Don’t Be In a Rush

One of my favourite quotes is, “It’s not what

you know, it’s what you can leverage.” In any

negotiation or sale, the amount of leverage a

person has – or doesn’t have – will drastically

affect the final outcome. If you passionately fall

for a home and can’t fathom walking away from

it, you’ve now handed all the leverage to the

seller. I know the idea of a home is inherently

emotional, but try your best to stick to your guns

about what you want to spend. There are always

more houses coming on the market. This is

Canada, we have an enormous industry built on

this fact.

Everything is Negotiable

Just like everything else in life, when you jump

headfirst into your house-buying adventure

remember that everything is negotiable.

Commissions, fees, interest rates, repairs, etc.

They can all be lowered at times, simply by

asking… and by not being afraid to walk away.

More importantly, don’t fall into the classic trap

of being penny-wise and pound-foolish. That

happens when people make good financial

decisions everywhere else in their lives, but

then accept a terrible deal when it comes to the

purchase of a home.




Checklist If you’re an A-type personality and like keeping track of everything, CMHC has useful third-party

checklist here. It can aid in comparing houses and help keep your decision-making rational. I certainly

have nothing to add to this comprehensive list.

http://www.cmhc-schl.gc.ca/odpub/pdf/66687.pdf

http://www.cmhc-schl.gc.ca/odpub/pdf/66687.pdf



ConclusionHopefully by now you are slightly less lost than

when I began my home ownership journey. For

many people, owning a own home is realizing a

dream to many people. It’s a deeply ingrained

part of the Canadian psyche. Just be prepared to

marshal your endurance and stamina as you take

your first steps into the world of real estate. It can

be a trying, but rewarding experience if you are

ready to proactively smooth out bumps along the

way.

For the next house I purchase, I intend to kick

things off by checking out RateHub.ca. Getting

pre-approved for the ideal mortgage will leave

me ready to take on the rest of the adventure.

Seeing all the mortgage options compared in

one place gives me the leverage I need to get the

best deal.

If you want more information on housing and

real estate, check out some of our most popular

articles on YoungandThrifty.ca

What to Consider When Buying a Condo

How Much Space Do You Really Need?


http://youngandthrifty.ca/what-to-consider-before-buying-a-condo/

http://youngandthrifty.ca/how-much-space-do-you-really-need/




How Much Home Can I Afford?

Rent vs. Buy Debate

Is It Worth It to Buy a Fixer-Upper?

The Cost of a Family Cottage or Cabin

How to Port a Mortgage

How to Rent Out Your Basement Suite

Who Needs Realtors When You Can List Your

Own Home?

Owning US Real Estate

Know Your Mortgage Penalty

Why I Chose a Credit Union for My Mortgage

http://youngandthrifty.ca/how-much-home-can-i-afford/

http://youngandthrifty.ca/rent-vs-buy-debate/

http://youngandthrifty.ca/is-it-worth-it-to-buy-a-house-thats-a-fixer-upper/

http://youngandthrifty.ca/cost-of-a-family-cottage-or-cabin/

http://youngandthrifty.ca/how-to-port-a-mortgage/

http://youngandthrifty.ca/how-to-rent-our-your-basement-suite-part-i/

http://youngandthrifty.ca/who-needs-realtors-when-you-can-list-your-home-yourself/

http://youngandthrifty.ca/who-needs-realtors-when-you-can-list-your-home-yourself/

http://youngandthrifty.ca/owning-u-s-real-estate-tax-structures/

http://youngandthrifty.ca/know-your-mortgage-penalty/

http://youngandthrifty.ca/credit-union-mortgage/

Getting Your Foot In the Door - Amazon S3 · How to Buy Your First Home in Canada. Kyle Prevost...

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