So you want to buy a home in Canada. Congratulations, you've joined millions of future Canadian homeowners in the tedious, nerve-wracking, but necessary process of determining your homebuying budget.
It's always wise to know exactly how much home you can afford—otherwise, you might be wasting time and dopamine on homes out of your price range. You'll only be left with disappointment when you view less expensive homes.
So to get an idea of what you can afford, you'll need to take into account the following:
Your Current Savings
What are you doing with your money? Are you hoarding it under a mattress, or are you actively investing in the future?
The more leverage you have over your savings, the better off you'll be. Having an extra $1,000 in cash isn't really going to help much if it's earning 1% interest in a low-interest savings account. If you were to put that money into an investment portfolio, however, it would grow with the help of the stock market's long-run appreciation rate of 7% or so.
The numbers will vary depending on how much your down payment is and where you live—as well as any potential tax incentives available in your area for first-time homebuyers. But as a rule of thumb, you'll want to use 20% or more of your current annual income on the mortgage payment and 10% on homeowner association fees and property taxes (if applicable).
Your Down Payment
Let's start with the down payment. The amount you're able to put toward the purchase price will be an essential factor in determining what you can afford since it will affect what interest rate and monthly mortgage payment you qualify for. In general, 20% is the minimum amount lenders want to see on a down payment—though it's not impossible to get a mortgage with less.
But if you can afford more than that, don't be shy about putting a higher percentage down. The more money you have in the deal, the better your chances of qualifying for the best interest rates—and therefore, the least expensive home.
Your Household Income
You'll want to consider how much money your household brings in every month. If you're single, this will impact the maximum you can afford by quite a bit; but if you have a family or other dependents, they could affect your ability to qualify as well. So make sure you consider their financial needs—and gross monthly income—too.
Your Current Debts (liabilities) + Monthly Amortized Payments
If you have any debts—student loans, car payments or credit card bills—you'll need to factor those into your homebuying budget. If your debts are high enough that they're putting you in a bind every month, don't even consider starting the home buying process until you've gotten yourself out of it.
Your Estimated Monthly Housing-related Costs
If you're moving from an apartment, you might be caught off guard with all the expenses that come with a household.
A big part of your monthly payment will be taken up by your principal and interest payments—however, you'll also have to factor in property taxes, property insurance, condominium fees, school taxes, utilities, maintenance costs, and all the other little expenses that come with owning a home. This is especially true if you're buying in an area where these fees are high or if they're included in mortgage payments.
Keep in mind that these monthly costs will be ongoing—including homeowner association (HOA) or condominium fees if any—whereas your down payment is a one-time expense.
You might also want to consider the impact of seasonal fluctuations on some of these expenses. For example, you'll likely spend more on utilities during the summer than you would in the winter and more on insurance during hurricane season.
Your Expected Closing Costs & Other One-time Costs
These fees, which can add from 2% to 5% to the total cost of a house, include appraisals, application and processing fees, credit reports and all other one-time expenses. Ask your lender about how much these might be for you.
You're also not invulnerable. Your home could get damaged from an accident; you need to handle that. Your home's shingles may need changing, or the air conditioning, or maybe one day the fire inspector decides your basement isn't safe. You want to ensure that you have some kind of savings and homeowners insurance for these events.
That said, there are a few other costs you should factor into your calculations as well. For example, you'll probably need to pay for a title search and survey—especially if you're cosigning the loan.
And speaking of which…
If you're going to have someone else co-sign on the mortgage or take out a second mortgage (at the very least), you'll need to factor in their financials too—whether it's your parents or a family member, an old friend who owes you one or someone else.
And then there are closing costs that come along with buying a house, like a title insurance and other services that can add up to 2-5% of your total home purchase price.
Your Current Spending Practices
You're not a robot. You're a human with natural desires—that means monthly expenses.
On top of your current debts and monthly housing costs, there's another factor you must consider: your spending. If you're looking to upgrade from a 2-bedroom apartment to a 4-bedroom house—or your lifestyle includes lots of entertainment or travel—then it might be time to dial back on how much you spend on things that aren't necessary.
As an example, let's say you have a $400-a-month gym membership—but you rarely make it down there. Or maybe your cable subscription is costing more than what you use most months (or don't use at all). That's money that you can put towards a down payment.
Conclusion
You're not going to get a blue ribbon for making a down payment on your first house. It's never going to be the "most fantastic" feeling in the world—but it will be one of those you grow fond of overtime.
And if you think about it, buying a house you can afford isn't all that difficult once you calculate your budget and debt to income ratio. From there, all you have to do is put in the time and effort to reach that goal. It will all be worth it in the end when you move into your new home—and have a place that's not just an investment but also a means of shelter for yourself and your loved ones.