Buying your first home is a huge step in one’s life. In many cases, becoming a homeowner is the first time purchasing a significant asset, and the first step to starting or expanding a family. You want to make sure you feel secure making such a substantial investment. Creating a great financial plan is one of the best ways you can feel confident in your decision. Below are a few things to consider when financial planning for buying a home.
High-Interest Debt and Credit
If you have pre-existing debt, especially high-interest debt, you may not be financially ready to purchase a home yet. Think about focusing on reducing your debt by paying off your credit cards or personal loans first. You can also transfer your high-interest balances to low-interest accounts. Check out Finally’s comparison tool to see if transferring your debt balances might be a good option for you.
Another thing to consider is your credit score. Your credit score is how financial institutions and mortgage lenders determine how well you handle credit. If your credit isn’t looking so good, you may want to work on building it back up before shopping for your new home.
When you have little or no credit history, establishing your ability to make consistent payments to creditors is challenging. If you don’t have much on your credit report, look into alternative credit to show your consistency. Some mortgage lenders may accept things like your rental history, payments on your car insurance, monthly subscription services and similar items.
Savings
Homeownership can be stressful. There are dozens of issues that can come up unexpectedly that may throw your finances off if you’re not prepared.
Keep an emergency fund aside for appliance breaks, plumbing issues, and more. Experts recommend keeping the equivalent to 3 to 6 months worth of living expenses set aside for this fund. Not sure what your costs are? Check out our blog on How to Organize Your Finances for a guideline on creating your budget and expenses.
Your Budget for Buying a Home
It is important to remember that aside from the initial down payment and mortgage on your home, you will also be responsible for regular maintenance and repairs. When you move in, you will also likely want to decorate and furnish your home, which can get very expensive.
A general rule of thumb for home-related expenses is that your utilities and home-related expenses should not come up to more than 35% of your income. This means that if you earn $3,000 per month, your expenses should be no more than $1,050 a month.
Incentives and Programs for Canadian Homebuyers
Now let’s get on to the incentives and programs Canadians need to know about when planning or savings for their home purchase.
The First-Time Home Buyer Incentive
The First-Time Home Buyer Incentive is a program implemented by the Government of Canada that assists first-time homebuyers with the financial weight of purchasing a new home. Eligible first-time homebuyers who have made the minimum down payment on an insured mortgage can apply to finance a portion of their home purchase.
Home Buyers’ Amount
This incentive provides homebuyers with a $5,000 non-refundable income tax credit on a qualifying home. Eligible individuals can receive up to $750 in federal tax relief from the credit.
Home Buyers’ Plan (HBP)
If you read our blog on knowing the difference between RRSPs, RESPs and TFSAs, you may be familiar with the Home Buyer’s Plan (HBP)
The HBP allows individuals to withdraw up to $35,000 out of their Registered Retirement Savings Plan (RRSP) to buy or build a qualifying home for yourself or relative living with a disability. This incentive comes with the benefit of not having to pay any tax penalties for withdrawing from your RRSP, but the amount withdrawn must be replaced within 15 years.
GST/HST New Housing Rebate
Depending on the circumstance, you may be entitled to a partial rebate of the GST or HST you paid on the purchase price or cost of building your home. The reimbursement may also apply to substantial renovations, additions, or the conversion of a non-residential property into a residential home.
Next Steps to Financial Planning for Buying a Home
If you are ready to start financial planning for buying a home, give Finally a try. We help you create and stick to a savings plan with our easy-to-use dashboard
Know someone that could use the financial tips shared in this blog? Please share it on social media to spread the word about these must-know financial tips.
Don’t forget to connect with us on Facebook, Instagram, and LinkedIn.
English