How to Buy Your First Home
Special Segment for Friends and Clients of Dillon Fraser
(Eight-minute read time)
Embarking on the journey of buying your first home is a landmark moment filled with anticipation and, admittedly, a fair share of complexities. It's a path that weaves through various stages, from initial dreaming to finally turning the key in your new front door. In this article, we address how to prepare to start the homebuying process, the steps you can expect in the homebuying process, how to overcome hurdles, and what you need to know about the First Home Savings Account (FHSA) - including common Q&A’s about the FHSA, and how to use multiple savings accounts to maximize your saving potential. With expert insights and clear, actionable advice, we aim to transform this intricate process into an achievable and rewarding journey, leading you to the doorstep of your very own home.
At the end of this article, we’ll also provide you a free cheat sheet you can reference during your entire homebuying journey, including a moving day checklist.
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Before You Begin the Homebuying Process
Save Up Money:
Set a savings goal for your down payment, typically ranging from 5% to 20% of the home’s purchase price. If your down payment is less than 20% you will need to get mortgage default insurance. This protects your lenders if you fail to make your prearranged mortgage payments. The insurance can be paid in one lump sum or added to the cost of your mortgage.
Also, consider saving for additional costs such as closing fees, moving expenses, home inspection, and emergency funds for unexpected repairs. To learn more about mortgage default insurance and the additional costs associated with buying a home, check out our article: Is Buying a House Worth It?
Build Your Credit Score:
Regularly check your credit report and score to understand where you stand. Pay bills on time, reduce debt levels, and avoid taking on new debts to improve your creditworthiness. The best thing you can do to improve your credit score is to pay on time and not use all of your credit.
Compare Mortgage Options:
There are different types of mortgages, such as fixed versus variable rate mortgages.
Fixed-rate mortgages offer homeowners the security that comes with knowing your mortgage rate and payment will remain unchanged. There is no need to worry about interest rate changes during the term of the mortgage - simply “set it and forget it.”
Variable-rate mortgages are flexible. With a variable-rate mortgage, you can benefit from lower rates if your lender’s prime lending rate decreases, making it a great option for those comfortable with taking on more risk or uncertain about how long they plan to hold the property.
Attend Homebuying Seminars:
Attending homebuying seminars or workshops can help you gain valuable knowledge about the process and connect with professionals who can help you navigate through it. If you plan to buy a home within a year, it's a good idea to start attending these events.
Did You Know We Provide Free Seminars to First Time Home Buyers?
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What to Expect in the Homebuying Process
As a first-time home buyer, here’s what to expect when navigating through the home-buying process:
1. Getting Pre-Approved for a Mortgage
Get pre-approved with a mortgage broker or a lender. Getting a pre-approval helps you understand your buying capacity. To learn more about pre-approvals, check out our article: Do I Need To Get A Mortgage Pre-Approval?
2. Finding and Choosing the Right Home
Create a list of your needs and wants in a home, such as location, size and layout, condition, resale value, and price. Then work with a realtor who can help you navigate the market and help you select the best home under your conditions.
3. Making an Offer
Get advice from your realtor on how to make a reasonable offer based on market conditions and home value. During this time it is also important to stay within your budget and react quickly to counteroffers.
4. Submitting the Mortgage Application
This step is similar to the pre-approval process. Working with a mortgage broker can help you get your application prepared and assist in gathering all necessary documents while also giving you clarity on terms and conditions.
5. Closing Day
This is the final step after you have met with a lawyer. Closing day includes the final walkthrough of your new home, funds transfer, title transfer, and receiving your keys!
Your First Home: Overcome Common Buying Hurdles
Navigating the nuances of the real estate market brings a set of unique challenges, from affordability amidst rising housing prices to facing stiff competition in hot markets. Understanding the mortgage qualification, the critical role of home inspections, and the often-overlooked closing costs are also essential steps in making informed decisions. In this section, we address how you can overcome common hurdles so you can optimize your success. If you like to read more, check out our article: What Are The Top Mistakes that Homebuyers Make?
Affordability:
With rising housing prices in Ontario, you may find it challenging to find a property that fits your budget.
Explore various government incentives and programs designed to assist them, such as the First-Time Home Buyer Incentive (FTHBI)*, First Home Savings Account (FHSA), or land transfer tax rebates. Additionally, working with a financial advisor to create a realistic budget and savings plan can help manage affordability issues.
* As of March 2024, the FTHBI has been discontinued.
Competition:
Ontario's real estate market is highly competitive, and you may face stiff competition from other buyers, leading to bidding wars and higher prices.
To navigate the competitive market, it's beneficial for you to work with an experienced realtor who understands the local market dynamics. They can provide insights into making compelling offers and strategies to stand out in bidding wars, such as flexibility on closing dates or minimal conditions.
Mortgage Qualification:
First-time homebuyers in Ontario must meet the requirements of lenders and mortgage insurers to qualify for a mortgage. This process can be stressful, especially if you have a limited credit history or low income.
You should consider obtaining a mortgage pre-approval to understand your buying power. Working with a mortgage broker can also help, as they can offer a range of options from various lenders and find competitive rates, especially if you have limited credit history or lower income.
Home Inspection:
The condition of a property is crucial, and you may find it stressful to determine if the property you are interested in has any hidden defects or structural issues.
Hire a certified home inspector to conduct a thorough inspection of the property. This helps in identifying potential issues before purchase. You should also consider a home warranty for additional protection against unforeseen repairs.
Closing Costs:
Closing costs can add up to a significant amount, and as a first-time homebuyer, you may be caught off guard by additional expenses, such as legal fees, land transfer taxes, and home insurance.
Financial advisors or mortgage brokers can provide a detailed breakdown of these costs well in advance, ensuring that you are not caught off guard. Plus your financial advisor or mortgage broker can help you save money on these costs.
Assemble Your Team
Working with professionals will help guide you in your process of obtaining your dream of homeownership. Book a call today for a free 15-minute consultation with a mortgage broker to get started
Make the Most Out of a First Home Savings Account (FHSA)
The Tax-Free First Home Savings Account (FHSA) is a new registered savings plan in Canada, aimed at aiding first-time homebuyers. This innovative program combines the benefits of a Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) to make homeownership more accessible.
Tax Advantages and Contributions
The FHSA allows contributors to deduct their contributions from taxable income, similar to an RRSP, while also generating tax-free returns, mirroring a TFSA’s benefits.
An annual contribution limit is set at $8,000, with a cumulative cap of $40,000, spread over a maximum period of 15 years.
Eligibility Criteria
To be eligible, you must be a Canadian resident with a valid Social Insurance Number and should not have owned a qualifying home in the last four years.
Withdrawal Rules
Unlike the Home Buyers' Plan (HBP) under RRSPs, funds withdrawn from an FHSA for the purchase of a first home do not require repayment.
Withdrawals used for buying a qualifying first home are entirely tax-free.
Contribution Flexibility
Parents and guardians can contribute monetary gifts to their children’s FHSAs.
Contributions can be carried forward until age 71, offering flexibility, and these deductions remain applicable even after the account's closure.
Account Duration and Transfer Options
The FHSA has a 15-year participation limit from the opening of the first account. After this period, unused funds can be rolled over into an RRSP or withdrawn, albeit with tax implications.
Do I Qualify for the First Home Savings Account (FHSA)?
Watch part 1 of our FHSA series
How Do I Make Withdrawals from My First Home Savings Account (FHSA)?
Watch part 2 of our FHSA series
Combine Saving Accounts to Achieve Homeownership
Using a Tax-Free Savings Account (TFSA) simultaneously with an FHSA and RRSP provides a multi-faceted approach to saving for a home. Each account offers unique benefits, and when used together, they provide a well-rounded savings strategy that can accelerate the journey toward homeownership.
Leveraging RRSP’s Home Buyers' Plan (HBP)
The Home Buyers (HBP) plan allows first-time homebuyers to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP) to purchase or build a home without immediate tax penalties. The withdrawn amount must be repaid within 15 years, returning the funds to the RRSP, to restore the retirement savings and defer tax implications.
The RRSP’s Home Buyers' Plan is a valuable tool for first-time homebuyers. Combining RRSP and FHSA funds could significantly boost the available capital for a down payment.
Utilizing Tax-Free Savings Accounts (TFSA)
The TFSA offers tax-free growth on contributions, meaning any interest, dividends, or capital gains earned in the account are not taxed, even when withdrawn. There is no tax penalty for withdrawals, making it a flexible option for accumulating additional savings for a home purchase.
A TFSA complements the FHSA, as savings can be seamlessly transferred between these accounts. Additionally, the TFSA contribution room is reusable, providing another layer of financial flexibility.
To learn more about savings accounts, check out our article: How to Effectively Use Your TFSA and RRSP
Conclusion
As you embark on the exciting path toward homeownership, remember that having a strong support team is valuable. A skilled mortgage broker, knowledgeable realtor, thorough home inspector, and experienced lawyer are your allies, helping you through each stage of the process. Moreover, smartly leveraging available savings accounts – such as RRSPs, TFSAs, and FHSAs – can significantly amplify your savings strategy, bringing the dream of owning your first home within closer reach.
Overall, the journey to buying your first home is filled with learning opportunities. For more detailed insights, complete the form below. You'll receive a free downloadable guide all about the home-buying process, equipping you with the tools and confidence needed to navigate this journey with ease.
First Home Savings Account (FHSA) - FAQ
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The FHSA is a tax-advantaged savings account designed to help individuals save for their first home. Contributions to an FHSA are tax-deductible, and the investment growth is tax-free. Withdrawals to purchase your first home are also not taxed.
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Generally, anyone who is a first-time homebuyer in Canada, meaning they haven't owned a home in the year of account opening or in any of the four preceding years, can open an FHSA. There may be additional criteria to meet, so it's important to check the latest eligibility requirements.
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An FHSA can be opened with most financial institutions that offer tax-advantaged accounts like RRSPs and TFSAs. You’ll need to provide valid identification and meet the eligibility criteria.
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There are annual contribution limits for the FHSA, and there's also a lifetime contribution limit. These limits are periodically updated, so you'll need to check the current year's limit.
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The funds from an FHSA can only be used for the purchase of your first home. If you use the funds for other purposes, there may be tax implications.
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Unlike the Home Buyers' Plan where you can withdraw funds from your RRSP to purchase your first home, the FHSA does not require you to repay the withdrawals. Also, the FHSA offers tax-deductible contributions, which RRSPs do, but the TFSA does not.
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Yes, you can utilize both the FHSA and the RRSP Home Buyers' Plan, but there are regulations around this to prevent abuse of these programs. It’s essential to understand the specifics of both programs to make the most of them.
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If you don’t use the funds in your FHSA for a first home purchase within a certain number of years from opening the account, the account may need to be closed. The funds can often be transferred to an RRSP or withdrawn under certain conditions, which may include tax consequences.
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The FHSA is intended for the purchase of a first home in Canada. There may be restrictions on the type of property that qualifies, so it's best to consult with a financial advisor or the institution where the FHSA is held.
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Yes, withdrawals not used for the purchase of a first home are typically considered taxable income, and there may be additional penalties. It's important to use these funds as intended to avoid such consequences.
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