1. Play 20 (or more) questions
Any decision about home ownership should begin with a rigorous round of self-analysis. Where do you want to be in two years? In five? In 20? How secure is your job? Do you plan to have children, or will your children soon be moving on to places of their own? Unless you’ve saved up heaps of cash for a fat down payment, your ability to manage debt is crucial, so you’ll need a decent credit history and a firm grasp on the debt you’re already carrying. Finally, take a cold, hard look at your discretionary spending. How much are you shelling out for travel or takeout, for movies or magazines? Once you add it up, be honest about what you’re willing to sacrifice for an investment in a home.
2. Crunch those numbers
Next, determine how much you can afford for a down payment and a mortgage. According to Mary Stergiadis of the Canada Mortgage and Housing CorporÂation (CMHC), “A good rule of thumb is that 32 percent is the maximum share of annual income you should put toward household costs, like principal, interest, tax and heating.” Total debt obligation, once you factor in any other loans, should not exceed 40 percent of your gross income – so if a good portion of your salary is already going toward car payments or student loans, purchasing a house isn’t the best idea. There are countless calculators online to help you with this; Chatelaine.com has a good one, as does CMHC at Cmhc-schl.gc.ca. But Alison Strimas, vice-president of mortgages at Scotiabank, advises first-time buyers to have “a face-to-face conversation with a mortgage specialist. We will work through all the financial costs, and whether you buy or continue to rent, you’re making an informed decision.”
Bonus: Unlike most of the services you’ll need, getting pre-approval for a mortgage is actually free.
3. Start scouting
Now that you know what you can afford, your lifestyle will help determine the kind of house you need. If kids aren’t in your near future and home maintenance isn’t your bag, Strimas says, “A condo is a great segue into the ownership market.” If you have a family and want a house near parks, you may be looking at an older property, which can be more expensive to maintain. Rosie Porter, a real-estate agent based in Halifax, suggests that to recoup the transaction costs involved in buying a home, you should find one that will serve your needs for at least three to five years.
4. Look ahead
When it comes to down payments and amortization periods (the amount of time it takes to pay off your mortgage), you’re spoiled for choice. It’s now possible to get into a house for zero money down, but the trade-off will be much higher mortgage payments, and possibly a much longer amortization period, up to 40 years. Be careful, though, that you’re not getting in over your head; the current American housing crisis was caused in part by predatory lenders and by borrowers defaulting on loans they couldn’t afford. Porter says her clients often provide at least five percent of the purchase price for a down payment. “No one should be maxed out by home ownership. If you can save that five percent, it’s a good education in saving for, say, the cost of replacing a roof; it shows some financial stability.” Anything less than a 20 percent down payment is called a high-ratio mortgage, and you will require default insurance. However, the government of Canada offers the Home Buyer’s Plan, which allows each first-time buyer to withdraw up to $20,000 from RRSPs to go toward a home, with a no-penalty, 15-year payback period. Lastly, be sure to set aside at least 1.5 percent of the purchase price for closing costs such as legal fees, land-transfer fees, utility hook-up fees and title insurance.
5. When rent is best
Obviously, renting provides a lot more flexibility, so if you’re thinking about skipping town, this probably isn’t the right time to buy. Renting is also a good bet while you wait for more job security, pad your savings or pay down any debt. If you’re not in a position to land a mortgage, Stergiadis suggests building a healthy credit history by “using a credit card in a prudent manner and making payments on it monthly.” But if you’re an unattached gal waiting for marriage before you take on a mortgage, please reconsider. You’ll be in good company: According to Royal LePage Canada, 37 percent of never-married and 45 per cent of divorced or separated women own their homes. So forget the guy; devote yourself to a fixer-upper you can actually fix up.
Need some help budgeting? Check out our budgeting guide to get all the help you need.