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‘I did mess up’: Even the experts admit mistakes on picking a mortgage

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It can’t be easy for a certified financial planner to admit this, but Ted Rechtshaffen admits he blew it on his last mortgage.

“I was wrong. I had a variable rate mortgage and in 2009 I pulled the plug and went fixed,” said the president of TriDelta Financial in Toronto, joking about how his rate was 75 basis points off of prime and would amount to 2.25% today. “I did mess up, but my question was what benefit do I get locking-in versus going variable?”

You can hardly blame him for thinking rates were going to increase. Variable rates are generally tied to the Bank of Canada’s overnight lending rate and most so-called experts, even the most renowned economists, have called for the central bank to raise rates. They were all wrong. The last time the overnight rate moved was September 2010.

Mr. Rechtshaffen said the gap between a variable rate mortgage and a five-year fixed rate mortgage was just 25 basis points, making his decision at the time less difficult. Most of the time variable does beat fixed, something pointed out in a now well-quoted study by York University professor Moshe Milevsky who found that over 50 years floating rates saved you money about 90% of the time.

His study didn’t include the current rate environment in which fixed rates have hovered around 3% the past few years, a period when there’s been no movement on the variable rate. The website ratespy.com suggests the lowest variable rate on the market is now 2.10% while the lowest five-year rate is 2.65%. The average variable rate is roughly 2.4% compared to 2.94% for the five-year.

Rates could move very fast once they go up

Basically, you’re saving 55 basis points on a mortgage. Based on a $500,000 mortgage with a 25-year amortization, that 2.94% mortgage would require a monthly payment of $2,350.86 and result in $67,923.39 in interest over five years. At 2.4% your monthly payment drops to $2,215.01 and the total interest is only $55,229.04.

Mr. Rechtshaffen said there are really two points to consider when deciding whether to lock-in: what is the gap; and what you think is going to happen to rates.

In some ways it comes down to how much are you going to pay to buy what amounts to an insurance policy that your rate won’t go up? How big does the gap have to be for you to switch to variable?

“To me, I think you have to be getting three quarters to 1% [savings] in today’s environment. Rates could move very fast once they go up,” Mr. Rechtshaffen said.

Ultimately you can take that conservative planning too far and lock into a 10-year mortgage, a term with rates well above 4%. That makes it a very expensive product.

Rob McLister, editor of Canadian Mortgage Trends, said he rarely sees people lock in to a 10-year mortgage because rates are so much lower for other products.

The other thing to consider is that while prime may not move because of the Bank of Canada’s insistence on keeping rates steady, there’s nothing to say the discounting off of prime won’t grow. It has in the past with consumers getting up to one percentage point off.

“Before the Fed taper talk began in summer 2013, we were steering variable-rate shoppers out of variables and into one-year fixed rates, Mr. McLister said. “There was a high probability of variable discounts improving. This saved people interest for one year, after which they were able to switch into a better floating rate.
“Since then, variable pricing has improved as expected. Barring a global crisis of some kind, we could see another 10-15 basis point improvement through 2015. If that happens, you’ll see brokers advertising prime minus 0.90% or below next year.”

Will Dunning, the chief economist with the Canadian Association of Accredited Mortgage Professionals, said the biggest determinant of whether to go short or long is where you are in the home ownership cycle.

“When there is zero spread, people lock in but people’s history is more important. When you buy your first home, you’re very cautious and you go for five-year fixed,” Mr. Dunning said. “The older you get and the longer you’ve been in your house you are more likely to go variable rate.”

A survey by CAAMP last year found about 28% of the market had gone into a variable rate product compared to 65% who were fixed and another 7% who had a mixed product.

Mr. Dunning said when the spread between variable and the five-year fixed has been more than 100 basis points, and even closing in on 200 basis points, you will see a strong movement into a variable rate product because of the temptation of interest savings which outweighs the risks of rising rates.

So what would Mr. Rechtshaffen do today? “I just renewed my mortgage and went with five-year fixed,” he said.

Will it cost him money? Maybe. “But I’m happy to have a rate locked in and not worry about them going up,” he said.

Illustration by Chloe Cushman, National Post

Steady as she goes for Canadian housing market in 2015, says CMHC

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OTTAWA – The Canada Mortgage and Housing Corp. says it expects housing starts in 2015 to be about the same as they were this year, and in line with economic and demographic trends.

The national housing agency says “some moderation is expected” in 2016.

The CMHC says that on an annual basis, it expects housing starts to range between 186,300 and 191,700 units in 2014, with a point forecast of 189,000 units.

Next year, the agency says it expects housing starts to range between 172,800 and 204,000 units, with a point forecast of 189,500 units.

In 2016, the CMHC says it expects housing starts to range between 168,000 and 205,800 units, with a point forecast of 187,100 units.

The agency says it expects Multiple Listings Service sales to range between 467,400 and 482,000 units in 2014, with a point forecast of 476,100 units.

Next year, it says it expects MLS sales to range between 457,300 and 507,300 units, with a point forecast to 482,500 units.

The CMHC says the average MLS price in 2014 is expected to be between $401,600 and $405,400, with a point forecast of $404,800.
Next year, the agency says it expects the average MLS price to be between $403,600 and $417,800, with a point forecast of $410,600, while in 2016 the average MLS price is forecast to be between $407,300 and $424,500, with a point forecast of $417,300.

Canadian home sales fall for first time in nine months

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EOTTAWA — Sales of existing homes cooled in September as they fell 1.4% on a month-over-month basis, the first monthly decline since January, the Canadian Real Estate Association said Wednesday.

The association said sales through its Multiple Listings Service were down in about 60% of all local housing markets last month.

CREA president Beth Crosbie said affordably priced single family homes are in short supply in some of the hottest markets and that contributed to the monthly decline.

Related he $11 billion in mortgage payments the Bank of Canada doesn’t know about Even Canadian real estate companies don’t see much growth in home prices left While Toronto’s housing boom rolls on, some of the housing itself is falling apart “That said, there are other markets with ample supply, but sellers there are holding firm on price,” Crosbie said in a statement.

“There is a lot of variation in housing market trends depending on the type of housing, neighbourhood and price segment.”

Compared with a year ago, sales were up 10.6%. However CREA said September 2013 had five Sundays, considered to be the slowest day for home sales.

The average price for a home sold last month was $408,795, up 5.9% compared with a year ago.

Excluding the Greater Vancouver and Greater Toronto markets, the average price was $325,406, up 4.5% from September 2013.

The aggregate composite MLS Home Price Index was up 5.28% compared with a year ago.

BMO Capital Markets senior economist Robert Kavcic noted that there were large regional differences in house prices with Vancouver, Toronto and Calgary posting strong gains.

“Conditions get decidedly weaker anywhere east of Toronto, with no city reporting average prices up more than 3% year-over-year, and fully half below year-ago levels,” Kavcic wrote in a report.

“The good news is that the wide disparities in Canada’s housing market largely reflect economic, demographic and supply/demand fundamentals at work, all but eliminating any fears of a widespread ’bubble.”’

The number of newly listed homes fell by 1.6% in September compared with August.

CREA said the national sales-to-new listings ratio was 55.7% in September compared with 55.6% in August and within the 40 to 60% range usually described as a balanced market.

The association noted that just over half of all local markets posted a sales-to-new listings ratio in the balanced range.

There were 5.9 months of inventory nationally at the end of September 2014, up slightly from 5.8 months in August.

TD Bank senior economist Randall Bartlett said the lack of listings on the market continued to be a surprise.

“This suggests that home price growth may have more upside room over the next few months,” Bartlett said in a report.

“While the housing market continues to defy expectations in 2014, we still remain of the view that housing activity will eventually cool from current levels. With home prices continuing to rise above incomes, affordability will become an obstacle to housing demand once interest rates do eventually begin to rise.”

Meanwhile, the Teranet—National Bank national composite house price index posted a monthly increase of 0.3% for September.

The increase came as prices rose in six of the 11 metropolitan markets surveyed including gains in Calgary, Vancouver, Toronto, Halifax, Winnipeg and Quebec City.

Prices were flat in Edmonton and down from the month before in Hamilton, Montreal, Ottawa-Gatineau and Victoria.

CMHC continuing with plans for banks to take on more mortgage risk

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The head of Canada Mortgage and Housing Corp. said the Crown corporation is continuing with plans to have banks take on more risk when it comes to the housing market.

“In the insured market all of the risk is on CMHC’s balanced sheet or 90% on the government’s balanced sheet through private sector competitors. The government wants to reduce its exposure to the housing market,” Evan Siddall, president of Canada Mortgage and Housing Corp. told the Canadian Club in Toronto in what was billed as a “conversation” with Terry Campbell, president of the Canadian Bankers Association.

Mr. Siddall said the government has asked CMHC to look at options and advise it on what to do next.

Related Joe Oliver says Canada won’t make major changes to CMHC, housing finance CMHC could force banks to pay deductibles on mortgage insurance Canada’s housing market on course for soft landing, says CMHC Consumers with less than a 20% downpayment must get mortgage default insurance if they are borrowing from a bank regulated by the Bank Act. The government backs loans insured by CMHC 100% and for up to 90% for private entities like Canada Guaranty.

Mr. Siddall has said there is some value to banks having some “skin in the game” which some have suggested could mean banks pay a deductible of up to 10% in the event a consumer defaults.

“It’s kind of classic perspective,” said the CMHC head. “It’s this idea of moral hazard that if you took risk away from the people who confronted it in the marketplace, it could lead to bad behaviour. The stupid example is if you insure someone who is driving a car, they won’t be a responsible car driver.”

Mr. Siddall said the banks are responsible but the idea of deductible is “good idea” and something along those lines is good economic policy.

Sources have told The Financial Post that CMHC has already been in discussions with the CBA and Office of the Superintendent of Financial Institutions about the idea which is years away from being implemented.

Mr. Campbell told the audience a lot of conversation with the industry will be needed before anything happens.

“In Canada, as you know and everybody in this audience knows, we did not have a housing crash like some other jurisdictions,” said Mr. Campbell, chalking that up to good risk management on behalf of banks when it comes it lending. “I think banks do have an awful lot of skin in the game if you look at the growth in their uninsured portfolio.”

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The new question for Canadian Snowbirds heading south: to buy or rent?

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When they got tired of trying to find the right rental property, Miriam and Bryan Gardner decided it was time to buy.

It sounds like the typical explanation you might hear from a Canadian buyer in today’s red hot real estate market but in this case it’s Florida where tight rental markets have made finding accommodation more difficult than ever, especially for those Canadians looking for short-term rentals for their winter home away from home.

“It just got so difficult to find a rental, that we wanted, the last couple of years. We had been thinking about buying down the road but the down the road just ended up coming sooner,” says Ms. Gardner, who bought a three-bedroom condominium in August near Fort Myers after five years of renting following her husband’s retirement.

We had been thinking about buying down the road but the down the road just ended up coming sooner

They were already paying about US$5,500 to US$6,500 per month, so buying a property for about US$550,000 made sense. The carrying costs will be equal to what the couple was already spending in rent for the three months of the year they wintered down south.

“Now, we’re probably going to be spending more time there and we have more flexibility,” said Ms. Gardner, who is from Aurora, north of Toronto. “We put the capital into it but the bills are about the same to maintain this place.”

She might be on to something. Even as the cost of U.S. housing has increased, abetted by a weaker loonie, low vacancy rates have driven up rental rates at a time when availability of homes is still very high in some states because Americans are still having trouble accessing credit.

Canadians continue to be the top foreign buyers of real estate in Florida and have purchased about US$2.2-billion in the past year, according to the National Association of Realtors for Florida. And, unlike Americans, they don’t need a mortgage. The same survey found 89% of Canadians use cash for a purchase, something analysts have speculated is coming out of their Canadian home equity.

Michael Dolega, senior economist with Toronto-Dominion Bank, said the dollar fluctuation and rising prices could put a damper on home-buying in Florida where 500,000 Canadians already own property.

Related 5 questions to help you decide whether to rent or buy a home Housing still cheaper in popular U.S. snowbird states than 2006 peak levels, new report shows Border shakeup could have tax consequences for snowbirds “But again, affordability is still relatively good,” said Mr. Dolega, noting prices in Florida are about 30% t0 35% below where they were when the market peaked. “Ownership is much more favourable than it was during the mid 2000s.”

At the same time, the economist notes monthly rent in the U.S., including the snowbird states like Florida, California and Arizona, is rising as consumers who can’t buy housing are forced to let.

“The rental market is a strong market, vacancies are low and falling,” said Mr. Dolega, noting construction of rental family housing is actually rising to fill the gap but not quickly enough.

There is no direct overlap between rental properties for Americans living in the U.S. full-time and snowbirds looking for part-time residences, but Mr. Dolega said there is still a degree of competition between the two for housing.

“People who live in those cities still need a place to live and given Americans can’t find a mortgage, if they can’t find a home they will crowd out some of these vacation property [prospective renters],” says the economist, adding the argument for ownership is not as strong in Arizona because home prices have risen higher.

FotoliaIn the 128 counties in the three U.S. sunshine states, it was cheaper in 107 to buy than rent. Daren Blomquist, vice-president of Irvine, California-based RealtyTrac, said on a national basis it’s better to buy than rent. In the 128 counties in the three U.S. sunshine states, it was cheaper in 107 to buy than rent.

RealtyTrac compares home ownership versus renting by tracking the monthly mortgage payment for a median priced home versus the average monthly fair market rent for a three-bedroom home. (RealtyTrac includes insurance and taxes when calculating costs for homeowners.)

There isn’t specific data looking at vacation property but one key consideration is that certain months cost more than others because they are considered prime vacation time.

“You could argue you’re only there half of the year but own it the whole year,” says Mr. Blomquist.

Naples-based realtor Pierre Fregeau, who originally hails from Montreal but has been selling property south of the border for three decades, said he’s found it very difficult to find short-term rental housing for snowbirds and will only bother looking for it for certain clients.

“What happened here is a lot of people lost their homes during the housing crisis. Well, these guys still need to live someplace so they started taking a lot of the rentals that were available and some of it was being rented for Canadians who want to just escape the winter,” says Mr. Fregeau.

He says you can easily spend US$3,000/month to rent a two-bedroom apartment in Naples that isn’t even that luxurious and nowhere near the beach but you can buy the same property for US$200,000.

“I get calls three or four times a week from people saying ‘I’m looking for something for January, February or March’. I tell them ‘good luck’ because everything is booked,” says Mr. Fregeau.

All of this is why Ms. Gardner felt like she had to pull the trigger after half a decade of renting. The price was important but timing the market less so.

“We realize we didn’t get the bottom but that’s not what we were all about. This worked for us psychologically even more because we just couldn’t get what we wanted [renting],” she says.

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Say Goodbye To Forward Guidance From The Bank Of Canada

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Bank of Canada Governor Stephen Poloz is signalling that it’s time to take off the training wheels; that the central bank will no longer be there to hold the market’s hand.

In more technical terms, the governor announced that the Bank would no longer be providing forward guidance – essentially, a paragraph, sentence, or phrase in its policy statement that provides an indication of which way the overnight rate is likely to go, how long it might stay at a given level, or what might cause it to change.

Poloz made this declaration in a discussion paper on Friday and reiterated this shift in comments to the press.

(As an aside, the governor noted that a working version of this paper had been presented at the Moneco-Econtro Summer Conference in Kingston – his private speech. However, attendees confirmed that Poloz did not provide a hint that he was on the verge of removing forward guidance at that point in time.)

When Mark Carney’s Bank of Canada introduced forward guidance in April 2009, the assertion that interest rates would stay low for a prolonged period of time helped flatten the yield curve, effectively easing financial conditions:

However, the governor made the case that there’s a downside to making a commitment of this nature: that traders will make one-way, levered bets based on the central bank’s stance. When a central bank appears to be on the verge of shifting its forward guidance, this can cause volatility to surge. “The volatility of a return to two-way trading is the future price of successful forward guidance today,” Poloz wrote.

Moreover, it’s difficult for monetary policymakers to provide credible forward guidance when their models aren’t doing a fabulous job of capturing  and forecasting post-recession realities. Guidance is inherently linked to the central bank’s view of how economic events will unfold – an outlook that has been, in the Bank of Canada’s case, riddled with uncertainty.

According to Poloz, forward guidance should be “reserved primarily for use at the zero lower bound, as a form of additional insurance that the economy will return to equilibrium.”

One could argue that the Bank of Canada already de facto removed forward guidance (at least partially) when the tightening bias was eliminated in October 2013 and replaced it with a data-dependent neutral bias. So this move could be described as:

The data-dependent neutral bias is dead. Long live the data-dependent neutral bias!

The omission of a phrase indicating that interest rates could go up or down depending on the data flow is merely an affirmation that interest rates could up or down depending on the data flow.

The governor admitted as much in his discussion paper. “Our experience…dropping the previously announced tightening bias, suggests that offering instead full transparency on the risks that the central bank is weighing causes the market to assess new information more or less as the central bank does; and because every data point can give rise to a debate between economists, the market remains two-way and less vulnerable to unusual leveraging and volatile shifts in sentiment,” he wrote.

So practically speaking, this changes nothing for the time being.

The only difference – and it’s a big one – is the market won’t get a signal from the Bank of Canada once a rate hike is back on the table – participants will have to figure out how the data flow is affecting the central bank’s stance.

While the governor seems to think that this will lead to less parsing of its policy statements, per Randall Palmer ofReuters, one could also make the case the opposite will occur. Instead of looking for tiny tweaks in one part of the statement, market participants will now likely pick through the entire statement with a fine-toothed comb to glean whether a rate hike is coming sooner or later than they anticipated. For example: The Bank is now saying that underlying inflation is now “slightly below target” rather than just “below target” – does that mean a rate hike is coming in April instead of July?

Of course, this extreme parsing already happens, and regardless of whether the Bank’s language is examined more or less closely than before, the end result is the same. As Poloz put it, ending forward guidance shifts “some of the policy uncertainty from the central bank’s plate back onto the market’s place.”

There’s one key unanswered question about the latest evolution of Bank of Canada policy: why now? The Canadian economy is still far away from home; why not wait until, say, the output gap has closed or rates are up to the ‘new neutral’ level to make this change?

Well, Stephen Poloz has prided himself on being an ‘honest’ central banker – even though some of his statements on currency fluctuations could be kindly characterized as misleading.

Perhaps, two weeks away from an interest rate decision and Monetary Policy Report, the Bank of Canada could no longer honestly say that a rate cut is just as likely as a hike.

Rather than admit that the chances of a  rate cut were going from slim to nil as the domestic data flow improved and American economy began to pick up steam, the governor has artfully avoided making what would be construed as a hawkish shift by choosing to say nothing whatsoever on that subject.

Housing still cheaper in popular U.S. snowbird states than 2006 peak levels, new report shows

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TORONTO – Housing prices in popular U.S. snowbird destinations are rising but are still below peak levels seen in 2006, says a new report.

The outlook by BMO Financial Group says overall, housing prices in the U.S. have increased by 20% in the last two years, but are only about halfway to the peak levels seen eight years ago.

For instance, homes in Miami, Fla., are down 52% compared with 2006 prices; Las Vegas homes are down 43%; Tampa, Fla., homes are down about 34% and Phoenix homes are down about 30%.

The average house price in Florida, which remains the most popular state for Canadian buyers, is US$124,000 — about half the price of a house in Canada.

There are more than 500,000 Canadians who currently own real estate in Florida, says the report.

Sal Guatieri a senior economist with BMO Capital Markets says it’s expected that U.S. house prices will continue to rise as the American economy and job growth gains further strength.

“We also expect the U.S. greenback to rise moderately further against the Canadian dollar, boosting capital gains appreciation for Canadians who purchase U.S. property,” he said.

No matter what statistics show, Canada’s housing boom is about to end, experts say

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It might be hard to convince some Canadians the end of the housing boom is near based on new statistics from the Canadian Real Estate Association which show prices still rising.

But the growing consensus, even in the face of record valuations for homes in Canada’s three most expensive cities, is that prices will flatten out — a thesis even supported by one of Canada’s largest real estate companies.

Ottawa-based CREA said Wednesday that sales across the country were up 10.6% in September from a year ago, though down 1.6% from August. The average price of a home climbed 5.9% from a year ago to $408,795.

“Momentum going into the the fourth quarter is showing tentative signs of waning,” says Gregory Klump, chief economist with CREA, noting low interest rates continue to support increased prices in the country’s more expensive cities.

What concerns me is some buyers seems to have this view that prices can only go up

But even Calgary, Toronto and Vancouver are unlikely to see the same gains in 2015 and Canadians in general are going to have to get used to a new reality in the housing market, where price gains drop below long-term averages, says Royal LePage chief executive Phil Soper.

“To be clear, we expect home prices to continue to grow in the months ahead, but at a slower rate than we have seen in recent years,” he said. “I don’t see prices going negative. Over the last 60 years home prices have appreciated in this country on average 5%. We are going to have more and more markets below that.”

Buyers entering the market today could be in for a long period of no growth in the price of their home but Mr. Soper says that’s probably not something they’ll be worried about.

“Buyers seem to reach a point in their life cycle, whether age, marriage or money saved, where they want to buy a house and enter the market regardless,” he says.

But David Madani, an economist with Canada Economics who has called for a major correction, wonders whether some consumers are even prepared for a flat market let alone one that is falling.

“What concerns me is some buyers seems to have this view that prices can only go up,” says Mr. Madani. “People feel it’s a one-way bet. A lot of younger people seem to think that if they don’t get in now on the home ownership ladder, they’ll miss out. Some of these people will come to regret this decision. In the more expensive markets, it’s almost like a capitulation where they say ‘If I don’t buy now, I’ll never own a home’. This is what happens in a housing bubble.”

Finn Poschmann, vice-president of research at the C.D. Howe Institute, says you can’t deny there is a sense of “getting in while the getting is good” but adds there is a big difference between prices tapering off and declining.

He does says debt levels are manageable for now but there’s not much room for them to increase which would help fuel price growth. “The growth rate [in prices] we have seen simply will not be sustained forever simply because it can’t be, whichever the major market you are looking at,” said Mr. Poschmann.

Still, there is evidence in the market that Canada’s debt problem — at least as far as mortgage debt — is not as bad as might be feared. Benjamin Tal, deputy chief economist with CIBC, says 30% to 40% of Canadian households are now accelerating their mortgage payments which means 40% to 50% of Canadian households have an amortization period of less than 20 years.

“I think there is still some temptation [to take on more debt],” said Mr. Tal. “If there is an increase in prices it will come because of demand [driven by cheap mortgages]. But mostly I do think this is a market that is getting tired. If you want to flip, you have no reason to be in this market. If you want to live in a place, interest rates are still low.”

Tips For First Time Home Buyers- Ask a Vancouver Mortgage broker

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Buying a home can have many advantages. Owning your own home instead of renting can provide security to you and your family. With your new home, you have the freedom to renovate as well as not have a landlord. Purchasing a home is a great investment for your future. Before you take the plunge and make a commitment, consider some advice for a first time home buyer.

As a long term real estate agent in the Greater Toronto Area,Karen Kubisoffers these three tips:

1.    Consider your Finances.  Before buying a home, make sure that other areas of your life, like a personal business or education, do not require financial savings as well or make sure that you can afford both. When you buy your first home, you should have enough saved to put down at least five per cent of the purchase price for your down payment. If you are able to save more than five per cent, then that is even better. Your job and home should be stable.

2.    Meet with a Mortgage Broker. It is best to assess what you can afford. By meeting with a mortgage broker, they will be able to tell you how much you can afford based on your savings and your annual income. Shop around for the best rates, terms, and options before you make a decision. If you have not been pre-approved for a mortgage, try using an online mortgage calculator to see your rate and monthly payments. First time home buyers can also take advantage of the government’s Home Buyers Plan. With this, you can use up to $25,000 of an RRSP towards the purchase of your home. This is tax free as long as you pay it back within 15 years.

3.    Ask Questions. While shopping for your first home, ask yourself as well as the other home owners and realtors questions. Consider what you will need – how many bedrooms, bathrooms, and garages? Do you want a condo or a single family home? Will you be having children? What type of neighbourhood do you want to live in? Consider everything from the size of the backyard and most importantly the location. Ask yourself if there are schools around or if your first home is close to your work. Consider all of these very important questions before making a final purchase.

As a first time home buyer, it can be a very overwhelming experience. When you are ready to settle on buying a home, get this advice and more from an experienced realtor