Good Morning Everyone. It’s time for the next post in our Investing Our Money in Our Twenties series.  Today’s post is all about buying a home; we will discuss how much money we need for our down payment, as well as the other expenses that come with being a first time home buyer.

 

Should I become a First Time Home Buyer?

Before we decide to become a first time home buyer we have to decide if homeownership is the right financial decision for us. There are advantages and disadvantages of buying a home. Some people put all of their money into their home as their primary asset with the hopes of living in the same home for a long time. This strategy allows the home value to appreciate over the long term.  The continuous increase in the value of real estate is definitely an advantage of buying our first home.  However, having all of our money in one non liquid asset is a major disadvantage of home ownership.

We also have to decide if it is the right time for us to buy a home, and this is definitely a personal financial decision. It may be the right time for you to buy a home, but it may not be the right time for me and vice versa.  Some people buy their first home at 25 years old, and some other people buy their first home at 35 years old.  It really depends on our personal financial situation. Buying their first home is not even a financial goal for some people.

 

How Much Do I Need For My Down Payment?

A down payment is the amount of savings that we give to the bank in order to determine our mortgage payments and get our mortgage approved.  Our total mortgage value is the purchase price of our first home minus our down payment amount.

According to RBC buying our first home is a personal decision, because homeownership is definitely not for everyone.  If we decide to become a first time homeowner we should consider the future impact of buying a home as well as the financial implications.  If we choose to buy our first home at a young age we have to consider that it may become too small for us in the future.  As we get married and start a family we may outgrow our starter home or condo.  The actual price of the home is not the only expense when becoming a homeowner. We should factor in the cost of property taxes, repairs, utilities and moving along with 1.5% of the total purchase price for closing costs.

Very few (if any) Financial Institutions are currently offering Mortgages to their clients with $0 down payment.  Many financial institutions require a minimum down payment of at least 5% of the total purchase price. The lower the down payment, the higher our mortgage payments will be, and therefore the greater risk we are to our bank for default.  This is why our Financial Institution requires us to purchase additional insurance with CMHC  (Canada Housing and Mortgage Corporation).  The CMHC insurance premiums are added onto our mortgage payment and protect our financial institution in case we (as clients) default on our Mortgage.  CMHC insurance is required on all Mortgages with less than 25% down payment of the total purchase price.

 

The First Time Home Buyers Plan for My Down Payment

If you are like many Canadians then you have been continuously saving in your RRSP account and nowhere else.  Usually you cannot withdraw money from your RRSP account without paying a penalty; however, there is an exception for First Time Home Buyers.

The Canadian Government allows RRSP savers to withdraw up to $25,000 from our RRSP to use towards the purchase of our first home.  This is an interest free loan that we lend to ourselves and have to repay within 15 years. Of course the down payment for our first home can come from any form of personal savings or gifts.

 

Here are Previous Posts in the Investing Our Money in Our Twenties series:

Traditional Savings Accounts Are Boring!

You are only 20. So take some risk!

You Won’t Get Rich Overnight

 

Photo by hillsborough