Real estate ads and television shows sell us the dream of home ownership every day. We see the moment when first-time home buyers walk into their perfect home. They gasp as the real estate agent dramatically reveals all the fine details: top-of-the-line appliances, polished hardwood floors and inviting fireplace.
Later, we see the happy homeowners moved in, hosting a party with friends and family in their perfect new home.
It's hard to resist the allure of purchasing your own home. But long before you measure curtains, lay down hardwood floors and open that bottle of champagne, you have to start with the numbers. Can you really afford to buy a home?
Ignore the media telling us that home prices are increasing/decreasing/becoming affordable/becoming unaffordable. If you want to buy a home, you need to look at your individual circumstances. It's time to do some calculations.
How much do you earn?
Write out your gross annual income - what you earn before taxes. That number is what determines how much house you can afford, and how big of a mortgage you may qualify for.
How much will your home cost?
This amount includes property taxes, cost of utilities, and monthly condominium fees (if applicable).
How much do you spend?
If you don't have a household budget, write down all your expenses so you have a sense of what you spend on a regular basis. This includes your telephone, car payments, student loans and credit card bills. Don't forget to add your grocery, restaurant, magazine and any other monthly expenses. This will give you an idea of the mortgage payments you may be able to afford.
Do you have a down payment?
You have to put at least 5% down, but in this case, the more the better, as you will pay less interest on the remaining amount, called the principal. It sounds complicated but there are tools that can help you calculate how much your monthly mortgage payment will be after the down payment and depending on the length of the mortgage. It's worth noting that if you put down more than 20 per cent, you don't require mortgage loan insurance from the Canadian Mortgage and Housing Corporation.
Saving for your first home
After entering all your details, the calculator will come up with an amount: that's the down payment you're aiming for, your savings goal. Don't let that discourage you. With a little planning, you can own a home.
Start by opening a savings account and setting up automatic saving each month. As a first-time home owner, you can also use your RRSP savings - up to $25,000 - for a down payment. You will have to pay it back over 15 years and payment begins two years after you buy your home.
Don't go over your limit
We read about homes selling for tens of thousands of dollars over the asking price. Before you get caught up in a bidding war, make sure you know your limit. Paying extra on the house means bigger payments, a longer amortization period and more debt.
Pay it off sooner
Your finances are in order, you've found your dream house and your bid has been accepted. You decided on an amortization period - the actual number of years it will take you to repay your mortgage - but there are ways to pay off your mortgage in less time.
You can change your mortgage frequency from monthly to bi-weekly or even weekly. By paying extra on your mortgage - whether it's every payment or via a yearly lump sum payment - you can reduce the amortization period by years. There are multiple online tools that help you calculate the best way to reduce your amortization period so you can be mortgage-free as soon as possible.
Buying your first home can be an exciting and stressful time but with planning, you can walk into your home knowing you've bought well and within your budget.