Father doesn't know best

Suzanne Wintrob, National Post · Friday, Nov. 19, 2010

Looking for your first home? Then do your homework before hitting the open houses.

"A first-time homebuyer can save a lot of time by knowing in advance how much they would qualify for and what they can afford," says Marcia Moffat, RBC's VP, Home Equity Financing, Canadian Banking.

RBC recently surveyed 1,050 Canadians, half who bought their first home in the past two years and half who intend to do so within the next two years. While two-thirds of future buyers said they hoped to purchase a single detached home, those who had already bought ended up in a townhouse or a condominium. The difference, suggests Ms. Moffat, comes down to dollars and sense.

"Affordability isn't just the house price -- it's thinking about maintenance of the home, taxes, legal feels on top of it and, if it's a young family, factoring in childcare costs," she says. "Sometimes when someone is in the market of intending to buy, they haven't thought through all those elements. Then, when they actually come down to buying, it's part of the whole approval process. Yet if they get pre-approval, it strengthens their credibility with the realtor and means they're not spending all of their time looking at homes that they can't reasonably afford."

Apparently, getting advice is all in the family. While one-third of current homeowners turned to the bank as their primary source of mortgage advice, those planning to buy turn to Mom, Dad and other family members to better understand mortgages. That's not always smart, says Ms. Moffat, since what was right for your parents when you were a kid might not be right for you now.

"I've heard parents say, 'You should go into a 10-year fixed,' but those were parents who lived through the late '80s at a time of very high interest rates and uncertainty," she says.

Of course, managing cash flow becomes a much more pressing concern once the sale is final. According to the survey, those planning to buy fret most about three things: being approved for a mortgage, affording the downpayment, and rising housing prices. Once in the market, though, they get cash-flow anxiety, worrying considerably about rising mortgage rates, being able to make their regular monthly mortgage payments, and declining housing prices. With all that stress, it's not surprising that 85% of first-time buyers said they intend to stay in their new home for the long-term.

As for mortgages, the study reveals that first-time homeowners are more likely to opt for fixed or variable rate mortgages -- though older first-timers are more comfortable with variable rates than their younger counterparts. Future buyers go for a combination of the two, which RBC concludes may reflect their uncertainty.

Ms. Moffat says there are many simple ways for first-time homebuyers and those planning to buy to make the experience more soothing. For those unsure if they're ready to buy, mortgage specialists can offer budgeting advice while online mortgage calculators can compare monthly rental payments to mortgage payments.

Ms. Moffat also suggests setting mortgage payments for the highest amount possible.

"If you are concerned about rising rates, a good rule of thumb is to plan for the worst case scenario for the next five years and build your financial plan around that number," she says. "If things turn out better, you'll be ahead of the game because you've already paid down a good chunk of your principal and you've tested your budget for higher payments."