Financial implications of purchasing a first home?
Congrats! Make sure you nail down NOW what happens to the house should you eventually separate. I know lots of unmarried couples who have stayed together for decades and look likely to do so for life; I've also seen some marriages break up that I wouldn't have expected to. Better to have this discussion NOW.  Beyond that: Main immediate implications are that you have new costs (taxes, utilities, maintenance) and new tax issues (mortgage interest and property tax deductability) and you're going to have to figure out how to allocate those between you (if there is a between; not sure whether unmarried couples can file jointly these days).
Awesome info, this is what I was looking for. I live in FL so i will look into LLC laws. Is there a difference in obtaining loans for multi-unit properties, or any special requirements? This would be my first purchase so I'm trying to decide if I should start with a multi-unit or a large home. I read something about a first time home buyers and the FHA allowing one to put down less of an initial investment. Im assuming this is if you are actually going to be living in the home or property?   Would it make sense to have separate entities for specific types of units? For example One separate corporation per multi-unit property, but have multiple single family homes under another single entity?   Thanks for the help.  *quick add-on, would you know how long the corporation would have had to exist before being able to obtain a loan? For example, would XYZ, LLC. have to have been around for 3 years prior to the loan, or could i just incorporate the month before going to the bank? My primary concerns. There seems to still be a fair bit of distressed property (forclosures etc) on the market at current, which might well keep prices down for the next year or so that it takes to finish flushing that stuff out of the market.  The gist I get from most experts/pundits is that There will be good deals around for while to come still I'd advise you wait.  Go ahead and do the math to figure out what total you WOULD be paying would be, and charge yourself that much a mohth for rent in your current place, pocketing the difference in a savings account.  You'll be able to get a feeling for what it's like to live with that kind of house payment, and if you can do it sans any room-mate (something you can't always count on)  If you can manage it, then you have a much more realistic idea of what you can afford, AND you'll have saved up a bunch of money to help with a down-payment in the process.  If for example your Mortgage plus taxes and insurance ends up running around say $1450 a month, plus another $150 for the HOA, well then, that's charging yourself $1600 a month for your 'rent' which means $1000 per month going into the bank, in two years that's nearly the same as what you have now in the $401K, and you'd have a really good idea if you can afford that much per month in housing costs. If you are bound and determined to do this now, then here's a few other things to consider. You might to shop around a bit to see how typical those HOA fees are.   Yeah you don't have the expense and hassle of needing to mow the lawn, paint the place etc  but still,  150 a month translates to around another 1.5 mortgage payments a year. You might be able to get around PMI by splitting the mortgage into two pieces and doing a 'purchase money second' of around 15-20% and 75-70% of the value for the main mortgage.  That way the LoanToValue on your primary loan is under 80%, which could be worthwhile even if the interest rate on that second loan is a little higher (at least it's deductible, paying PMI is just money lost to you) although trying to do any kind of creative financing these days is a lot trickier What options do I have? Realistically?  Get a regular full time job.  Work at it for a year or so and then see about buying a house. That said, I recently purchased a decent home.  I am self-employed and my income is highly erratic.  Due to how my clients pay me, my business might go a couple months with absolutely no deposits.   However, I've been at this for quite a few years.  So, even though my business income is erratic, I pay myself regularly once a month.  In order to close the deal with the mortgage company I had to provide 5 years worth of statements on my business AND my personal bank accounts.  Also I had about a 30% down payment.   This gave the bank enough info to realize that I could absolutely make the payments and we closed the deal. I'd say that if you have little to no actual financial history, don't have a solid personal income and don't have much of a down payment then you probably have no business buying a house at this point.  The first time something goes wrong (water heater, ac, etc) you'll be in a world of trouble. I'd keep the risk inside the well-funded retirement accounts. Outside those accounts, I'd save to have a proper emergency fund, not based on today's expenses, but on expenses post house. The rest, I'd save toward the downpayment. 20% down, with a reserve for the spending that comes with a home purchase.  It's my opinion that 3-5 years isn't enough to put this money at risk. This may effect how much, or under what terms a bank is willing to loan us I don't think this is likely, an investment is an investment whether it is money in a savings account or a loan. However, talk to your bank. Is it worth getting something by a lawyer? Definitely, you need a lawyer and so do your parents. There is a general presumption at law that arrangements between family members are not meant to be contracts. You definitely want this to be a contract and engaging lawyers will make sure that it is. You also definitely want this to be a proper mortgage so that you get first call on the property should your parents die or go bankrupt. In addition, a lawyer will be able to advise you of the pitfalls that you haven't seen. If both of my parents were to pass away before the money is returned, would that document be enough to ensure that the loan is returned promptly? No, see above. Tax implications: Will this count as taxable income for me? And if so, presumably my parents can still count it as a tax deduction? Definitely, however the ATO is very keen that these sorts of arrangements do not result in tax minimisation. Your parents will get a deduction at the rate charged; you will pay tax on the greater of the rate charged or a fair commercial rate i.e. what your parents would be paying a bank. For example, if the going bank mortgage rate is 5.5% and you charged 2% they get the deduction for 2%, you pay tax as though they had paid 5.5%. Property prices collapse, and my parents aren't able to make their repayments, bank forecloses on the place and sells it, but not even enough to cover the outstanding loan, meaning my parents no longer have our money. (I could of course double down and pay their monthly repayments for them in this case). First, property prices collapsing have no impact on whether your parents can pay the loan. If they can it doesn't matter what the property is worth. If they can't then it will be sold as quickly as possible for an amount that covers (as far as possible) the first mortgagee's indebtedness.  It is only in reading this far that I realise that there will still be a bank as first mortgagee. This massively increases the risk profile. Any other risks I have missed? Yes, among others: Any mitigations for any identified risks? Talk to a lawyer. Talk to an accountant. Talk to an insurance professional. Anything I flagged as a risk that is not actually an issue? No Assuming you would advise doing this, what fraction of savings would you recommend keeping as a rainy day fund that can be accessed immediately? I wouldn't, 100%. "This is not a full answer and I have no personal finance experience. But I have a personal story as I did this. As Vicky stated Another point: there are various schemes available to help first time   buyers. By signing up for this, you would exclude yourself from any of   those schemes in the future. I did this for my dad when I was 16 or so. I am in Canada and lost $5,000 first time buyers tax rebate. As long as many other bonuses like using your rsps for your first home. I also am having a fair amount of trouble getting a credit card, because even though I am only a part member of the mortgage they expect you to be able to cover the whole thing. So when the banks look at my income of say $3000 a month they say ""3000 - rent(500) - mortgage(3000)"" You make $-500 a month. I then explain that I do not actually pay the mortage so it is not coming out of my paycheck. They do not care. I am responsible for full payments and they consider it used." You and your husband are fronting all the money upfront. I'm guessing this will cost you around 67,000 once closing costs and fees are included. So obviously you would be hundred percent owners at the beginning. You'll then pay 31% of the mortgage and have your sister pay the remaining 69%. This puts your total investment at the end at 67k + 74.4k + 31% of interest accrued, and your sisters total investment at 165.6k+69% of interest accrued. If you hold the full length of the mortgage, your sister will have invested much more than you( assuming 30 year fixed rate, and 3.75%, she'd pay 116.6k in interest as opposed to your 49.6k) She will have spent 282.2k and y'all will have spent 191k. However if you sell early, your percentage could be much higher.  These calculations don't take into account the opportunity cost of fronting all the cash. It could be earning you more in the stock market or in a different investment property. Liability also could be an issue in the case of her not being able to pay. The bank can still come after you for the whole amount. Lastly and most importantly, this also doesn't include the fact that she will be living there and y'all will not. What kind of rent would she be paying to live in a similar home? If it is more than 1400, you will basically be subsidizing her living, as well as tying up funds, and increasing your risk exposure. If it is more than 1400, she shouldn't be any percent owner. First, some general advice that I think you should consider A good rule of thumb on home buying is to wait to buy until you expect to live in the same place for at least 5 years. This period of time is meant to reduce the impact of closing costs, which can be 1-5% of your total buying & selling price. If you bought and sold in the same year, for example, then you might need to pay over 5% of the value of your home to realtors & lawyers! This means that for many people, it is unwise to buy a home expecting it to be your 'starter' home, if you already are thinking about what your next (presumably bigger) home will look like. If you buy a townhouse expecting to sell it in 3 years to buy a house, you are partially gambling on the chance that increases in your townhome's value will offset the closing costs & mortgage interest paid. Increases in home value are not a sure thing. In many areas, the total costs of home ownership are about equivalent to the total costs of renting, when you factor in maintenance. I notice you don't even mention renting as an option - make sure you at least consider it, before deciding to buy! Also, don't buy a house expecting your life situation to 'make up the difference' in your budget. If you're expecting your girlfriend to move in with you in a year, that implies that you aren't living together now, and maybe haven't talked about it. Even if she says now that she would move in within a year, there's no guarantee that things work out that way. Taking on a mortgage is a commitment that you need to take on yourself; no one else will be liable for the payments. As for whether a townhouse or a detached house helps you meet your needs better, don't get caught up in terminology. There are few differences between houses & townhomes that are universal. Stereotypically townhomes are cheaper, smaller, noisier, and have condo associations with monthly fees to pay for maintenance on joint property. But that is something that differs on a case-by-case basis. Don't get tricked into buying a 1,100 sq ft house with a restrictive HOA, instead of a 1,400 sq ft free-hold townhouse, just because townhouses have a certain reputation. The only true difference between a house and a townhouse is that 1 or both of your walls are shared with a neighbor. Everything else is flexible. "I second DJClayworth's suggestion to wait and save a larger down-payment.  I'll also add: It looks like you neglected to consider CMHC insurance in your calculation.  When you buy your first home with less than 20% down, the bank will require you to insure the mortgage. CMHC insurance protects the bank if you default – it does not protect you.  But such insurance does make a bank feel better about lending money to people it otherwise wouldn't take a chance on. The kicker is you would be responsible for paying the CMHC insurance that's protecting the bank.  The premium is usually added on to the amount borrowed, since a buyer requiring CMHC insurance doesn't, by definition, have enough money up front.  The standard CMHC premium for a mortgage with 5% down, or as they would say a ""95% Loan-to-Value ratio"" is 2.75%.  Refer to CMHC's table of premiums here. So, if you had a down-payment of $17,000 to borrow a remaining $323,000 from the bank to buy a $340,000 property, the money you owe the bank would be $331,883 due to the added 2.75% CMHC insurance premium. This added $8883, plus interest, obviously makes the case for buying less compelling.  Then, are there other closing costs that haven't been fully considered? One more thing I ought to mention: Have you considered saving a larger down-payment by using an RRSP?  There's a significant advantage doing it that way: You can save pre-tax dollars for your down-payment. When it comes time to buy, you'd take advantage of the Home Buyer's Plan (HBP) and get a tax-free loan of your own money from your RRSP. You'd have 15 years to put the money back into your RRSP. Last, after saving a larger downpayment, if you're lucky you may find houses not as expensive when you're ready to buy.  I acknowledge this is a speculative statement, and there's a chance houses may actually be more expensive, but there is mounting evidence and opinion that real estate is currently over-valued in Canada.  Read here, here, and here." My experience with owning a home is that its like putting down roots and can be like an anchor holding you to an area.  Before considering whether you can financially own a home consider some of the other implications. Once you own it you are stuck for awhile and cannot quickly move away like you can with renting.  So if a better job opportunity comes up or your employer moves you to another office across town that doubles your commute time, you'll be regretting the home purchase as it will be a barrier to moving to a more convenient location.   I, along with my fiancée and two children, are being forced to move out of my parents home ASAP.  Do not rush buying a home.  Take your time and find what you want.  I made the mistake once of buying a home thinking I could take on some DIY remodeling to correct some features I wasn't fond of.  Life intervenes and finding extra time for DIY house updates doesn't come easy, especially with children.   Speaking of children, consider the school district when buying a home too.  Often times homes in good school districts cost more.  If you don't consider the school district now, then you may be faced with a difficult decision when the kids start school.   IF you are confident you won't want to move anytime soon and can find a house you like and want to jump into home ownership there are some programs that can help first time buyers, but they can require some effort on your part.  FHA has a first time buyer program with a 3.5% down payment.  You will need to search for a lender that offers FHA loans and work with them.  FHA covers this program by charging mortgage insurance every month that's part of your house payment. Fannie Mae has the HomeReady program where first time home buyers can purchase a foreclosed home from their inventory for as little as 3% down and possibly get up to 3% from the seller to apply toward closing costs.  Private mortgage insurance (PMI) is required with this program too.  Their inventory of homes can be found on the https://www.homepath.com/ website. There is also NACA, which requires attending workshops and creating a detailed plan to prove you're ready for homeownership.  This might be a good option if they have workshops in your area and you want to talk with someone in person. https://www.naca.com/about/ Buying a house may save you money compared with renting, depending on the area and specifics of the transaction (including the purchase price, interest rates, comparable rent, etc.). In addition, buying a house may provide you with intangibles that fit your lifestyle goals (permanence in a community, ability to renovate, pride of ownership, etc.). These factors have been discussed in other answers here and in other questions. However there is one other way I think potential home buyers should consider the financial impact of home ownership: Buying a house provides you with a natural 'hedge' against possible future changes in your cost of living. Assume the following: If these two items are true, then buying a home allows you to guarantee today that your monthly living expenses will be mostly* fixed, as long as you live in that community. In 2 years, if there is an explosion of new residents in your community and housing costs skyrocket - doesn't affect you, your mortgage payment [or if you paid cash, the lack of mortgage payment] is fixed. In 3 years, if there are 20 new apartment buildings built beside you and housing costs plummet - doesn't affect you, your mortgage payment is fixed. If you know that you want to live in a particular place 20 years from now, then buying a house in that area today may be a way of ensuring that you can afford to live there in the future. *Remember that while your mortgage payment will be fixed, other costs of home ownership will be variable. See below. You may or may not save money compared with rent over the period you live in your house, but by putting your money into a house, you have protected yourself against catastrophic rent increases. What is the cost of hedging yourself against this risk? (A) The known costs of ownership [closing costs on purchase, mortgage interest, property tax, condo fees, home insurance, etc.]; (B) The unknown costs of ownership [annual and periodic maintenance, closing costs on a future sale, etc.]; (C) The potential earnings lost on your down payment / mortgage principal payments [whether it is low-risk interest or higher risk equity]; (D) You may have reduced savings for a long period of time which would limit your ability to cover emergencies (such as medical costs, unexpected unemployment, etc.) (E) You may have a reduced ability to look for a better job based on being locked into a particular location (though I have assumed above that you want to live in a particular community for an extended period of time, that desire may change); and (F) You can't reap the benefits of a rental market that decreases in real dollars, if that happens in your market over time. In short, purchasing a home should be a lifestyle-motivated decision. It financially reduces some the fluctuation in your long-term living costs, with the trade-off of committed principal dollars and additional ownership risks including limited mobility. The £500 are an expense associated with the loan, just like interest. You should have an expense account where you can put such financing expenses (or should create a new one). Again, treat it the same way you'll treat interest charges in future statements. The calculations you suggest have some issues, but I think they are not necessary to answer the question: It sounds like you are buying the house either way. So the question really is simply whether to pay toward your house first or your loan first.  In that case, the answer is simple: pay whichever has the highest interest rate first.  Make the minimum payment on the other until the first is paid off.  Remember this and make it your mantra for the rest of your life.  If you have any debts (such as credit cards) that charge a rate higher than the two options you have presented, do them first. Now, be careful as you compute the interest rates.  Most likely you can deduct interest on your mortgage, so its effective interest rate is lower [it is (1-T)*R instead of R, where T is your marginal tax rate]. For a while, the cost of mortgage insurance will make your effective mortgage rate artificially high, but it sounds like you intend to get to that 20% hurdle pretty fast, so my guess is that this is not a big factor. Congratulations on your bonus and good luck with your new home. "No magic answers here. Housing is a market, and the conditions in each local market vary. I think impact on cash flow is the best way to evaluate housing prices. In general, I consider a ""cheap"" home to cost 20% or less of your income, ""affordable"" between 20-30% and ""not affordable"" over 30%. When you start comparing rent vs. buy, there are other factors that you need to think about: Renting is an easy transaction. You're comparing prices in  a market that is usually pretty stable, and your risk and liability is low. The ""cost"" of the low risk is that you have virtually no prospects of recouping any value out of the cash that you are laying out for your home. Buying is more complex. You're buying a house, building equity and probably making money due to appreciation. You need to be vigilant about expenses and circumstances that affect the value of your home as an investment. If you live in a high-tax state like New York, an extra $1,200 in property taxes saps over $16,000 of buying (borrowing) power from a future purchaser of your home. If your HOA or condo association is run by a pack of idiots, you're going to end up paying through the nose for their mistakes. Another consideration is your tastes. If you tend to live above your means, you're not going to be able to afford necessary maintenance on the house that you paid too much for." In general you must charge HST on and after July 1, 2010. However, in the case of delivered sales, you must charge HST if the transfer of goods will happen on or after July 1,2010. Example:  A person comes into my hypothetical store on June 29, 2010 and buys a couch.  They opt to have it delivered by my truck on July 2, 2010.  I should charge HST on this purchase, not GST/PST. References: