How to set a budget....
In this article, we will explore the first stage “Set a budget” in detail. You always want to set your preliminary budget before meeting with a mortgage broker or real estate agent.
For the sake of clarity, we’ve grouped the activities into three areas.
| Financing | Property | Risk Protection |
|---|---|---|
|
|
|
Rendering: Fraser Commons at Marine Drive
Decide how much of your savings you will put toward the purchase.
A mortgage lender will require that you put some of your savings toward a down payment. The larger your down payment, the less you need to borrow. Most home buyers put in the minimum down payment allowed by the lender so that they have savings left to pay for closing costs, furniture, movers, and minor repairs.
Generally, lenders will match 4 dollars for every dollar you put in (e.g, $80k mortgage with a $20k down payment). If you pay for mortgage default insurance to protect the lender, then they can lend you up to max $95k to match your $5k contribution but default insurance can be expensive. It can cost as much as $4,000 for every $100,000 you borrow.
Surprisingly, not all first time home buyers are dipping into their savings. According to Mortgage Professionals Canada, 92% of first time home buyers draw on personal savings for their down payment and many get help from their parents. 43% are gifted money from their parents and 19% borrow from their parents.
Use this table to calculate your total cash you are comfortable putting toward buying a home (including the closing costs). If more than one person is buying a home the home, add the contributions from the additional people as “co-borrower(s)”.
| Down payment source | Borrower | Co-borrower(s) |
|
Savings / Chequing Account |
||
|
Retirements Savings Plan (RSP) |
||
|
Tax Free Savings Account (TFSA) |
||
|
Gift from parents |
||
|
Loan from parents |
||
|
Loan from employer |
||
|
Other |
||
|
Total |
Define Your Home Requirements.
When defining your requirements, you should be thinking about what you need from your home rather than how you want the need met, or what would be a bonus feature.
Separating what from how can be confusing at first but it’s pretty simple and very important because you don’t want to pay for features you don’t need. Typically, requirements are features that are structural and difficult to add in a renovation. For example, in the table below we’ve listed the requirements and the wish list items. The requirements should be listed in order of importance and the order we’ve listed below is simply an example. You should figure out your own priorities and re-order the lists.
| Requirements (in order of importance) | Wish List (in order of importance) |
|---|---|
|
|
| Deal Breakers (options you want to exclude) | |
|
|
You want to limit your requirements to the core needs. If you have too many requirements, then your real estate agent will find fewer properties that match. When this happens, you may be presented with the most expensive properties, because they are the only ones that meet all your requirements. If you haven’t prioritized your requirements for the real estate agent, they will use their own judgement to prioritize them and they may not value the same things that you do!
Deal breakers are items that you absolutely don’t want. In the example above , they’ve chosen to live in a building that does not allow dogs because of allergies.
Make a list of amenities you need in your neighbourhood.
This is similar to the home requirements, but focused on factors that are intrinsic to the area where you will be living.
| Requirements (in order of importance) | Wish List (in order of importance) |
|---|---|
|
|
| Deal Breakers (options you want to exclude) | |
|
|
Set your financing priorities.
Most people focus entirely on the interest rate but this overlooks fees, insurance premiums, loan size, and other ways that a mortgage can add value to your home purchase. Don’t be blinded by the lowest rate. Rate is only 20% of the full financing picture. At mortgage sandbox, we’ve developed a quick questionnaire to help you tell your mortgage broker what’s most important to you, and we’ve also created a CostCompare calculator to help you compare the financing costs of offers from two different lenders.
When looking at financing priorities, we always assume that you want a competitive low rate for whatever mortgage type works best for you.
Find a suitable mortgage broker and real estate agent.
The Basics
At a bare minimum you want a competent mortgage broker convenient to where you are living today and real estate agent who knows the neighbourhood where you’re shopping and both should speaks your preferred language. At Mortgage Sandbox, we believe you can get more than that.
Custom Matched Professionals
We believe that Canadians want to work with and give business to people who share and understand their interests and values. Home buying can take up to 5 months from beginning to end and it is the largest and most complex financial transaction a Canadian with complete. You should embark on this journey with professionals that you get along with and trust.
We're working on a new algorithm that matches homebuyers with suitable Realtors and Mortgage Brokers, but in the meantime ask your colleagues, friends, and family for people they've used. Both of these professionals will be able to help you determine exactly what you can afford.
What's next?
Setting your budget the first key step to get the ball rolling to buy your new home. At this point, you should have established a relationship with your Realtor and Mortgage Broker, have determined how much you can spend, and the figured out what you need from candidate homes. Thanks for reading, here's the next step when you need it:
Like this post? Like us on Facebook for the next one in your feed.
