Overview and Tips on Getting Pre-approved for a Mortgage
My goal is to help you realize your dream of owning a home! This is a decision that requires a lot of research and insight, and I am here to provide you with the right tools to succeed.
This is Part 2 of a 11 part series that I will share with you weekly. If you want to read the previous step, please click here.
2. Buy What You Need and Move Up Slowly
When it comes to buying our first home, most people imagine that perfect, single detached family house in a quiet neighbourhood, with lots of space, a white picket fence, and maybe even a second rent-able suite. However, for many of us, home ownership is more of a gradual process that requires a lot of saving and often the purchase of a starter home before attaining that perfect forever home. This is no mistake either, the purchase of a starter home can actually make a lot of sense, both in terms of managing risk and investing toward your financial future. On an investment side, let’s say you’re currently paying $2000/month for rent. Even if you only put 5% down, that rent could be the equivalent to a $500,000 mortgage! Assuming a current 2% interest rate, this could translate to an extra $1200+ going toward your equity every month, effectively into your own pocket instead of your landlord’s. On top of converting part of your rent into additional savings, there is also the potential for future property appreciation, which historically tends to trend upward in most markets. We won’t dive into this side too much here since we lack the possession of a crystal ball, but even on the equity investment side, there is still enormous potential.
If we continue with our current assumption, purchasing a starter home now could net you an additional $14,400 per year in equity, assuming the value of your property stays the same and does not appreciate! Another benefit of starting out small as a first time home buyer is that you may be exempt from property transfer tax (PPT). Today in BC, property transfer tax has the following rates:
1% of the fair market value up to and including $200,000
2% of the fair market value greater than $200,000 and up to and including $2,000,000
3% of the fair market value greater than $2,000,000
As mentioned before, on an $763,300 home that would be an additional $13,266, but on a smaller, first time home of $500,000 or less you may be fully exempt from this fee! The other thing to keep in mind is risk management. If you are a first time home buyer, odds are your earning potential is still growing. This could mean that you need to be careful not to bite off more than you can chew when it comes to affording your first home. According to Statistics Canada, the median household after-tax income in Canada in 2019 was between $62,900 and $93,800 ($93,800 when excluding senior families). To be on the safe side, let’s stick with the more conservative estimate. Remembering that household expenses should not exceed 35%, a family earning $62,900 per year should arguably pay no more than $22,000 on housing expenses, or $1800 per month. When accounting for additional expenses beyond a mortgage this would put our buyer comfortably in the $400,000 range. With 5% down, this would afford our buyers a home worth $421,000. If we go a little higher, and assume a household income of $93,800, then this would put our buyers in the $599,000 range, or about $628,000 with 5% down. In either case, enough to get started, but leaving room for a comfortable lifestyle and savings to cover unexpected emergency expenses.
Stay tuned for part 3!
I am a Victoria based local realtor with eXp Kiteke. My commitment to honesty, integrity, loyalty and hard work have been important pillars for me because they drive a high standard of excellent service for my clients. Helping you realize your dream is my goal!
I service Vancouver Island, but my focus is on: Victoria, Sooke, Saanich, Malahat, Shawnigan Lake, Cobble Hill, Duncan, and the rest of the Cowichan Valley.