Worst mistakes first-time home buyers make

DIANNE NICE

The Globe and Mail

 

 

When Chris Kiskuna bought her first house in 1985, she was so anxious to close the deal quickly, she skipped the home inspection - a decision she paid for the first time she turned on the tap in the bathroom sink.

"The water's running and I'm hearing it run everywhere and thinking, 'What's happening here?' And I look under the sink: no pipe."

Ms. Kiskuna, a regional sales manager at Royal Bank of Canada, says jumping into a deal is one of the most common mistakes first-time home buyers make. They fall in love with a property, worry about losing out, and throw caution to the wind or spend more than they should.

A house is one of the biggest investments most Canadians ever make, so it's important to plan ahead, to think about what you need in a home and what you can afford.

Getting pre-approved for a mortgage is a great way to budget for a home and signal that you're a serious buyer. However, keep in mind that the amount for which you are approved is the maximum amount the lender feels you can afford based on your income and projected property expenses. That figure doesn't account for other expenses you may face, such as renovations or emergency home repair, as well as regular household costs.

"You know best ... what your costs are, so my advice would be look at what your paycheque is net, line up all those costs, including what you're being told on the calculator is affordable for you, and see what is left at the end of the month," Ms. Kiskuna says. "The last thing you want to do is hang yourself out to dry with [mortgage]payments that are simply too high to carry."

Here are some other mistakes first-time buyers make, and how to avoid them:

Not knowing your credit score

A credit rating is a record of your credit history and current financial situation. A good credit rating can improve your ability to get loans, so if your score is low, you may want to work on improving it before you apply for a mortgage.

Not budgeting for the costs of home ownership

Being a homeowner brings new expenses, including property taxes, higher insurance costs, regular upkeep and an emergency fund for repairs. Don't forget to factor in the cost of any renovations your new home may need.

Not researching down payment choices

Lenders typically require CMHC mortgage loan insurance if you make a down payment of less than 20 per cent, and premiums for that insurance can be as high as 3.25 per cent of the value of the loan. Under the Home Buyers' Plan, first-time buyers can use up to $25,000 in RRSP savings ($50,000 for a couple) for a down payment. A higher down payment will save thousands of dollars in interest over the life of your mortgage.

Focusing too much on interest rates

First-time home buyers rush in to the market when interest rates are low. While rates are important, other things have a greater bearing on the overall cost of home ownership, including the cost of the house, the type of mortgage, the amortization period and payment options.

Not choosing your own payment schedule

Paying off your mortgage sooner saves you interest costs, while a longer amortization period reduces your regular payment and frees up cash flow. You can save thousands of dollars in interest by choosing a shorter amortization period, paying fortnightly instead of monthly, or increasing the amount of payments by even a small amount. Use an online mortgage calculator to run the numbers.

Forgetting about closing costs

When calculating closing costs, assume you will need an additional 1.5 to 2.5 per cent of the purchase price to cover such things as the home inspection, legal fees, land transfer tax, property tax, property insurance, utility hook-ups and moving costs.