When you are ready to take the step into home ownership, there are quite a few things you need to take into consideration but one of the most important things is learning how much you can actually spend. While your mortgage payment will most likely take up the bulk of your expenditures each month, you cannot forget about other expenses.
There are four categories to pay attention to that include the following:
- . Household Expenses. This includes things such as utilities, groceries, childcare, clothing, and things you typically spend as a household necessity.
- Entertainment. These expenses include travel, dining out, books, magazines, movies, sporting events, and anything you spend on entertainment.
- Debts and Loans. If you have credit cards, car loans, student loans, personal loans, or debt of any kind that includes loans – include it.
- Savings/Donations. This includes charity, savings accounts, RRSP, and TFSA.
Once you have these numbers, you will need to subtract it from your income for the month. For instance, if you make $5K each month and the above numbers equal $2500, then that gives you an idea of what is left for your mortgage plus any other expenses or emergencies. You can also use online calculators to help you figure your expenses and money left over.
What Can You Afford?
The next calculation to do is to figure out how much you can afford for your mortgage but without putting your finances at risk. There are two rules:
- Affordability Rule 1. Take your housing costs (mortgage payment each month with interest and principal), heating expenses, property taxes, and if applicable, 50% of condo fees. Then take these housing costs and figure that they should be no more than 32% of your gross income averaged each month. This is what is called the debt-to-income or gross debt service (GDS)
- Affordability Rule 2. In this rule, you take your monthly debt load which includes the housing costs that you calculated in the Affordability Rule 1, credit cards, auto loans, lines of credit, other mortgages and this monthly debt load should be no more than 40% of your average gross income each month. This percentage is known as your total debt-to-income or total debt service (TDS) ratio.
Once you have crunched these numbers, you can find out more about how much you can afford and keep in mind that this all depends on these numbers and what you have put down as a down payment. For many, the down payment is the hardest part of buying a new home.
Your Upfront Costs
There is a third calculation you must do in order to find out if you are financially ready to own a home and that is figuring out your upfront costs.
The upfront costs is actually more than just a down payment. The following list is what you really must have as upfront costs:
- Down Payment. As stated, this is sometimes the hardest part in buying a home. This is what you will pay after an offer is made to buy the home.
- Legal and/or Notary Fees.
- Home Inspection and Appraisal Fees.
- Land Registration Fees. This is calculated based on a percentage or portion of the buying price of the property.
- Moving Costs.
- Renovations or Repairs.
- GST/HST/QST. This is on the purchase price (for newly built homes) or on the mortgage loan insurance (if applicable)
- Prepaid Utility Bills and/or Property Taxes. This is when the seller may have paid these in advance and needs reimbursing.
Oakville Real Estate Law is one of the top firms in Canada for real estate transactions. The firm’s team led by Robert Rose has worked on thousands of transactions the years and have the knowledge and experience you need. For more information on what you need to know about being able to afford a home, please contact us and we will be glad to help.