A starter home is defined as \u201ca relatively small, economical house or condominium that meets the requirements of young people buying their first home.\u201d Keep in mind, if you\u2019re living in Canada\u2019s most expensive markets (I\u2019m looking at you Toronto and Vancouver), you may have to drop the word \u201ceconomical\u201d from the definition and put the word \u201cvery\u201d in front of \u201csmall.\u201d<\/p>\n
While McMansions aren\u2019t on everyone\u2019s shopping list, at some point, just about everyone who gets into the property market will start with a starter home. And for most, it\u2019s the largest sum of money they\u2019ll put down in their lives, with a lot riding on the purchase. Here, Toronto-based realtor Jenelle Cameron dishes on what you should be thinking about (and looking for) when you\u2019re house-hunting for the first time.<\/p>\n
Crunch the numbers \u2014 and take the leap.<\/strong><\/p>\n Transitioning from renting to owning can be daunting. First-time homebuyer Kathryn Reed recently purchased a starter home with her husband in Mount Denis, an up-and-coming Toronto neighbourhood. \u201cWe worked really hard to track our spending and make budgets to see what we were left with,\u201d says Reed. They worked closely with a mortgage broker to determine what they could afford to carry and cited determining exactly how much it costs to put a roof over their head as one of the biggest challenges. \u201cHydro, mortgage payments, property taxes \u2014 everything,\u201d she says.<\/p>\n \u201cIf you\u2019re coming from a rental, it\u2019s really important to analyze what those overall costs are every month,\u201d says Cameron. Her clients are often shocked to learn that their rent costs more than the mortgage payments and housing expenses associated with homeownership. One client is currently renting a condo for $2,000 a month in Toronto. With a maximum budget of $430,000, she will end up paying less each month to own. \u201cBut it\u2019s scary for people to pull the plug sometimes,\u201d says Cameron. If you\u2019ve managed to jump over the hurdle of saving for a downpayment, it can be frightening to take the leap \u2014 even if your monthly payments will be about the same, or even less.<\/p>\n Get pre-approved for a mortgage.<\/strong><\/p>\n Just like Reed did, it\u2019s important to crunch the numbers and be honest about your lifestyle and expenses. Next, you want to keep your budget in mind and visit a mortgage lender, who will look at your finances to figure out the maximum amount they can lend you and what interest rates are available to you.<\/p>\n Your lender will do a series of calculations to determine what percentage of your income is going towards housing costs. The guidelines state your Gross Debt Service (GDS) ratio should be no more than 32 percent and your Total Debt Service (TDS) ratio should be no more than 40 percent. These calculations form the basis for the maximum amount you\u2019ll be approved for and are detailed in this article about getting pre-approved for a mortgage.<\/p>\n Fifty percent of condo fees are included in your GDS and TDS calculations. \u201cThe most surprising thing for us was that it was often cheaper to carry a home that was even $100,000 more than other homes that have maintenance fees,\u201d says Reed. \u201cFor example, it was more expensive to carry a home that was $600,000 with $400 in maintenance fees than something that was closer to $700,000 without maintenance fees.\u201d<\/p>\n Many experts recommend not taking the maximum amount you\u2019re approved for to avoid becoming house poor. For Cameron, this isn\u2019t always the best rule of thumb. \u201cIf you\u2019re a young professional, and you know that five years from now, your salary is going to double, then maybe you should be taking the maximum on a mortgage,\u201d she says. \u201cSo you really have to analyze the situation and know what trajectory you\u2019re on in terms of your career path.\u201d<\/p>\n But keep in mind, you\u2019ll also have to pay closing costs and build a nest egg to take care of unforeseen circumstances and repairs. Looking closely at your budget and the lifestyle you\u2019d like to maintain will ensure that all of your money doesn\u2019t get tied into putting a roof over your head.<\/p>\n Don\u2019t expect to cross absolutely everything off your list.<\/strong><\/p>\n With so much at stake, homebuyers may be tempted to check absolutely everything off their wishlist from the ideal location and granite countertops to a home they can grow into with a family. Cameron takes a different approach: When it comes to a starter home, just get into the market. \u201cBuy the best you can afford, ride the wave, get off in a couple of years and move on,\u201d she says.<\/p>\n \u201cA starter home means you\u2019re not going to be there very long,\u201d says Cameron. \u201cYou\u2019re just there to make some money, make an investment, build equity and move on.\u201d Experts suggest living in your house for at least five years before selling it (most Canadians end up with a five-year fixed-rate mortgage), but in some markets (like Toronto\u2019s soaring condo segment), homeowners are jumping ship after just three years \u2014 and reaping major rewards.<\/p>\n \u201cI always say to people, you can\u2019t save as fast as the market is escalating \u2014 even in a bad year,\u201d says Cameron. \u201cSay you buy a condo for $700,000. You know that it\u2019s going to go up at least eight percent. Well, that\u2019s $50,000. You\u2019re not going to save $50,000 in the same amount of time.\u201d<\/p>\n Cameron also challenges the advice that young couples should look for a starter home that a family can grow into. \u201cIf you think you\u2019re going to have kids in five years, why worry about that now? This is a starter home, you\u2019re not going to be here long, you\u2019re just here to make your money and move on,\u201d she says.<\/p>\n If you can\u2019t afford a property in the city, look outside.<\/strong><\/p>\n Expect to make sacrifices when it comes to where your starter home is located. In Toronto, the price soars as soon as you\u2019re close to transit. \u201cAll of a sudden, you\u2019re spending a million for a condo on the subway line instead of $700,000 for a condo out in Scarborough.\u201d<\/p>\n Remember, a starter home will look drastically different depending on where you buy it. In Toronto, the majority of Cameron\u2019s clients are snatching up studio condos for their first home. \u201cYou could get a really nice home in Windsor for $350,000. Maybe a three-bedroom, two-bathroom,\u201d she says. \u201cIf you still want to be accessible to downtown Toronto, you could live in Whitby or Ajax and get a really nice house for $600,000. In Oshawa, it might be $400,000.\u201d<\/p>\n Get representation.<\/strong><\/p>\n An experienced realtor is your secret weapon for buying a property that will suit your needs and build equity. They\u2019ll be able to report on the average selling price for a specific neighbourhood and will tell you how much above asking similar properties sold for and how many days they sat on the market.<\/p>\n \u201cWhen you\u2019re looking for something, it makes sense for you to analyze the neighbourhood and what the sales have been doing in that particular condo or that particular neighbourhood over the last couple of years,\u201d says Cameron. \u201cIf you can see they\u2019re getting a consistent seven percent or eight percent return, then you don\u2019t have to do anything. You can just bank on living there for five years and make a profit.\u201d<\/p>\n \u201cBuying a garage is better than buying nothing,\u201d says Cameron. \u201cBut you want to be smart about getting a good return on your investment. It\u2019s important to have good representation.\u201d<\/p>\n