• August 2, 2019

The thought of buying a home can be both exhilarating and daunting at the same time. It is widely accepted as one of the most significant financial decisions an individual will make in his or her lifetime. It is also one of the longest debt obligations, as most mortgages have a term of 25-35 years to repay. To get on the right path to homeownership, here are a few considerations to make:

Get Pre-Approved

Make an appointment with a lending institution to find out “how much house” you can afford. Usually, the bank determines this by using debt-to-service ratio (DSR), which is a fancy way of measuring cash flow available to pay debt obligations. Typically the bank will not lend beyond a 40-45% DSR, which will include the mortgage payment.

The key to remember here is that although the bank may approve you for X amount, only you know whether or not you can handle that payment. Most finance experts would not recommend house obligations exceeding 30% of one’s monthly income.

Use A Trusted Real Estate Agent

The realtor is there to help you house hunt and see what’s available in your price range. A savvy realtor will assist with negotiations, provide information on the communities you’re looking at, and will help with home inspections, such as the structure of the building, etc.

You should take this opportunity to ask the realtor whether he or she knows of any suitable properties on banks’ distressed listings, which can provide even more negotiation room and may very well contain the home of your dreams.

Account for Your Down Payment & Closing Costs

Most financial institutions require an equity injection of 20% of the purchase price of the home. If you are unable to meet this requirement, they may consider a 10% injection with mortgage indemnity insurance, which comes with a premium. That’s just the down payment! The other kettle of fish is the closing costs, which are third party fees that some people grossly underestimate. These include, but are not limited to:-

• Stamp Duty: 10% of the purchase price to be split with the vendor. If eligible, your attorney can apply for first-time homeowner’s exemption. However, it must be noted that the lender may require this to sit on a deposit account until the exemption is approved by the Public Treasury.

• Attorney’s Fees:1.50-2.00% of the cost of the mortgage and conveyance transaction. The attorney must be on the lending bank’s list, but you should try to negotiate fees here.

• Commitment Fee:1-2% of the purchase price. Some banks offer a campaign where this may be waived.

• Homeowner’s Insurance: Banks are likely to require the first annual premium in full.

• Inspection, Survey & Appraisal Fees

Separate Savings for Down Payment

Now you would have determined a savings goal for your down payment. A not so good idea is to comingle this with your regular checking/savings account. Not only do these accounts offer little interest, but you don’t want the urge to dip into these funds. Consider placing the cash in a mutual fund or at a local credit union to earn more money.

Create a Sinking Fund & Adjust Your Budget

As soon as you sign on the dotted line, create a sinking fund for home repairs, renovations, etc. as you will undoubtedly need them being a homeowner.

But what is a sinking fund? We’re glad you asked!

Sinking funds allow you to set aside monies for a specific purpose. In the case of a home, it eases the stress of having to find funds when an issue an arises. It also prevents you from dipping into your emergency fund which should strictly be used for out-of-the-blue expenses such as a medical emergency, etc.

Debt Repayment Plan

Not because you signed a mortgage to repay in 30 years means you have to do so. Speak with your lender and ensure there aren’t any pre-payment clauses, and if not, start a repayment plan as soon as you can.

Here’s an example of how much you can save. Let’s say you have a $300K mortgage for 30 years at 5% interest rate. Your monthly payment is $1,610. You will pay approximately $280K in interest which is in addition to the principal. But let’s say you add $250 each month to the principal. You will repay that same mortgage in 22 years and would save almost $82K in interest.

The considerations above will help you confidently turn the keys to your home someday.