Dear Daughter - So You Want to Buy a House

Dear daughter, it seems like just yesterday, you were playing house with Barbie dolls, and now you want to buy a real house to live in!  Allow me to make a few comments from a financial planner perspective.

I’m proud of you for making your way, getting an education, and finding a job that suits you and pays enough that you can even consider your own house. 

The good thing is, you already know the value of hard work, time and sacrifice.  You did all of that to get an education.  All it takes to get your own house is more of the same!

I imagine you want a starter home or condo.  Some people think small and pay for their whole house with cash, but a tiny house is not everyone’s small cup of tea.  If you’re building, zoning can be a bit of a problem as well.   So I’m going to throw a figure of $250,000 out there as your starter house price.

Every lending institution has numbers it can’t compromise on due to regulations.  The first one we’ll talk about is the biggy – the down-payment amount.  Here’s where time vs money makes quite a difference.  The standard down-payment is 20% of the value, which means you would need to come up with $50,000.

Could you save it?  Sure.  If you were to put away $833 per month, you would reach the goal in 5 years.  You’d have to keep those cell phone bills down and limit your eating out and going on expensive vacations!

As a boost, it would be of considerable help to contribute the maximum you can to an RRSP, then you’d receive 1/3 of that amount back in a tax refund which you could put in your TFSA.  That money can be used for a first time home buyer down-payment, but you will have to repay it in the following 15 years.

Or, maybe your relative will gift you part of the down payment.  It can’t be a loan.  It’s a little awkward asking for that kind of gift, but Amity trust has sometimes worked it into estate planning for some families (they are very good at that)!

Well, maybe 5 years is too long for you to wait.  If you’re willing to pay for mortgage insurance, you can put as little as 5% down.  With that in mind, you’d pay 4% of the home value, or an extra $10,000 for that option, which is added to your mortgage.

Here’s another speed-up option for you.  Since you have Saskatchewan Graduate Retention Program tax credits, you could use up to $10,000 of those credits to put toward your home.

Saskatoon even has a program to get you in a house for zero dollars down, but your choices will be limited and building equity may be affected.

You should also be aware that your ability to pay the mortgage will be tested at the time of application.  You can’t be paying more than 40% of your income for shelter and debt expenses.  So please, please don’t start taking on expensive vehicle payments for that dream SUV!  Pay off that credit card completely – every month.  I’ve seen people denied a home loan because of their monthly payment obligations for unnecessary stuff.  You have to think ahead dear daughter! 

There is more help available too.  As you will be taxable, you can factor in a nice tax credit of up to $5,000 from the federal government on your first time home.  Saskatchewan adds another $1050 (if you didn’t use the Graduate Retention for a down-payment).

You know dear daughter, there are a lot of rules, incentives and numbers to consider.  It would be worth sitting down with a mortgage specialist to walk you through them all.  Amity has kind, understanding, professional people to help you to plan from saving to borrowing to saving again.  You’ll be happy you called them and charted a plan forward.

I look forward to enjoying your first barbeque at your new home – a tasty, steak ‘Barbie’ at your house.  Isn’t that how the British say it?  I know, weird sense of humour…

Love, Dad

 


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