Policymakers have been slapping our wrists on a pretty regular basis when it comes to the spending habits of Canadians. We’ve had warnings from the Bank of Canada about high consumer debt levels, followed by tighter rules around mortgage lending. The message is clear: we had better rein in our spending or face financial Armageddon.
If you’re standing in the wings waiting to buy your first home, all these messages about economic turmoil and high debt loads may be curbing your enthusiasm to take the plunge.
My advice to you: if you’re not sure whether it’s a good time to buy a home, turn off the news, tune out the noise, and take a breath — then ask yourself these basic questions to see whether buying your own place is the right move for right now.
Where do you see yourself in the next few years?
It’s hard to know what life will throw your way, but the reality is, it costs money to buy or sell a home — lots of it. Real estate agent commissions alone can bite into your home. Some take five percent of your sale price — that’s $12,500 on a $250,000 sale! You can’t count on double-digit increases on home values to cover the selling cost if you need to unload your place in the short-term. It’s best to think of home ownership as a buy and hold strategy — if you think you’re going to sell up and relocate in the next year or two, maybe renting is the best choice for now.
How’s your credit rating?
If you are looking for a mortgage to finance your home purchase, then potential lenders will check your credit report, which contains information on any loans you’ve taken out in the last six years. Bankruptcies or problems paying anything back are listed there for all prospective lenders to see — and they could affect your ability to get credit. For more information read this recent post on credit scores.
How much can you afford?
There’s a quick and easy way to estimate how much you can reasonably spend on a home based on your income. Just multiply your gross annual salary by 3.4 — so if you earn $50,000 a year, you can afford a home that costs $170,000. Of course, that number will rise depending on how much of a down payment you have.
Experts also say you shouldn’t pay more than 32 percent of your gross monthly income on housing costs, including your mortgage, heating costs, taxes, etc.
Most banks will also look closely at your Total Debt Service ratio (TDS) before approving you for a mortgage loan. This measures your total debt obligations, including credit card payments and car loans. Your TDS should be no higher than 40 percent of your gross monthly income. Not sure how to calculate yours? RBC has a tool to get you started.
You’ll also need a down payment — 20 percent will get you a “conventional mortgage” where you don’t require mortgage loan insurance. Don’t have 20 percent? Then you need to calculate the cost of insurance.
What about maintenance?
Mortgage payments are only part of the picture — owning a home means you’re responsible for all repairs and upkeep. Expect to pay about three percent a year for maintenance on a newer home, and bump that number up to five percent for an older place. So, if your house cost $300,000 and it’s on the new side, plan on $9,000 a year (or $750 a month) for repairs and upkeep.
Can you cover all the other purchase costs?
It can be really expensive to buy your own place — and it’s not just the price tag we’re talking about. You might need a home inspection (around $500) and there are other costs like title insurance, land transfer tax, and sundry legal fees that can top $500. And don’t forget the cost of moving: movers, service connection fees and the cost of all those little things the previous owners decided to take with them (shower curtain, blinds, shelving, etc.).
So if you think you can handle the costs of buying a new home, moving in and being a homeowner, then happy hunting!
Caroline Cakebread is a Toronto-based financial writer and editor. She’s also a recovering academic and the mother of two kids. Check out her personal finance blog for Chatelaine Your Money.