Before committing to buying a property, you have to be well aware of the financial aspects of your decision.
Funding sources – Will you apply for a mortgage? You’ll have to invest some of your own money
Before buying a house, a future homeowner must supply part of the necessary funds. This money will be used:
- as a down payment for buying a home
- to cover start-up costs
- to pay expenses for the first year
Down payment
A down payment is applied directly to the sale price of your house. The larger the down payment, the less you will have to borrow and the more you will save in interest.
Where will you get the money for your down payment and to pay for other costs? There are 3 main sources:
- your savings and gifts
- the Home Buyers’ Plan (HBP)
- other financial assistance programs
1. Your savings and gifts
How much money have you saved until now?
To find out, make a simple balance sheet of your personal savings or of your savings as a couple. Mainly, check the balances in your savings accounts. Has a relative or friend offered to help you financially by giving you some money? This money must be in the form of a non-refundable gift. Add this amount to your balance sheet.
Be aware that you should keep the equivalent of 2 or 3 months of net income in your regular account. That way, you won’t be caught short to pay your usual expenses and provide for emergencies. It is also suggested that you pay off any debts with particularly high interest rates.
Haven’t accumulated enough money to become a homeowner? Desjardins has savings and down payment solutions for you.
2. The Home Buyers’ Plan
Do you already have an RRSP? The Home Buyers’ Plan (HBP) is a government program that allows you to use your RRSP to buy or build your house. You must repay the sums to your RRSP afterwards, according to the terms defined by the federal government.
What is the advantage of the HBP? The amount you withdraw from your RRSP is not taxable.
- How much can you withdraw from your RRSP?
The maximum is $25,000 per borrower. This amount can be applied directly to the down payment for the purchase of your house. You will, however, have to take into account certain tax rules for eligibility. To find out about tax rules regarding the HBP, see the Canada Revenue Agency site.
- How much time do you have to pay back what you borrow?
The federal government gives you a maximum of 15 years to reimburse the total amount you withdrew for the HBP to your RRSP. You will have to pay back a minimum of one fifteenth of the total amount withdrawn from your RRSP every year. You must use the HBP judiciously, and plan the mandatory annual reimbursement amount into your budget.
If you do not reimburse this amount annually, you will be taxed on the amount that you have not returned to your RRSP. Here’s a good tip: make regular instalments to a registered retirement savings plan (RRSP).
Interested in the HBP but don’t have an RRSP? Desjardins can offer you an HPB loan. Meet with your Desjardins advisor to discuss it, as this solution needs to be well planned out.
3. Other financial assistance programs
Sometimes governments and municipalities offer programs other than the HBP to help you become a homeowner. These programs apply to specific areas, regions, urban boroughs or to a particular type of house.
Often, the aid comes in the form a subsidy when you buy a home or a purchase price below market value.
Your Desjardins advisor can give you information about current programs.
Two options to calculate the required down payment
Because of laws and other requirements that financial institutions must abide by, you have 2 possibilities for taking out a mortgage:
- Provide a down payment of at least 20% of the purchase price of the house (or of its market value, if it is below the purchase price). In this case, you won’t need mortgage insurance.
- Provide a down payment of between 5 %and 20% of the purchase price of the house (or of its market value, if it’s below the purchase price). In this case, you must get mortgage insurance from the Canadian Mortgage and Housing Corporation (CMHC) or from Genworth Financial Canada.
Note that you will have to pay a premium for this mortgage insurance. It’s payable only once, when you purchase your house. The premium depends on the amount of the loan, as well as on the percentage and source of your down payment.
In summary, when you buy your house, you have to have the cash needed for your down payment as well as for:
- your down payment
- start-up costs
- first year expenses
- assuming your new responsibilities as a homeowner, that is:
- the equivalent of 2 months of net income
- the savings required for your other projects
It’s critical to evaluate the amount you have available to cover the cost of “housing” in your budget. This will allow you to find out the maximum amount you could pay to buy your house.
Use our How much can I afford to spend on a home? tool to estimate this amount.
Your budget
As a homeowner, you will likely be faced with expenses that a renter does not have to bear. These expenses are often unpredictable and expensive. Knowledgeable homeowners allow for some room to manoeuvre in their budget to account for the unexpected.
Here are the main steps to consider:
- Before throwing yourself into buying a home, make a budget. To get an accurate picture of your income and expenses, see Budget management tool – My budget. This is the only way to see the impact of a home purchase on your net income. Are you a part of a couple? Be sure to include your net income as a couple, which will be used for common expenses.
- For a realistic big picture, minimize your future net income and exaggerate the expenses. Are you thinking of buying a condo? Don’t forget to include condo fees in your budget. These are generally paid monthly.
- There is another important item to be seriously considered in your budget: savings. Not including it will put your financial security and other projects like retirement in jeopardy. Desjardins offers several savings solutions to help you to accumulate the necessary funds.
- Your insurance premium for housing is another important element to your budget. All mortgage lenders require this type of insurance, but it protects you as well. Desjardins Insurance offers home and car insurance solutions adapted to your needs.
Your Desjardins advisor has budgeting expertise from which you can benefit. Among other things, your advisor will point out items you might otherwise forget (such as medical coverage, clothing, school fees, auto repairs, holidays, etc.).
Once you have your budget in hand, look at which expenses recur on regular basis and which ones you will only incur once. It would be a good idea to transfer the necessary funds into a designated account, whether on a monthly or weekly basis. Desjardins can help you choose the financial solution best suited to your needs.
Start-up costs to finalize the purchase of your home
You must plan to have the funds required to pay for these start-up costs. You don’t have to include them in your budget because you’ll only have to pay them once. They amount to 3% to 5% of the value of the home.
| Main start-up costs | ||
|---|---|---|
| Before you buy | At the notary or lawyer’s | After you buy |
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Account for all the fees using our Start-up costs of buying a home – Québec (PDF, 183 KB) and Start-up costs of buying a home – Ontario (PDF, 178 KB). If you do not know the exact amount, input an approximate one.
For help covering a portion of the costs, ask an advisor about our cash remittance solution for start-up costs when you’re granted a mortgage on a home.
First year expenses
These are set-up or operating expenses that vary depending on the type of house you have in mind. You must plan ahead to set aside the money necessary to cover these expenses. Do not include these items in your budget. They are not recurring items.
Here are some examples of the types of expenses you will have to incur in the first year.
| Main first year expenses | ||
|---|---|---|
| Your first tax bills | Home maintenance | Basic landscaping and inside finishing |
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Your capacity to pay your mortgage
There are 2 golden rules for this calculation. They are presented here for information purposes. You will find the details for the components of the calculations and some interpretative comments on the Canada Mortgage and Housing Corporation (CMHC) web site.
1. According to your Gross Debt Service (GDS)
The amount you spend annually on housing costs should not be more than:
- 32% of your gross family income
- 28% when the CMHC or Genworth mortgage insurance is not necessary
2. According to your Total Debt Service (TDS)
The amount you spend annually on paying off your all your debts should not be more than:
- 40% of your gross family income
- 35% when the CMHC or Genworth mortgage insurance is not necessary
We recommend you evaluate your capacity to repay with great precision.
To do so, you can use our How much can I afford to spend on a home? It will allow you to map out different mortgage scenarios. Then, you can compare these scenarios to your personal budget or to your budget as a couple.
If you were to die, could your loved ones continue to pay the mortgage?
What if you were disabled? Would you need to dip into your savings for lack of income?
Even if you have salary insurance, is it enough?
For all these questions, there is an answer: Desjardins Loan Insurance.
This insurance is ideal to protect your capacity meet your financial obligations related to your loans in the event of disability or death. It includes:
- life insurance to pay off the balance of your mortgage in the event of your death
- disability insurance to replace your regular payments to the caisse for you while you are disabled
Preauthorized mortgage – Your “trump card” for shopping for a home
Asking a Desjardins advisor for a preauthorized mortgage will let you:
- know in advance up to how much you can borrow
- know what kind of house you can shop for based on your borrowing capacity
- draw up your budget more easily
- negotiate with the seller or broker with peace of mind
- protect yourself from potential interest rate hikes if your rate is guaranteed
The best mortgage solution is not just a matter of interest rates. You have several important decisions to make.
Repaying your mortgage is generally the biggest expense related to buying your home. Be sure to make the best choices.
To do so, you need to give a lot of thought to it.
First thing: the interest rate is not the main element to consider. You need first to find your borrowing profile. This is the best way to get to know yourself better, define your objectives and make an informed decision.
Your borrowing profile is determined by:
- your current and future financial capacity
- your tolerance to interest rate fluctuations
Ready to find out your borrowing profile?
Use our Find out what type of mortgage is right for you tool, then make an appointment with a Desjardins mortgage advisor. He will guide you towards the best choices based on your results.
The more you know, specifically about your borrowing profile and your objectives, the better able you will be to make the appropriate choices for your mortgage. Some of these choices can be very advantageous from a financial point of view.
Here are the main elements to consider.
Open or closed mortgage?
Whether you opt for a fixed or variable rate mortgage, you will have to choose between the very common closed mortgage and an open mortgage:
- An open mortgage allows you to repay the entire loan ahead of time, without having to pay a fee at any time, but the interest rate is generally higher.
- A closed mortgage can be entirely repaid ahead of time, given a fee, but partial repayments without having to pay a fee are allowed.
The following table will help you to understand the difference between the two.
| Closed mortgage | Open mortgage | |
|---|---|---|
| Term (duration of the loan ) | From 6 months to 10 years
The choice depends on your borrowing profile and your objectives. |
6 months or 1 year |
| Interest rate | Usually lower than the open interest rate.
In the case of a fixed rate, the shorter the term, the lower the interest rate. |
Usually higher than the closed rate, since you can repay the loan in whole or in part, at any time without having to pay a fee. |
| Anticipated reimbursement and fee | Maximum 15% of the initial amount each year without penalty.
You will have to pay a minimal fee if the 15% limit is surpassed. |
Pay all or part back at any time without having to pay a fee. |
| Your situation and your plans | Type of loan chosen by the majority of borrowers.
In the case of a fixed rate loan, your payments are stable for the duration of the term. In the case of reduced or protected variable rate, your payments should not change, unless there is a major increase in interest rates. In the case of yearly rate resetter mortgage, your payments are adjusted annually in relation to interest rates. |
Advantageous if:
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Fixed or variable rate?
Should you opt for a fixed or variable rate for your mortgage? There are many options available, and the differences between them are often misunderstood.
Generally, your choice should depend on your answers to these 2 questions:
- Do you plan to repay your loan in the short- medium- or long-term (amortization)?
- Do you have low, medium, or high tolerance to potential interest rates increases?
A Desjardins mortgage advisor can help you establish your borrowing profile. Want to have a look at your borrowing profile right now? Use our Find out what type of mortgage is right for you tool.
To learn about the main features and advantages of fixed rate loans versus variable rate loans, consult our Fixed rate or variable rate? (PDF, 558 KB) comparative table.
A profitable strategy: mortgage diversification
In response to changing rates, you may be hesitating between choosing a fixed rate loan or a variable rate loan. With hybrid mortgages you have the possibility of diversifying your mortgage financing by combining 2 or 3 products. For example, 50% with a fixed rate loan and 50% with a variable rate. This strategy promotes interest cost savings and accelerates your loan repayment, or may reduce the impact of possible rate hikes.
Do you want to repay your mortgage in a very personalised way depending on your financial situation and your capacity to repay?
Do you want to take advantage of both short-term and long-term products? (e.g.: 1 year fixed rate and 5 year fixed rate)
See the hybrid mortgages section or meet with a Desjardins advisor, who will help you find your optimal diversification according to your borrowing profile.
Frequency of your payments
The frequency of your mortgage payments is an important factor to be considered. It depends on your preferences, your financial capacity, and your repayment objectives. You may opt for weekly, weekly accelerated, bi-weekly, bi-weekly accelerated or monthly payments.
The following table will help you determine the frequency that best suits you. In addition, our Calculate and optimize your mortgage payments tool allows you to see the impact of the various payment options on your interest costs and on the amortization of your loan.
| Frequency of mortgage payments | Mortgage payment amount | Advantages |
|---|---|---|
| Monthly | Depends on the chosen duration of the loan (e.g.: 25 years) |
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| Weekly | Annual total of monthly payments divided by 52 |
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| Weekly accelerated | Monthly payment divided by 4 – equivalent to adding one monthly payment per year |
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| Bi-weekly | Annual total of monthly payments, divided by 26 |
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| Bi-weekly accelerated | Monthly payment divided by 2 → equivalent to adding one monthly payment per year |
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Amortization period of the mortgage
The maximum amortization period for a mortgage is 25 years in Canada for mortgages secured by the Canadian Mortgage Housing Corporation (CMHC) or Genworth Financial. The amount financed by these insured loans generally represents 80% of the price paid or the market value of the property if it is lower than the purchase price.
The choice of amortization period is very important. The shorter the amortization period, the greater your mortgage payments, but the less you will pay in interest in the long term. A shorter period will also allow you to increase the net value of your property more quickly.
You may also choose a longer period to start and shorten it by repaying a greater amount or by repaying your loan more quickly, depending on your financial capacity.
But before making your choice, ask yourself these 2 questions:
- What is my repayment objective: short, medium or long term?
- What is my repayment capacity?
To answer these questions, you can use our Calculate and optimize your mortgage payments tool. It will let you to visualize the impact of various payment and amortization options on your interest charges and on your loan’s amortization.
Accelerating your loan repayment
Do you want to pay down your mortgage faster? Do you have an inflow of new cash?
At any time you may:
- repay up to 15% per year of the original amount borrowed ahead of time, without having to pay a fee
- pay up to double your regular payments without paying a fee
What would be the effect on the repayment of your loan? See the impact of various scenarios using our Calculate and optimize your mortgage payments tool.
Paying back the Home Buyer’s Plan (HBP)
Did you use the Home Buyer’s plan (HBP) to make up your down payment? You must also repay your Registered Retirement Savings Plan (RRSP) within 15 years, by paying back annually at least one fifteenth of the total withdrawn.
The most efficient repayment method is to make regular deposits throughout the year to your RRSP. Your repayment is then integrated into your budget. This method makes it easier to manage and ensures you repay the amount within 15 years.
MTL Real Estate Broker & Coach 