Financial Considerations Before You Buy

For those interested in buying a home, financial considerations are always paramount.  There are many costs associated with the home as well as the key considerations of the price and the interest rate on the loan.  Prudent buyers consider all of the financial factors before engaging in a transaction.

The price is the first thing to consider. Start by looking at comparable properties to the one you are interested in and how they have sold in the previous few months or years. Make sure to identify the location, number of square meters, number of bedrooms, bathrooms and special features of the property. If the location is better or the number of bedrooms is greater, make sure to note that fact when comparing the price. After understanding the market, determine the fair price for the property that you are seeking.

Next determine the amount you are willing to pay as part of the down payment and how much you would be willing to take out as a loan from the bank. Your credit rating will be important in the amount of credit you can get from the bank and the interest rate.  Typically, buyers will pay between 10% and 30% of the total value of the home upfront as a down payment. The greater the down payment, the lower the interest payments will be over time. However, the greater the loan amount, the more the buyer can get a return on their investment in a rising market.

For example, if the buyer buys a 100,000 home with a 90,000 loan and sells the home two years later for 120,000, they will make a 200% return on the down payment minus the interest payments and closing fees.  If the same person paid a 20,000 down payment originally they only receive a 100% return minus the fees.  However, when the price of the home goes down the buyer can lose everything if they have a bank loan that is too large.  So there is an important element of risk.

Fortunately, the last decade has seen quite low interest rates at Canadian banks. It is not unusual to obtain a loan at the 2%, 3% or 4% interest rate level. This dramatically reduces the price of the home over time. Back in the 80s and at times during the 90s, interest rates soared to 8%, 10% and more. That made it much more difficult for buyers to afford new homes.

For example, a 100,000 loan for 20 years at 2% interest would amount to 21,412 dollars in interest payments. However, a 100,000 loan for 20 years at 8% interest would amount to 100,745 in interest payments which doubles the price of the total loan. Obviously, this will make a huge difference in the monthly payments and the total value of the home as well as the expected return on the sale.  So the low interest rate environment today is a huge boost to buyers.

Closing fees are also obviously an important component of a real estate transaction. Sound legal advice is key and paying for a good lawyer is often worth its weight in gold. The real estate broker also gets paid approximately 2% to 3% of the value of the transaction. Title transfer, taxes and other fees are also applicable.

Lastly, the new home buyer has to be aware of the maintenance costs of owning a home. It is not a financial security but a tangible property that has deficiencies and needs to be kept in good working condition.  Smart buyers usually have an inspection of the property before purchasing. Still, things always break down and maintenance costs are inevitable.

Oakville Real Estate Law is one of the leading Canadian real estate law firms. Mr. Robert Rose has decades of experience helping thousands of parties with their real estate needs. For more information, please contact us.