H4

Carla Bouchard

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When you are buying your first home, one important factor to keep in mind is: don't let your dream home outweigh the size of your pocket book.

Think of it, what if all the money you had went into the purchase and mortgage payments for that wonderful home? There wouldn't be much left over for minor repairs, a night out, vacations, new furniture or any of the little things that go wrong from time to time. And when that happens, your dream can suddenly become a nightmare.

Being over-extended financially is the quickest way to destroy the excitement of home ownership and to add unneeded stress to your life.

Smart home-buying means knowing what you can afford and being practical about it.

Most first-time buyers lack the funds needed to purchase a home without assistance from a bank or financial institution, and therefore require our old friend, the mortgage.

To keep mortgage payments within their means, most first-time buyers purchase what is commonly called a "starter home."

It is just what it says -- a way of getting started in long-term real estate investment.

In order to match the home you want to buy with your pocketbook, you have to realistically assess your needs, determine what you can afford and in the end, perhaps lower your expectations a bit.

A good way to help you do this is to begin by enlisting the services of a REALTOR®. They can help you target your home ownership dreams and provide valuable information on mortgage options, interest rates, and incentives such as government programs for the first-time buyer.

In the mean time, here are some ways to help you determine for yourself, how much you can afford.

Determine your "affordability" price range by calculating two amounts: the amount of cash you can afford to put toward the purchase (the down payment) and the maximum amount of loan (mortgage) you can comfortably carry.

The key to getting started for most first-time buyers is the initial down payment -- the amount you have to put down as cash.

In general, put down as much as you can because the larger the down payment, the easier it will be to manage the other expenses such as mortgage payments, utilities and taxes.

An ideal down payment is 25 per cent of the purchase price. Keep some cash though in reserve for unexpected expenses like land transfer tax, legal fees and moving costs.

Fortunately, today's mortgage rates remain low.

In addition, there are also banks willing to give you your five per cent down payment and/or cover your first six months mortgage payments all for interest rates that are affordable. Buying a home has never been easier!

Next, to help establish the maximum mortgage limit for you, a financial institution will calculate your debt-service ratio.

In general, this is done by adding up all of your outstanding debts (credit cards, car loans etc.) and subtracting that total from 40 per cent of your gross income. That amount (the difference between your total debts and the 40 per cent) is your maximum mortgage limit.

If that's a little confusing, there are some websites of financial institutions that have a debt-service ratio calculator online that you can use.

And in figuring all this out, it's a good idea to understand interest rates. The size of the mortgage payments you can afford, depends on these interest rates. The lower the rates, the larger the possible mortgage and the more affordable home buying will be.

However, there are other variables to consider.

How open is the mortgage? Is it portable? Would prepayment be allowed? Discuss your mortgage options with your REALTOR®, banker or financial advisor. Decide what's best for you, establish a limit and stick to it.

In addition to what you've been able to put away for a down payment, there are other sources of funds you can look at. Like your RRSPs.

The federal government's RRSP Home Buyers' Plan allows eligible taxpayers to withdraw up to $20,000 per person ($40,000 per couple) tax free from their plan to buy a qualifying home.

However, you have to pay back at least 1/15th every year of the amount taken out until it's all paid back, or there will be a tax penalty.

Also, the Canada Mortgage and Housing Corporation's (CMHC) five per cent down mortgage program is available to both first-time buyers and those who have already owned a home.

Under this program, CMHC may insure the mortgage on your home (against default in payments) for up to 95 per cent of the lending value. An insurance premium of about 3.75 per cent of the mortgage loan is charged. This amount can be added to the mortgage or paid on a monthly basis.

Other sources of funds you can tap into for a down payment include savings and investments or other loans.

All in all, when searching for your dream home, make sure it's in line with your pocket book.

That way, you can enjoy your home stress-free, and live the dream.

* Carla Bouchard is owner/broker of Royal LePage Metro in Moncton. Her column appears each Saturday in Home & Garden.