Moving from renting to owning a home: what you need to know
Even if your monthly rent matches a mortgage, there’s still more to know about moving into owning your own home.
Get your down payment lined up
“Transitioning from being a renter to a homeowner, let's say the first thing you have to look at is your budget,” says Grover. “So for budgeting, the main thing is the down payment – how much down payment you need.”
You may find that mortgage payments are inline with rent payments, but you’ll still need to have money saved up for the initial down payment. Plus, beyond the down payment, you’ll need funds for property transfer taxes (PTT), closing costs and other fees. However, first-time buyers may be exempt from some or all of the PTT. It’s a good idea to work with a mortgage broker to help you sort through everything.
It’s also important to take time and take stock of what you’re spending money on, including not only rent, but also car loans, credit cards and other expenses. Then plot out how much you take in each month. Banks will take this into account when approving you for a mortgage, so it’s good to know ahead of time what kind of mortgage you’ll be expecting.
Know your GDS and TDS.
Buying real estate works a little differently than renting. When working with a landlord, they likely want to see proof of income, maybe your credit score and perhaps references. When applying for a loan, lenders look for proof of income as well as your credit score, but they have more formal cutoffs and formulas in place. That’s because they factor in your Gross Debt Service (GDS) and Total Debt Service (TDS) ratios.
For GDS, “In general, keep in mind your 39% of your income can be used towards qualifying a mortgage… especially if it's an insured mortgage,” says Grover. If you put more than 20% down and therefore don’t need mortgage insurance, you can use up to 44% of your income to qualify.
Another difference to note here when it comes to buying versus renting is that the cost of heating is factored into this calculation separately. You may be used to having your rent payment cover your heating bills as part of your tenancy agreement, but that’s not the case with a mortgage. Heating costs can be quite high during Canadian winters, so be sure you have an accurate idea of what they might be for the property you're interested in. Ask the previous owner if you can see some past bills or consult your agent and mortgage broker.
Furthermore, Grover points out that, “if you're buying a stratified property, which is like an apartment or a townhouse, there is an extra strata fee.” Most single-family detached homes don’t have strata fees, but most condos, townhomes and even some multiplexes all do.
Your TDS covers all your debts, not just your mortgage. “Let's say if you have a car loan, right? That becomes part of the TDS or any other debt, which is like, let's say, line of credit, credit card, that will become part of TDS… that can go up to 44% [of your income],” says Grover.
So, instead of focussing purely on your monthly rent payment and seeing if it lines up with potential mortgage payments, consider your total payments on everything including rent, credit cards, car loans and other forms of debt, plus heating costs, taxes and more. That will give you a better idea of what you can really afford. You can use the REW mortgage calculator to help determine what your true monthly payment will be when owning a home.
Fixed versus variable mortgages
One other consideration you may not have anticipated in the switchover from renting to owning is a fixed- versus variable-rate mortgage. Rent increases in BC are regulated by law each year. In contrast, depending on the type of mortgage, the fluctuations in those monthly payments could be quite large.
That’s why Grover says, “if you're a first-time home buyer, because you are going to consider your budget depending on today's market… we usually recommend getting a fixed rate, even if you don't want to do it for five years, let's do it for three years. Because then you don't have to stress about the change in the payments.” Fixed rate mortgages are more predictable – you’ll know from day one what your payments will be each month for up to the next five years. That peace of mind can be invaluable, even when you consider they tend to have slightly higher interest rates.
Variable interest rate mortgages, on the other hand, are much more sensitive to market and economic conditions. That can be good news, because a Bank of Canada (BoC) announcement that it is cutting the overnight interest rate will bring your interest payments down. That could either mean you pay less each month or you pay the same amount but more goes to paying off the principal (the loan itself) versus the interest on your loan. On the other hand, if the BoC raises its overnight interest rate, either your payments will go up or more of your payment will go toward interest, rather than the principal.
That kind of volatility is unappealing to many first-time buyers transitioning from renting to owning. You are likely familiar with a more predictable monthly payment and knowing well ahead of time if an increase is coming. Therefore, as Grover says, a fixed-rate mortgage may be best from people freshly moving into owning.
It’s worth it to become a homeowner
As with any major decision in life, there are some things to think about and plan, but it’s worth it to become a homeowner. As Grover says, “[the] first thing is don't be afraid when you're… transitioning from being a tenant to a homeowner. The good thing is it's a positive debt. So look at the positive things. It's going to be your own space rather than you being afraid of being evicted by a landlord.”
It may seem intimidating or scary, but becoming a homeowner isn’t just a solid financial option. It’s peace of mind, security and comfort. Plus, you’ll be building up equity that you can tap into later, or even when you sell and perhaps pocket the difference.
If you’re considering moving from renting to owning, REW has mortgage brokers ready to help and agents that can show you homes and neighbourhoods you’ll love.
Information obtained from rew.ca and Zak Khan