If we aren't there already, there will most likely come a time when we feel financially ready to purchase our own home. This is an exciting time, and searching for the perfect first house can be both fun and overwhelming.
Whether you're looking for a condo in the city or a home with a yard in the suburbs, the same first step applies: make sure you're prepared to become financially responsible for all the expenses that come with homeownership.
Besides the upfront costs of purchasing a home, you'll want to make sure you're not house-poor and can comfortably afford your property and all the expenses that go with it, like the initial lawyer fees, and month-to-month utility bills.
To make sure you're prepared, we recommend saving 25% of the cost of the home, putting aside three to six months' worth of salary to cover emergency expenses (like repairing your roof), and ensuring your monthly cash flow is positive.
The upfront costs of buying a home
Like we said, a good rule of thumb is to have 25% of the value of your home saved for your initial purchase.
20% of the value of your home will go towards the mortgage. If you have anything less, you'll have to obtain mortgage default insurance (called CMHC insurance in Canada), and add that to the value of your mortgage. CMHC is 2.4% of the value of the home with a 10% down payment.
When purchasing your first home, there are several expenses that may surprise you. We recommend planning for 3-5% of the value of the home in additional costs. To get a better idea of what these costs inclulde, consider:
- Lawyer fees
- Bank charges (like appraisal and lien registration)
- Moving costs
- Inspection costs
- Utility adjustments
- Any immediate changes you want to make
Note that as a first-time home owner, there's a small government tax credit of up to $750 and, depending on where you live, you may also be eligible for a refund on your land transfer tax.
Three to six months' worth of expenses
The cost of a new home doesn't end with a down-payment. If you're purchasing an older home, you may find repairs that need to be done in the immediate future. Maybe something came up in your home inspection that needs attention, or the washing machine breaks down within your first few months in your home. Or, maybe you lose your job, and need to continue making your monthly payments while you look for something new.
The point is: things come up, and it's best to be prepared for when they do. Aim to save three to six months of your salary as an emergency fund. Then, the big expenses won't seem so overwhelming, and you'll have peace of mind knowing you saved for them in advance. Once you withdraw from your emergency fund, remember to replenish it and keep that buffer in your budget.
Ongoing costs for your home
Now let's consider the monthly and annual costs for your home. To help you determine if your cash flow will be positive, make a budget and include all your expected monthly expenses. Budgeting everything out will make sure you're not house poor and can comfortably buy new furniture if the situation arises, and still enjoy your leisure life.
Some of your monthly bills may include:
- Utilities, taxes, insurance, condo fees, and other home costs
- Costs of acquiring new equipment and maintaining it (like a lawn mower)
- Alarm system
- General home repairs and replacing appliances
- Life and disability insurance in addition to your home insurance, both of which are important for home owners
- Commuting expenses; consider the location of the home. Is it worth spending more on a house to be closer to work and saving money and time on your commute, or vice versa?
When thinking about how much you can afford, don't bank on being able to flip it for a sizeable profit. The home increases lately are not the norm. In regular times, homes increase in value around 6% per year. After inflation, closing costs, land transfer costs, and transaction charges, flipping a house is often more of an expense than a profit.
Now that you're figured out how much you need to save for the initial and ongoing costs of your home, enjoy your search. While budgeting may feel like a dose of reality, you'll enjoy your home so much more when it fits comfortably in your lifestyle.