Ahh, your first home.  You’ve dreamt about it – and now you’re ready to take the plunge.  But before you sign on the dotted line, here are a few money management tips that can help you avoid ending up “house rich and cash poor”. 

How much home can you afford?  There are three important cost factors that determine the real affordability of your new home:

1.       The maximum house price you can afford.  There’s the purchase price, of course, but remember that home ownership costs involve much more than that – including GST and provincial sales taxes (where applicable), appraisal fees, property tax, survey fees, property insurance, land transfer tax, legal fees, service charges, home inspection fees, mortgage application fees and insurance premiums, moving costs and possibly immediate renovation or repair expenses.

2.       The maximum monthly housing cost you can afford.  The “affordability” guideline for monthly housing costs is that they should not be more than 32 per cent of your gross monthly income.  Housing costs include mortgage principal payments, plus interest, taxes, heating expenses and condominium fees (if applicable). 

3.       The maximum monthly debt load you can afford.  Your entire monthly debt load should not be more than 40 per cent of your gross monthly income.  Your calculation should include car loans and credit card payments. 

Of course, it’s always a good idea to keep your debt ratios comfortably below these thresholds.

What type of mortgage is best for you?  The mortgage you choose will have a significant impact on your monthly mortgage payments and total interest costs.  Mortgages can have a variety of features such as prepayment provisions, portability and assumability. They can have a variable or fixed interest rate and a term ranging from months to years.  This is how two typical mortgage features can affect your finances:

·         Amortization period is the number of years it will take to completely pay off the mortgage – and shorter is better.  Let’s say you have a $100,000 mortgage at a rate of 7 per cent (compounded semi-annually).  At the standard amortization period of 25 years, your monthly payment will be about $700.  But by reducing the amortization period to 20 years, your monthly payments will be just $69 higher, yet your interest savings will be almost $26,000 over the 20-year period. 

·         Payment frequency is the number of payments you make on your mortgage over a period of time.  Take that $100,000 mortgage at 7 per cent interest and a 25-year amortization period.  Simply by making bi-weekly payments of $350 instead of monthly payments of $700, you would save nearly $24,000 in interest costs by the time the mortgage was paid off.

How much of a down payment do you need?   With a conventional mortgage, you’ll need a down payment of at least 25 per cent of the purchase price.  High-ratio mortgages are available that can reduce your down payment requirement to as little as 5 per cent of the cost of the home, but this type of mortgage requires mortgage loan insurance, normally obtained through the Canadian Mortgage and Housing Corporation (CMHC) or private mortgage insurers.

To give homebuyers a greater choice in what they can use for a down payment, CMHC will allow you to obtain your down payment from such sources as lender incentives or borrowed funds.  And as a first time homebuyer, you can take advantage of the Home Buyers Plan (HBP) through which you can withdraw up to $20,000 from an RRSP tax free to use as a down payment.  You must repay your RRSP withdrawal in minimum annual instalments within 15 years or the amount you do not repay will be taxed.  Keep in mind that an RRSP withdrawal will reduce the potential growth of your investments in that important asset over time.

A financial planning professional can help make sure your home purchase and mortgage are a good fit with your family’s overall financial goals.