Avoid stretching your home-buying budget
OTTAWA — Whether it’s the sizzling real estate market or the desire for something just a little bit nicer, the temptation to stretch your home-buying budget may be tough to resist.
But there are numerous factors to take into account before making the biggest purchase of your life, even if you’ve qualified with your lender for more.
John DeRose, who oversees Vancouver City Savings Credit Union’s mobile mortgage specialists, says people paying $1,500 a month in rent can’t necessarily afford a monthly mortgage of $1,500.
“When you own a home there are extra costs, so that’s why it is important to sit down and talk to somebody,” he says.
The maximum amount people can spend on a home depends on the size of their down payment and two key ratios.
According to the gross debt service ratio rule, monthly housing costs — which are mortgage payments, property taxes, heating expenses and 50 per cent of any condo fees, if they apply — should not exceed 32 per cent of one’s average gross monthly income.
The second rule, called the total debt service ratio, says monthly debt loads should be no more than 40 per cent of average gross monthly income. That includes all housing costs included in the gross debt service ratio as well as other debts such as car loans or leases, credit card payments and line of credit payments.
However, DeRose says those two ratios likely don’t capture the full picture for many Canadians.
“Everyone’s financial situation is different, so just using a calculator is not going to give you all the answers,” he says. “Everyone is in a different part of their life cycle. They have expenses that others may not have, they may have children, they many not.”
Planning for the future is important because costs can fluctuate throughout life. Interest rates are near record lows, but will rise at some point, as will things such as utility costs, property taxes and condo fees. Your paycheque, however, may not keep pace.
There’s also the cost of buying a new car, or a family situation could change. For those planning on having children, keep in mind the cost of daycare in a big city can be more than $1,000 a month.
Canada Mortgage and Housing Corp. offers a step-by-step guide for potential homebuyers including worksheets that help people take a careful look at their household budget now and in the future.
It also includes lists of possible costs in addition to the purchase price, such as legal and inspection fees associated with the transaction as well as moving expenses, all of which can add up to thousands of dollars.
Ina Wielinga, a knowledge transfer consultant at the housing corporation, says it is important to be honest when creating a budget and planning for the future.
In a hot real estate market, potential buyers need to be realistic about what their budget will allow for today and beyond, DeRose says. “Sometimes renting is better.”