Buying a property can be fun and exciting. If you’re buying a new property, you can choosing everything down to the design of your countertops and the type of flooring. If you’re buying a used (resale) home, you don’t get as much choice with the property itself, but you can choose to buy a neighbourhood with everything that you’re looking for (provided it’s within your budget).
While purchasing a property can be a lot of fun, there are costly home-buying pitfalls you can make along the way. By making these costly mistakes, it can set you back months or even years in your finances. You’ll have less money to save in the SPP and for other goals like an early retirement.
Without further ado, here are five common home-buying mistakes and how to avoid them.
Mistake #1: Not Getting Preapproved for a Mortgage
Before going house hunting, don’t forget to get preapproved for a mortgage. Without being preapproved, you’ll have no clue about how much you can afford to spend on a property. You could buy a home for $600K, only to find out that based on your income and down payment amount, you can only spend $550K on a home. Yikes! Don’t let this happen to you.
When you get preapproved for a mortgage, you also benefit from something referred to as a rate hold. With a rate hold, if mortgage rates go up while your preapproval is in effect (typically 90 to 120 days), you’re guaranteed the lower rate (or the spread if you’re preapproved for a variable rate mortgage). You have absolutely nothing to lose.
Just because your lender preapproves you to spend $550K on a home, doesn’t mean that you should go out and spend that much – or even more. Take the time to prepare a mock budget (or if you’re already a homeowner, use your current budget as a mock budget for the property you’re thinking of buying). See what your budget would be like if you actually moved into the home. Budget for ongoing costs like your mortgage payments, utilities, property taxes and home insurance.
You’ll want to leave some breathing room in case you run into any financial difficulties along the way like costly home renovations or losing your job. You also don’t want to find yourself “house rich, cash poor,” with no money left over to save or have fun.
Mistake #2: Buying a Home for the Looks
Purchasing a property based solely on looks is a lot like dating based solely on appearance. Sure, looks are important to a degree, but other factors like compatibility matters, as well.
When you step foot inside a property the first time, it’s easy to get distracted by the wrong things. Sure, it’s nice to find a home with hardwood floors and stainless steel appliances, but what about the “bones” of the property? I’m talking about the roof, furnace, windows and structure. Anyone can hire a contractor to put in a new kitchen, but if the roof is leaking and the windows are old, ask yourself, do you have the money to invest in upgrading them? If it’s a house flip, it’s not unheard of for corners to be cut on renovations. Pay special attention on everything to stay clear of a home that’s a money pit.
Mistake #3: Not Putting Enough Money Aside for Closing Costs
When buying a home, it’s easy to overlook closing costs, but they’re anything but a drop in the bucket. Closing costs typically add up to between 1.5 and 4 percent of the purchase price of your home. For example, on a $550K home, you’d be spending up to $22K on the so-called “transactional costs of real estate.” And it’s your responsibility to have the funds for closing costs. Your lender won’t foot the bill for your closing costs.
The most common closing costs for homebuyers incur are land transfer tax, real estate lawyer fees and home inspection fees. If you’re buying a home the first time, the good news is you may be eligible for a rebate on land transfer tax depending on the province you’re buying in. Nevertheless, closing costs can still add up to a lot. Don’t forget about them!
Mistake #4: Forgoing a Home Inspection
In more competitive housing markets, you may be tempted to forgo your home inspection. When you find a property that you like and 5 other people are interested, it’s tempting to skip the home inspection and make a clean offer (an offer without any conditions). While a clean offer can help you come out on the winning end in a bidding war, you’re also leaving yourself open to all sorts of costly repairs you may not have anticipated. For example, your new home could have issues with the structure or a knob and tube wiring that an inspector could have flagged.
Hiring a certified and experienced home inspector is money well spent. You’re making the single largest purchase of your lifetime after all. If you’re afraid you might not get the home if you make it conditional on inspection, why not get the inspection done ahead of time? If the inspection is good, you can make an offer knowing that you’re investing in a property that’s a good long-term investment.
Mistake #5: Choosing a Mortgage Only for the Rate
When you go to the supermarket to buy bread, do you buy the cheapest loaf? I hope not. You look at other things like carbs, sugar and dietary fiber. So, why do so many of us do the same thing when looking for a mortgage? We look for the mortgage with the lowest rate when there are so many other factors to consider – mortgage penalties, prepayments and portability to name a few.
Mortgage penalties are probably the last thing on your mind when signing up for a mortgage, but you should care. Here’s why. If you’re signing up for a 5-year fixed rate mortgage like most Canadians, 6 out of 10 Canadians who sign up for that mortgage type will break it before the end of their mortgage term. If you asked those same 10 Canadians whether they’d break their mortgage when signing up, all 10 would probably say, no way!
That’s why if there’s a chance you could break your mortgage, it’s a good idea to choose one with a fair penalty. That’s where a mortgage broker comes in handy. A broker can help you choose the ideal mortgage based on your financial situation. You may be better off paying a slightly higher mortgage rate if it has other features that are important to you like prepayments and a lower penalty.
This post was written by Sean Cooper, bestselling author of the book, Burn Your Mortgage. Sean is also a mortgage broker at mortgagepal.ca.