Financial Planning For Couples: Buying A Home

Buying a home will probably be the most expensive one-time purchase you’ll ever make. It can also be one of your best investments (housing values have historically increased over the long run) as long as you choose wisely and pick a house you can afford.

Saving for a down payment

How much money do you need to put down to buy a home? Lenders generally prefer a down payment of at least 20%.

For many young buyers this is not always realistic. If you put down less than 20% you will require mortgage loan insurance through CMHC or Genworth Canada. You are required to put down a minimum of 5%, but do try to come up with at least 10%. The lower your down payment, the higher your mortgage insurance fee. The insurance is paid to the lender and is generally blended in with your mortgage payments.

Related: How first time home buyers are getting into the housing market

Automate your savings into a high interest savings account or choose laddered GICs to protect your principal amount.

Another way to secure a down payment is through a gift from a family member. You will need a letter to present to your bank stating the amount is a gift and need not be repaid.

Buying a home

Before buying a home

You’ll save a lot of time and heartache in your search for the right place if you first have a realistic idea of how much you can afford to spend – both on the down payment and related closing costs, plus the monthly mortgage payments.

You might even be better off renting for another few years (especially in high-price housing markets like Vancouver and Toronto) so you can build up further savings and grow your incomes. Get your finances in order before you start your house hunt.

Find out exactly what you can afford from your lender. Lenders will add up your estimated housing costs to figure out what percentage they are of your gross monthly income, a figure known as your Gross Debt Service (GDS) ratio.

According to CMHC those monthly housing costs (mortgage principal and interest, taxes and heating expenses) shouldn’t be more than 32% of your gross household monthly income. They also suggest that your entire monthly debt (house and other debt payments) shouldn’t be more than 40% of your gross monthly income. They will also take into account your credit scores. So keep that in mind if you are wondering whether you should pay down debt or save the down payment.

Related: 5 rules of thumb that need an update

Don’t forget to factor in the other upfront costs:

  • Appraisal Fee. You can often negotiate to have this fee waived.  If you have to pay it yourself, it will be between $250 and $350.
  • Deposit. This is part of your down payment that must be paid when you make the initial Offer to Purchase – 1% to 5% of the purchase price, depending on area.
  • Home inspection fee. CMHC recommends that you make a home inspection a condition of your Offer to Purchase. This is a report on the condition of the home and can cost around $500.
  • Property Insurance. The mortgage lender will require this because the home is security for the mortgage. It must be in place on the day you close.
  • Legal fees and disbursements. These have to be paid upon closing. Legal fees are generally a minimum of $500, plus the cost of any disbursements made.
  • Property transfer tax. This amount varies by province. It is generally calculated as 1% of the first $200,000 of the price, plus 2% on the remaining amount.

Be realistic about what you can actually afford to spend. If one of you wants to stop working or slow down their career after you start a family, would you still be able to pay your mortgage comfortably?

Location, Location

Before you start house hunting take some time to discuss the features you must have and those you could live without. Model show homes are especially enticing. Making a prioritized list can curb your enthusiasm for every new feature. A list can also help you narrow down your search and keep you from wasting time looking at homes that don’t meet your criteria.

When you explore various neighbourhoods, ask yourselves if it’s reasonable to expect that this community will still be an attractive place to live in ten or fifteen years.

Is it an up-and-coming area or an established community? Are there nearby schools? Is there a mix of business development close by so you can go to a local restaurant, dry cleaner or grocery store?

If you are looking at a new community, what are the future development plans? Work with a competent, experienced real estate agent who will act in your best interests.

You might consider buying a larger, but less expensive, house in a neighbouring bedroom community. Don’t fail to take into account that the one-hour plus travel time to your job in the city in heavy traffic at peak hours can become stressful day in and day out. Lengthy commutes also take a toll on your car and take time away from your spouse and children. Is the commute worth it for a bigger yard?

Think of the lifestyle you want to live. You are buying for the long term so you want to think about your future needs as well as your current ones.

Pick the mortgage that’s right for you

There are several elements to consider in a mortgage:

  • Amortization period. This is how long it will take to pay off the total mortgage which typically ranges from 5 to 25 years. Sometimes you can secure a 30-year mortgage. Remember that the longer you take, the lower the payments, but you’ll pay more in accrued interest.
  • Mortgage term. Terms range from 6 months to 10 years. When the term expires, you can renegotiate terms, pay it off, or renew it for another term. Interest rates will vary according to the term you select and whether you choose a fixed or variable rate.
    • Fixed interest rate. The interest rate will remain the same for the entire term. Usually, the longer the term the higher the rate.
    • Variable interest rate. The interest rate is tied directly to the prime rate. When rates change, your payment amount will still remain the same, but the amount that is applied towards interest and principal will change.

Carefully select the type of interest rate based on your risk tolerance.

You can discuss various options and prepayment features, and go through different calculations with your mortgage broker or banker. Then spend some time discussing with each other how much of a loan you’re willing to take on, and which type makes the most sense for both of you.

It’s become the latest trend to pay off a mortgage in 5 years, or so. I’m not really in favour of this for young couples who often have a lot of competing goals to save for. If this is you, however, make sure you at least have a decent emergency fund so you can weather any unforeseen personal or house related expenses that can knock you off budget.

Some help for first time home buyers

There are some programs that may make it easier for you to buy your first home.

  • The Home Buyers’ Tax Credit allows you to claim a credit of up to $750 on your income tax.
  • The Home Buyers’ Plan allows you to withdraw up to $25,000 from your RRSP to help buy your home. You must pay back the amount you borrow within 15 years or it will be added to your taxable income.
  • You may also be exempt from paying a property transfer tax. Your lawyer can apply for the exemption on your behalf when the property is registered at the land title office.

Further reading on Financial Planning for Couples:

My TFSA Dilemma and Solution

I embraced the tax free savings account with open arms when it was first introduced back in 2009. I made the maximum $5,000 contribution in 2009 and again in 2010. My TFSA game was strong, indeed, as I invested those funds in Canadian dividend paying stocks and quickly turned $10,000 into $15,000.

But then I raided my TFSA to top-up our house downpayment in the summer of 2011 and, after just a couple of one-time deposits in the last five years, the account sits today at less than $4,500.

So now my TFSA contribution room is a lofty $50,500 and I confess that I’ve felt a bit paralyzed about how to treat this account going forward.

My TFSA fail

My TFSA Dilemma

The beautiful thing about TFSAs is that they can be used for just about anything. Emergency fund? There’s a TFSA Savings Account for that. Prefer something that pays a higher interest rate for 1-3 years? Lock into a TFSA GIC. Looking for long-term results? Use your TFSA to invest in individual stocks, ETFS, bonds, or mutual funds.

But all of that flexibility can mean difficult choices for savers and investors who are looking to get the most out of their TFSA.

I didn’t necessarily start saving inside my TFSA with the intention of cashing out two years later. If I did, I would have put my money into a savings account or GIC instead of into the stock market. As it turned out, my investments were up big and I decided to use that money to top-up our downpayment and avoid costly CMHC premiums.

Five years later and it’s clear I haven’t prioritized TFSA contributions at all. Instead, we bought a car, developed the basement in our new home, and poured our savings into my RRSP and into the kids’ RESPs.

I was paralyzed by the large amount of contribution room available – nearly $100,000 when you consider my wife’s unused TFSA room. I felt like I needed to make big TFSA contributions each year or it wouldn’t be worthwhile.

Not only that, I had to decide whether my TFSA should be used for short-term, medium-term, or long-term savings, and how that would fit into our financial plan.

My TFSA solution

Of course, I’m familiar with terms like ‘pay yourself first‘, or ‘the best time to start saving is now‘. I know I should have simply started contributing $25 or $50 a month towards my TFSA back in 2012. I wouldn’t have missed the money at all, in fact, I probably would have upped the contributions each year like I’ve done with our RESPs. But here we are.

My plan is to turn our $825 monthly car payment – which ends in October – into future tax free savings account contributions, starting in January 2017. That’s $10,000 per year to stash inside my TFSA, which at that rate would catch-up all of my unused room by 2027.

I’ve decided to treat my TFSA as a long-term retirement savings plan (part of a three-pronged approach to developing retirement income streams from my defined benefit pension plan, RRSP, and TFSA).

My long-term investments are held in just two ETFs – Vanguard’s VCN and VXC – which means I’ll be buying VCN inside my TFSA and keeping VXC and a bit of VCN inside my RRSP to achieve an overall mix of 25% Canadian, 75% U.S. and International investments.

Final thoughts

I’ve committed a cardinal sin by neglecting my TFSA for the last five years and letting other financial priorities get in the way. I thought that starting small wouldn’t be worthwhile – that I needed to make BIG contributions or I shouldn’t even bother. I also wasn’t entirely sure if I should go all-in with a long-term ETF approach inside my TFSA or keep a bit of cash on-hand for shorter-term goals.

Now I finally have some clarity about what to do with my TFSA going forward. The source of funding these contributions will be freed-up in a few short months, I have a solid plan in place, and I can’t wait to start building up my tax free savings account again!

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