Building your career, paying back student loans, establishing a credit rating, buying your first home – if you’re like most Canadians in their 20′s and 30′s you probably have a lot on the go.
A home may be the biggest purchase you ever make, so it’s important to know that you can comfortably afford to buy and maintain it. If you have a partner or spouse, it’s equally important to communicate openly and regularly about your feelings and expectations about money, your home and your overall financial plan. Before you start visiting open houses, here are some helpful steps to review.
Save for your down payment
One of the first steps is to set a goal for your down payment and create a plan to reach it. Consider setting up an automatic savings plan with preauthorized contributions from your chequing accoung to a high-interest savings account. Choose an account that pays interest on every dollar, regardless of the balance.
Put down as much as you comfortably can and you’ll be rewarded with a shorter mortgage term and reduced interest costs. If you have at least a 20 per cent down payment, you likely won’t require mortgage loan insurance, which protects the lender if you default on your mortgage loan. Mortgage loan insurance is offered by the Canada Mortgage and Housing Corporation (www.cmhc-schl.gc.ca) Genworth Financial (www.genworth.ca) or Canada Guaranty (www.canadaguaranty.ca)
Determine how much you can afford
To work out how much you can afford, consider factors such as your down payment amount, household income, other monthly debt payments, estimated housing-related costs and closing costs.
Housing-related costs are recurring expenses that may included utilities, phone and cable, maintenance, home insurance, mortgage insurance, property taxes and condo fees (if applicable). Closing costs are one-time charges paid at the time your house purchase closes. Typically, they can include legal fees, appraisal fees, home inspection fees, title insurance, service charges for connecting utilities, a land transfer tax and moving expenses.
As a good rule of thumb, your mortgage payments, other monthly debt payments and housing-related costs shouldn’t exceed 40 per cent of your gross annual income.
Stay on top of your credit record
Every time you pay a bill or apply for credit, two credit reporting agencies (or credit bureaus) – Equifax Canada (www.equifax.ca) and TransUnion Canada (www.transunion.ca) – take note. This information is used to calculate your credit score, which is a key measure a lender will consider when deciding whether to offer you a mortgage. Information is kept on file as long as 14 years, so it’s important that you ensure the credit bureau records are up to date and correct. Each will release your file to you at your request. Their processes differ, so visit their websites for more information.
If you’re serious about buying a home, consider getting pre-approved for a mortgage. This process will identifyexactly how much the lender is willing to lend you, provide you with an estimate of your payments and give you the opportunity to lock in at the current interest rate until a particular date.
Pre-approval doesn’t mean you have to get a mortgage with that lender, nor does it cost you.
Talk to your spouse about priorities and concerns
In addition to the financial aspects of buying and owning a home with someone, it’s also important to regularly communicate about the emotional side of money, including your spending and saving priorities and habits.
You may love trying out a new restaurant each month, while your partner may like to splurge on the latest gadgets. That’s fine. It just means that you need to set clear expectations with each other on how you will use your discretionary income.
It’s important to discuss expectations and goals for the money you’ve saved as well. One person may be expecting to put some savings towards new flooring, while the other may be eyeing a new leather sofa. Or one person may feel it’s very important to save for retirement, while the other may have vacations as a priority. The goal is to ensure that you understand your monthly cash flow, talk about your finances openly and do not overspend and accumulate debt.
Work with a financial professional
Whether you’re looking to purchase your fist home in a few months or a bit further down the road, a financial professional can help you create a savings plan and a suitable cash flow plan. An advisor can also help facilitate important discussions between you and your partner. If you don’t already have an advisor, reach out to one. And when you have a plan in place with your partner, review your progress regularly with each other.