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Money Advice for Life
Help! I need a mortgage!
Purchasing a home, especially your first, will be one of the most expensive and important purchases of your life. It’s important to understand how the process works and the impact that buying a home can make on your short and long term finances. Follow these three handy tips to see how much house you can afford!
Did you ever drive around with your parents during the holidays looking for the best lights in town and thought “I wonder how much this actually costs?” Or maybe you’ve started looking at listings in neighbourhoods you’d like to live in, only to realize you have no idea how much you can afford? Whatever the case may be, securing a mortgage is an intimidating process. We’re here to help with a three step process that gives you a great starting point for where to go and how to makes sure it fits your budget.
Step 1: Check, Check, Check It Out
Are you ready for this next chapter to begin? It starts with a word that still sends shivers down everyone’s spine after high school… “homework”.
First you’ll need to determine your credit score. I recommend sitting down with your financial advisor who will be able to best accurately determine how much debt you’ll be able to undertake.
Financial advisors use your credit score to determine whether you qualify for a mortgage and how much you will qualify for (alongside the Mortgage Stress Test). An easy way to take a realistic look at your spending patterns is by going through your banking and credit card history. Staying in touch with your current spending habits will prevent any unpleasant surprises when going in to discuss your options with your advisor.
Step 2: Evaluation Time: What Can You Spend?
Figuring out “how much you can afford to spend” versus “what you should spend” can be hard. Imagine spending your entire budget on your lavish dream home, but you can’t invite anyone over because you don’t have furniture for them to sit on. Compare that with a home within your means that you can afford with furnishings that you, your friends and family will enjoy. Just because you qualify to buy a large house, doesn’t mean you should make yourself “house broke”. If you purchase a home and leave yourself some wiggle room, it’ll give you more flexibility to spend your disposable income on other things such as trips, family, and decor for your new digs! Ask your financial advisor about the lifestyle trade-offs that occur when you take that step to become a homeowner.
I also recommend talking to your financial advisor about creating a budget that provides a holistic picture of your current expenses, long-term expenses, future expenses, and miscellaneous expenses that will come with being a new homeowner. Compare this budget with your current spending habits you identified in step one and you should be able to identify if you can realistically afford the purchase of a home. Need some help? We have some tools to help you create a budget.
Tip: Practice living on this self-made budget for a while before making the steps to purchase. This way, you know that you can actively save and handle the budget change while making sure it is accurate.
Step 3: What You Should Spend & Knowing the Fees
Time to look at all the fees that come with buying a home! *Gulp* Many of these fees exist on top of the cost of your home so make sure you leave room in your budget.
Down payment (at least 5%),
Mortgage Default Insurance Premiums
Your down payment amount affects the costs associated with your mortgage. The higher your down payment, the less Mortgage Default Insurance Premiums (more commonly known as CMHC). Mortgage Default Insurance Premiums are mandatory in Canada, and are calculated based on your down payment amount. These fees are an insurance on your mortgage. If you can realistically afford putting down a 20% down payment, you can avoid paying CMHC. If you have the means to save for a 20% down payment, it will save you a ton of money.
Home inspection fees,
Land transfer fees, and
Lawyer fees (approximately 1.5% of the total cost of your home)
As well, remember that once you buy a place to call home, your total monthly house costs are much more than just your mortgage payment and things like property taxes, home insurance and condo fees should be added to your budget. One of our previous blogs explores the expenses of homeownership.
In Canada, there are guidelines on how much an individual can spend on a house, based on your monthly income. In most cases, it is recommended that your monthly housing costs do not exceed 30-40% of your total gross monthly income. There are many good reasons to stay well under that number, remember, all those pesky fees and your monthly house costs we discussed above? They stack up fast and can leave you “house broke” if you are not careful.
Only you can decide your lifestyle and how much you’re comfortable spending each month, and if having a mortgage payment is right for you. Your finances are one of the most crucial and personal pieces of your life so it is important that you feel confident making the decisions that are right for you!
Are you thinking of purchasing a home? What advice do you have for people looking to buy a home? Share your thoughts in the comments below, it’s on the house!