How to Tell If You're Ready for a Mortgage - What You Can Realistically Afford
by Julie Jaggernath
Make a budgeting plan with monthly expenses in it before you buy a house
The best way to tell if you’re ready to buy a house and commit to years of mortgage payments is to try before you buy. A new home is the single biggest purchase most people will make in their lifetime, however many people spend more time considering which car to buy than they do choosing a new home.
Test drive owning a new home, just as you would a new car, to discover if the home you would like to buy is a good financial fit for you and your family. You can do this with a budgeting plan.
What No One Tells You - Can You Really Afford to Buy a House?
A test drive will help you discover if you can afford the new housing costs and how they will impact your lifestyle. Yes, the lifestyle you’ve grown to love. If you’re used to having sunny vacations each year and don’t think twice about your entertainment costs, this might all need to change if you’re spending more on housing-related costs.
With higher housing costs, what are you willing to compromise so that you can afford the increased expenses?
Identify Your Immediate and Secondary Expenses as a New Homeowner
Identify your immediate additional expenses:
- A larger mortgage payment
- An understanding of the new mortgage rules
- Higher insurance and taxes
- Increased utility costs
- Renovations, repairs or improvements
Consider secondary expenses that may increase as a result of owning the new home:
- Increased transportation costs
- Saving monthly for home maintenance and improvements
- Strata, utility, insurance or property tax increases
- Purchasing furnishings – this is especially important to plan for if you are buying a larger home
Can You Really Afford Higher Housing Costs?
After identifying the additional expenses with owning the new home of your dreams, set aside in a separate savings account each month the difference between your current housing payment and what your new housing payment will be. For example, if your current monthly housing payment is $1,500 and the new housing payment will be $2,700, set the additional $1,200 aside in a savings account to get a feel for the financial reality of owning the new home today.
After 3 – 6 months of test driving owing your new home, consider what you’ve learned:
- Maybe you’ve been able to top up your down payment
- Maybe you’ve saved yourself time and money learning a valuable lesson
Either way, you’ve got nothing to lose.
Tools and Tips to Help You Test Drive Buying a House
If your test drive of buying a house is less than comfortable, ask yourself if you can truly afford the home you would like to own. Buying a home should be a sound financial decision, not an emotional, impulsive one. Mortgage rates are low right now, but they will increase and at some point, your mortgage payment will go up as well. Taking the time for a financial test drive can save you from making a costly mistake.
Get started with some tools to build a household budget that will allow you to test drive owing a home.
To find out what you need to consider when buying a home, visit CMHC for a practical check list.
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