A starter home is defined as “a relatively small, economical house or condominium that meets the requirements of young people buying their first home.” Keep in mind, if you’re living in Canada’s most expensive markets (I’m looking at you Toronto and Vancouver), you may have to drop the word “economical” from the definition and put the word “very” in front of “small.”
While McMansions aren’t on everyone’s shopping list, at some point, just about everyone who gets into the property market will start with a starter home. And for most, it’s the largest sum of money they’ll 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’re house-hunting for the first time.
Crunch the numbers — and take the leap.
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. “We worked really hard to track our spending and make budgets to see what we were left with,” 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. “Hydro, mortgage payments, property taxes — everything,” she says.
“If you’re coming from a rental, it’s really important to analyze what those overall costs are every month,” 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. “But it’s scary for people to pull the plug sometimes,” says Cameron. If you’ve managed to jump over the hurdle of saving for a downpayment, it can be frightening to take the leap — even if your monthly payments will be about the same, or even less.
Get pre-approved for a mortgage.
Just like Reed did, it’s 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.
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’ll be approved for and are detailed in this article about getting pre-approved for a mortgage.
Fifty percent of condo fees are included in your GDS and TDS calculations. “The 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,” says Reed. “For 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.”
Many experts recommend not taking the maximum amount you’re approved for to avoid becoming house poor. For Cameron, this isn’t always the best rule of thumb. “If you’re 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,” she says. “So you really have to analyze the situation and know what trajectory you’re on in terms of your career path.”
But keep in mind, you’ll 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’d like to maintain will ensure that all of your money doesn’t get tied into putting a roof over your head.
Don’t expect to cross absolutely everything off your list.
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. “Buy the best you can afford, ride the wave, get off in a couple of years and move on,” she says.
“A starter home means you’re not going to be there very long,” says Cameron. “You’re just there to make some money, make an investment, build equity and move on.” 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’s soaring condo segment), homeowners are jumping ship after just three years — and reaping major rewards.
“I always say to people, you can’t save as fast as the market is escalating — even in a bad year,” says Cameron. “Say you buy a condo for $700,000. You know that it’s going to go up at least eight percent. Well, that’s $50,000. You’re not going to save $50,000 in the same amount of time.”
Cameron also challenges the advice that young couples should look for a starter home that a family can grow into. “If you think you’re going to have kids in five years, why worry about that now? This is a starter home, you’re not going to be here long, you’re just here to make your money and move on,” she says.
If you can’t afford a property in the city, look outside.
Expect to make sacrifices when it comes to where your starter home is located. In Toronto, the price soars as soon as you’re close to transit. “All of a sudden, you’re spending a million for a condo on the subway line instead of $700,000 for a condo out in Scarborough.”
Remember, a starter home will look drastically different depending on where you buy it. In Toronto, the majority of Cameron’s clients are snatching up studio condos for their first home. “You could get a really nice home in Windsor for $350,000. Maybe a three-bedroom, two-bathroom,” she says. “If 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.”
An experienced realtor is your secret weapon for buying a property that will suit your needs and build equity. They’ll 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.
“When you’re 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,” says Cameron. “If you can see they’re getting a consistent seven percent or eight percent return, then you don’t have to do anything. You can just bank on living there for five years and make a profit.”
“Buying a garage is better than buying nothing,” says Cameron. “But you want to be smart about getting a good return on your investment. It’s important to have good representation.”