Team case study: Laying the foundation for buying a home

This past summer, a few members of the Ratehub.ca team went from being hopeful house hunters to first-time home buyers. After contributing to the resounding messages of “Congrats!” from the rest of the team, my next thought was: We should share these experiences with our readers. Fortunately, the new homeowners agreed – and one volunteered to share it all!

Every Monday, for the next 5 weeks, Kerri-Lynn (KL) will be here to answer questions and share her experiences with jumping into the Toronto housing market. If you’re not in Toronto, that’s ok – most of these are questions that any potential first-time home buyer should consider. For our first post, we sat down and talked about how she started the process. In her words: it’s all about laying the foundation…

Cait: How did you know it was the right time to buy?

KL: As you approach 30, you start to think about things like settling down, starting a family and just setting up a grown-up life for yourself. So, naturally, you want to lay the foundation for that life. I’m 29, I’ve been with my partner for a number of years, we know we want to get married and start a family in 2-3 years. For all of that to happen, we knew we wanted a place big enough to house that family and to start embarking on those goals. Also, we’ve been living in 700 square feet with our dog (RateHub’s official mascot, Kingston!) for the past 4 years, and it was starting to get claustrophobic!

Cait: Did you have to feel confident in your current and future income potential, before you could enter homeownership?

KL: The fact that we are a dual income family definitely helped with most of our decisions. We’re both young, and we both have increasing incomes because we’re climbing up career ladders. With two incomes, you also increase your odds of being able to survive a financial setback, should one come up, because you have another person to help you. If I was single and buying a place on my own, I would’ve been more conservative throughout the entire process. Because there were two of us, however, and we both earn a good salary and are confident in our future earning potential, we were able to push our limits a bit.

Cait: How did you determine your max budget?

KL: First, I hope everyone knows this, but a lender will offer you more money than you should probably ever assume in debt! So, we got pre-approved, but we did not use the amount our mortgage broker gave us as our max budget. Instead, we did a cash-flow analysis based on our net incomes, then figured out how much we were comfortable paying for all our monthly carrying costs (mortgage + property taxes + utilities + maintenance, etc.) and determined what our max budget was from there.

Because we ended up in a bidding war (which we’ll discuss in a future post), we did end up at sort of our maximum comfort threshold. At that point, we had to take a couple other things into consideration. First, we knew that if we could afford it now, we could definitely afford it in the future, as our salaries would go up. Second, after seeing a number of condos in Toronto, we also decided that it was important we buy a long-term home vs. just a starter home.

When you buy a starter home, you run the risk of outgrowing it pretty quickly, therefore needing to sell/buy/move all over again. If we had to sell and buy again in 5 years, we’d lose the Ontario land transfer tax rebate we had gotten as first-time home buyers, meaning we’d have to fork out even more money with the new and larger purchase price. As sellers, we’d also have to pay the realtor commissions. And, depending on where you buy, all of this could mean you’d be saying goodbye to any gains you might make on the price appreciation. (Although, Toronto is kind of a crazy market, so you may not have to worry about that part here.)

Anyway, knowing we would have increasing income and that it was a long-term home gave us the assurance that we were doing the right thing.

Cait: What percentage of a down payment did you make and how did you decide to do so?

KL: From the beginning, our goal was always to put down 10%. However, because we increased our price in the bidding war (and won), if we had put down 10%, we would’ve been left with very little in savings. Since we both agreed it was important for us to have an emergency fund, as well as some extra money to buy furniture, etc., we decided to put down less. I wanted to put down 5%, but we compromised and ended up putting down 8%. It maybe wasn’t the most logical decision, when you consider the increments for CMHC insurance premiums, but choosing 8% over 5% will save us nearly $200/month.

Cait: Did you also think about closing costs, when you were deciding how much to put down?

KL: Yes! We always thought about closing costs. We used the ClosingCosts.ca calculator + the “Cash Needed” dropdown menu on Ratehub.ca’s mortgage payment calculator, to get an idea of how much we might need. From there, we added a buffer. The land transfer tax calculation is standard, but things like legal fees can fluctuate. So, we just added a $2,000 buffer to our overall closing costs budget and kept that as cash on hand for closing day.

Cait: Let’s talk about what we know best – mortgages! How did you choose your mortgage term?

KL: So, this is another decision where I had to compromise with my partner. We both agreed we wanted a 5-year term. Five-year terms are the default for most homeowners, and because mortgage rates are really low right now and we plan on being in this house for at least 10 years (and 10-year mortgage rates aren’t as great as they used to be), choosing a 5-year term was an easy decision for us to make together.

Where I had to compromise was on whether we got a fixed or variable rate. I would’ve been comfortable taking on a variable rate, because I don’t expect interest rates to go up anytime soon and I think it makes more sense on a cash flow basis. My partner, on the other hand, is a little more conservative and was more comfortable with the stability of a fixed rate. The spread between the two rate types isn’t huge right now, so I compromised and we got a 5-year fixed.

Cait: Last question for today. How did you assemble your team of real estate professionals (mortgage broker, real estate agent and real estate lawyer)?

KL: Good question! Personally, I’m in a unique position where, because of this job, I have relationships with a lot of people in the mortgage and real estate industry. Unfortunately, this actually made the decision extremely difficult! Not only did I have a long list of providers to choose from, I also didn’t want to offend anyone by not working with them. At the end of the day, though, we knew we needed people who we were comfortable sharing our personal and financial information with, who were smart and analytical, and who knew our style and comfort level; and that’s the same advice I would give to any first-time home buyer.

So, the first thing we loved about our real estate agent was that he wasn’t aggressive or pushy. I like to make my own decisions, so I don’t deal well when it feels like someone is pressuring me, and he never did. In fact, he was the first person to point out things that were wrong in a condo or house, rather than just point out everything that was right! He also knew our style so well that he could tell what we would and wouldn’t like, and was even able to give us decorating tips. If you know me at all, you know this makes him a perfect match for me!

As for our mortgage broker, we chose ours because he’s very analytical (like my partner and I are) and has a business background (which we both do, as well). He was able to run scenarios, give us examples, and all the numbers we needed to see to make an informed decision. I would also stress that it’s important to find a mortgage broker who is extremely diligent – not aggressive, but diligent. Ours was in constant communication with us, letting us know where we were in the process, which documents were still outstanding, etc. And he was always available to chat or answer questions. This is the largest bundled transaction you’ll ever make, and there are so many pieces of the puzzle, so it’s usually a really stressful process (there’s no sugar coating that). You want a mortgage broker who will be available to help you every step of the way.

It’s great to get recommendations from family and friends, but don’t be scared to do some research and find new names for yourself. Search online, read reviews and make a couple appointments. You’re allowed to “interview” providers and choose the ones you think will be a good fit for you!

Great first round of questions, KL!

Next week, we’re going to talk about what to look for when you go to viewings with your agent, how KL decided which neighbourhood she wanted to call home, and why she and her partner eventually decided to buy a house in Toronto after seeing only condos first.