Can you afford to own your own home in Canada?
Home ownership is a HUGE decision. So how do you even begin to know if you’re ready?! To make it easier, here’s a step-by-step guide.
Step 1: Is Your Financial Sh*t Together?
Do you know where all of your money is going? (ie. Do you have a budget! Are you keeping track of your spending & savings, it isn’t a ‘mystery’ that just ‘works itself out’)
Do you have money each month that you’re consistently putting in savings? (You don’t just KNOW where your money is going, you’re choosing to keep some of it for yourself!)
Is that savings amount at least 20% of your total income? (Savings Amount / Income x 100 = Savings Rate)
Check your credit, is it at least in the ‘good’ range? (Anything between 660 - 724 is ‘Good’ Above 724 is better! You want that number as high as you can get it.)
Have you been employed for at least 2 years? (To approve you for a mortgage, lenders are going to look at your income for at least the last 2 years. If you’ve just come off a maternity leave, or gotten a big promotion, it will be better to wait and build up that employment history again so you’ll have a better chance of being approved and at a better rate!)
Do you have good job stability? (This one is subjective, and you’re going to have to judge it yourself. Some good starting points are: the length of time you’ve been in the position, relationships with boss & coworkers, salary satisfaction, overall company stability etc. There are no guarantees, no one’s job is 100% stable. But there may be signs that your job is UNstable and in that case you should wait to buy a home)
If you’ve said no to any of the above q’s, buying a home is not recommended at this time. I’m not saying you CAN’T buy a home if you’re saying no to these things, but you want to be as prepared as you can. Making sure you can say ‘yes’ to all the tasks listed above will help make sure you’re being as responsible as you can and in the best position to buy!
Step 2: Can you ‘Afford’ a Home?
We all know, ‘afford’ is a relative word. But here are some things to check that are best practice according to financial experts!
Housing Costs:
According to the CMHC (Canadian Mortgage and Housing Corporation) an ‘affordable’ house is less than 30% of your household income.
Start with that. You want to calculate 30% of your household income and pretend that number is what you’re paying for your housing costs. (This should include all the costs associated with your housing: Mortgage payment, home insurance, property taxes, association fees, etc.)
Here are some articles that will help you determine the average cost of those things:
Property taxes - Varies greatly! Click the link to get a Canadian costing chart.
Home Insurance - approx. $960 per year
HOA (homeowner’s association) fees - approx. $100-$700
These may only be applicable to certain areas. You may not have an HOA organization where you buy!
Condo Fee’s - Sometimes called ‘maintenance’ only applicable when buying a condominium
Other Costs:
Obviously, buying a home gives you a lot more responsibility than renting! It’s no longer a landlord who’s covering your municipal water, sewage or garbage fees. You need to pay for repairs, you need to maintain the property, etc. You’ll want to make sure all of these things are included when you’re thinking about the ‘affordability’ of your housing purchase!
Is your landlord covering any personal maintenance fees like water, hydro, or internet? Add those to your budget!
Add a line for housing maintenance (take the average yearly fee /12 to get a monthly cost)
Average Housing Maintenance: approx. This is a great article by MoneySense!
Add any municipal fees you might have to pay. You’ll need to research the fees associated with your specific municipality as each place will be different!
Try searching: “Municipal homeowner fees <the town you’re buying in>”
This will give you an idea of the additional cost associated with living in a certain area. For example, you should look for fees associated with water / hydro usage, sewer collection, or garbage collection.
Action Step:
Take all of the numbers above, and make a ‘test budget’ for yourself. Does including all of the new housing costs drastically change your lifestyle? Is there still room for your own savings and personal goals?
Try to live within that new budget for 3 months. If you can do it, you’re ready to make the change. If you aren’t, think about how to rearrange that budget to make things better.
If you’re feeling stressed and overwhelmed sticking to your test budget, jumping into home ownership is not going to improve it. If you can’t live on the test budget you’ve set for yourself before you buy, you won’t stick to it after you’ve bought so find something that works!
Step 3: Do you have the down payment?
If you’re buying a home $500,000 or less your down payment can be as low as 5% of the purchase price.
If you’re buying a home over $500,000 your down payment must be 5% up to the $500,000 and then 10% for the additional amount. (*Legislation as of 2016)
For example:
Purchase price: $700,000
Down Payment = (5% of $500,000) + (10% of 200,000)
Down Payment = ($25,000) + ($20,000)
Down Payment = $45,000
If you’re putting less than 20% of your purchase price as a down payment, then you will need to pay mortgage loan insurance. Here is a mortgage loan insurance cost calculator from ratehub that will help you determine what that might be.
t’s not a BAD thing to put less than 20% down and pay for mortgage loan insurance. These days, I get it, housing is EXPENSIVE.
Step 4: Do you have the closing costs?
Closing costs are the legal and administrative costs associated with buying a home. According to RateHub.ca, they are approx. 1.5-4% of the purchase price. Make sure to include this AND your down payment in your calculations!
Please visit: https://www.ratehub.ca/closing-costs-overview to see a detailed list of closing costs.
Please visit: https://www.ratehub.ca/closing-costs to find a detailed list of other potential fees.