August 27th 2021
Buying a House: Are You Ready?
By Jaswantee Ravi
As someone who’s considering buying a home for the first time, you’re probably aware of the elevated responsibilities and commitments that come alongside a financial endeavour of this size. Like paying for higher education, starting a business, or purchasing a vehicle, buying real estate (and particularly a house) is easily one of the largest investments you’ll make in your life. This decision can’t be made lightly, especially not in a hot real estate market like Canada.
Understanding the Canadian housing market
As real estate continues to eat up increasing percentages of Canada’s GDP, it’s not surprising to see skyrocketing sale prices, increasing bidding wars, and a larger general willingness to invest in property. This boost in activity also affects ancillary industries like construction, finance, and insurance. Residential property, in particular, has been driving economic activity throughout the COVID-19 pandemic, culminating in it being nearly 10% of Canada’s Q4 GDP.
Another interesting development caused by the events of the last 18 months is the mass exodus of consumers from metropolitan areas like Toronto, Vancouver, and Ottawa towards suburban areas and satellite cities. The city’s high prices and spatial restrictions are less tolerable after you’ve spent a year and a half locked inside, so people are opting for green space and increased square footage. In many ways, the pandemic has been an eye-opening experience for would-be home owners.
But, despite all the disruption, the Canadian housing market remains a difficult terrain for first time home buyers to navigate. Buying a house in Toronto may still be a challenge, but there are plenty of other markets emerging across the province of Ontario and across the rest of the country. However, with the Canadian Real Estate Association recently reporting a slight decrease in listings over the past month, it’s more important than ever for you to be certain about your initial real estate investment.
Here’s how potential first time home buyers can assess whether they’re ready for homeownership.
Are you ready for homeownership?
When it comes to buying a new home, there are two major components that need to be considered: your financial circumstances and your lifestyle preferences. It’s not only important for you to have your ducks in a row financially, but you should also discuss the future with your significant other or family members to make sure that buying a house fits your ideal lifestyle.
As you’re no doubt aware, first time home buyers experience a high level of scrutiny, regardless of whether the goal is buying a house in Toronto or somewhere in Atlantic Canada. A major aspect of being ready for homeownership is simply having the requisite financial backing and skills. Make sure you analyze the following factors prior to taking any action on the purchasing front.
Unless you’ve inherited a vast estate or are supported by a strong financial network, it’s highly unlikely that you’ll be able to afford a home in Canada without stable employment. Certain areas like the GTA or Vancouver can take multiple combined incomes just to qualify for a mortgage. In addition to letters of employment, many financial institutions will also require a proof of funds letter to ensure that your compensation provides you with enough money to immediately cover things like a down payment or closing costs.
Credit scores are often a stress-provoking topic for first time home buyers. Up until this point, it’s unlikely that you’ve needed to use (or even check) your score. Now it seems like your entire real estate future is dependent on this number. But, unless you’ve been placed in collections, written multiple bad cheques, or have made other bad financial decisions, chances are you will have an average to good score.
Even in the case of a sub-optimal rating, there are still actionable steps you can take to improve your credit score before purchasing a home.
Once the primary factors are in good shape, you can proceed to a financial institution or other lending groups to secure your home line of credit. Also known as a mortgage, these arrangements allow you to purchase a home while only putting down 20% (and sometimes even less) of the actual cost. The bank or lender then covers the rest of the purchase price with the pre-arranged mortgage amount, which you, the new homeowner, will pay back with interest over a set period.
Whether you choose an open or closed, fixed- or variable-rate, high-ratio, or conventional mortgage will depend on your specific circumstances and risk tolerance. By meeting with financial advisors and real estate professionals, you’ll be able to determine which financing option works best for you!
Ironing out the money side is only half the battle when buying a house in Toronto or any other city in Canada. You also have to make sure that your lifestyle, goals, and personal characteristics lend to homeownership. In addition to finances, this process can also be quite taxing on a physical, mental, and emotional level. It’s one of the most exciting decisions you’ll make in your life, but you need to be realistic about whether the timing is right for you.
Here are some of the important personal questions to consider when deciding whether or not you’re ready to buy a house:
- Do I know where I want to be living 5, 10, 15 years from now?
- Will I be able to dedicate enough time towards maintaining the house?
- Would it be more conducive to my lifestyle to rent?
- Can I handle the responsibilities associated with homeownership?
- Does buying a house fit in with my financial and personal goals?
This is by no means an exhaustive list of questions, but it provides you with a starting point to assess the match between your ideal lifestyle and owning a home. You’ll also want to discuss your options with the other important people in your life — like friends, family, and your significant other. Remember, when it comes to assessing whether you’re ready to buy a house, outside feedback is always important!