If you’re currently renting an apartment or even a house, then you are aware of the steep costs associated with renting. Now obviously it would be better if part of those monthly payments were going back into your pocket in the way of home equity, but purchasing a home is no small decision. Unlike renting, owning a home is a commitment that, while worthwhile for reasons financial and non-financial, comes with its share of costs. Therefore, it’s good to do a little soul searching prior to jumping in to the market. Here are some simple questions to ask yourself:
Can you afford it?
This is a qualifying question. Down payment aside (which can start as low as 5%), what does your monthly cash flow look like right now? Are you living paycheque to paycheque? Do you have outstanding credit card debts, student loans or car payments? Do you spend a lot of money on entertainment, eating out, clothes, etc.? Are you willing to give any of those up to make home ownership work? While mortgage rates are favourable, home ownership requires more of a financial commitment due to ongoing maintenance and repairs, property taxes, etc. This is important; work with your real estate salesperson and mortgage professional to see what you can realistically afford.
Does home ownership fit your lifestyle?
Sure, you want to own your own home – but does it make sense for you even if you are financially ready? For instance, do you shudder at the prospect of gardening, mowing the lawn or shovelling your driveway? Do you travel a lot for work and therefore won’t be able to maintain your home? Is it possible that you may need to move for work, or change careers entirely in the next 2-5 years? You may not have all the answers right now, but these questions serve as a starting point to see if you’re emotionally ready to make the move to ownership. Be honest with yourself and save yourself a lot of stress down the road.
Can you stomach closing costs, like the CMHC Mortgage Insurance Premium?
Yes, you can purchase a home with less than a 20% down payment – but there’s a cost to doing so. Banks consider any mortgage worth more than 80% of the selling price (this represents a less-than-20% down payment) a “high ratio” mortgage, which may as well be called a “high risk” mortgage. In this case, you’ll need to pay a CMHC Mortgage Insurance Premium in addition to your other closing costs. This is calculated based on your down payment and purchase price (here’s the calculator). While this premium can be lumped onto your mortgage, it still represents an added chunk of debt you’ll need to pay down over time. Again, consult with professionals, get a hold of all the costs and make the right decision.
What about your future wants and needs?
Do you only plan on living in this home for the next 3-5 years before moving to a larger home? Even if you need to move for work, would you be open to the possibility of renting out your home? There are so many possibilities for investment growth once you have more equity in your home (part of this due to appreciation). If this is something you’d consider, perhaps you don’t need to max out your budget on this home, since it’s not permanent.
We can’t emphasize the point enough: home ownership has huge advantages, but only if you’re ready. The points presented above are all important considerations worthy of a discussion with your real estate and mortgage professionals – and the advice is FREE. A little planning today can set you up for a bright financial future.