The Advantages and Challenges of Being a First Time Home Buyer

Being a first time homebuyer is exciting! After years of saving, all that hard work is about to pay off. Having your own place is a rewarding feeling as you are moving to the next chapter of your life, no pun intended. However, there is more to the home buying process than just saving, going to the bank to get a mortgage and buying the right property. We will go through some opportunities of being a first time buyer and also some challenges to look out for.

1)   Take Advantage of the Home Buyers Plan

Coming up with significant savings is difficult for many young people given that young people are not at their peak earning years and the cost of homes continue to rise. This has made it very difficult for many young first time home buyers who are diligently saving to purchase a property, but can’t seem to catch up to the needed down payment. The Government has tried to assist those that are in this situation allowing Canadians to withdraw $25,000 tax free from their RRSP for the purpose of buying their first home. As a First Time Home Buyer, you would still get all of the tax benefits of contributing to the RRSP while you are saving into it, that can add some money to your savings account after doing your tax returns. The only caveat is that you need to repay the withdrawn money back to your RRSP over 15 years. This strategy can put you ahead thousands of dollars and make the reality of home ownership that much closer.

2)   Live the Life or Rent for the Future

After purchasing your first home, most home buyers can’t wait to move into their new home, and rightfully so. The independence, freedom, and comfort of having your own home is something that can’t be replaced. However, for some of us, living with our parents is still an option and doing this for a little while would help to pay off that mortgage with much less stress. Renting out your new home is a great option to save additional money that can be used to invest or even pay down that mortgage quicker. Make sure that you use a professional when looking for tenants if you do decide to rent out the home, as you want to make sure the renters are qualified tenants that can and will make their payments on time.

3)   Income may be holding you back

When obtaining a mortgage, many First Time Home Buyers may find it difficult to be able to afford the home they want, as the banks will only give you the amount they are sure you can afford. The typical rule for this is that the bank will finance 5x your current income in the form of a mortgage. (Please know this is a general rule and is not equal for all, as personal loans outstanding, credit rating, etc play an important role.) This would mean that an individual earning $50,000 per year would be approved for a $250,000 mortgage. This may seem like a lot but given where home prices are, many first time homebuyers may be held back from getting into the market because they can’t get the necessary mortgage. A strategy that could be used to get around this hurtle is to get a co-signer on the mortgage by either purchasing with a family member or using your parents income to help support the loan. This means that the family member would be liable for the mortgage payments so a level of trust is required and working with professionals in the financial services and real estate fields will assist as each case is different.

You are now a little wiser and hopefully more confident in the home buying process. We wish you the best of luck and look forward to seeing your financial success.

The Wise Investor