Buying a home seems like a good idea. But is it a good idea for you right now?
Let’s follow Kevin as he does some soul-searching on whether his family is ready to enter the property market. (Obviously, you don't need a family to buy a home - we've just gone for the family-friendly Kev in this example.)
Kevin and his family have a dream. They want to own a home. No landlord to worry about. Freedom to mark your kids’ growing heights on the kitchen wall. No need to live with the ugliest bathroom ever designed. But Kevin didn't throw himself blindly at this dream. He and his partner asked themselves some tough questions and did some digging to find out if this was the right adventure for their family.
- Is home ownership for me? Do I want to commit to living in the same home and same area? Do I want to stay in the same or similar job so that I can pay my mortgage? Am I in a stable enough relationship and are we both committed to buying a house together?
- Can I afford a home? Lenders will look at your Gross Debt Service (GDS) ratio to decide if they will give you a mortgage. Your GDS covers everything related to housing - mortgage, taxes, heating costs, and condo maintenance fees (if applicable). This not-so-magical number should not be higher than 35% of your before-tax income if your credit score is under 680, and 39% if you're above 680.
They will also look at your total debt service (TDS) ratio, which includes all expenses in the GDS ratio, plus your debt service payments on any personal loans, credit cards and lines of credit. Your TDS should be within 42% of your before-tax income if your credit score [same link as above] is less than 680, and 44% if it's above.
What they don’t look at, and what you need to consider, is all your other expenses - vacations, retirement savings, furniture and the cost of raising kids. If you were to max out on your mortgage, what would your life look like? No holidays? No money to buy any furniture and no shoes for your kids? When budgeting, take a long hard look at your finances and projected expenses and decide on what you can really afford.
There is also the "stress test" included in the above ratios. This is the government's attempt to protect homeseekers from overextending themselves. - Am I ready to own a home? Not only are there the extra expenses of property taxes, utilities, regular upkeep and repairs. How are you with DIY? There is a mountain of maintenance that comes with home ownership.
What Kevin did.
Kevin felt that he and his family were ready. He wasn’t amazing at DIY but he had Youtube. He’d be fine.
- Kevin has a job. A steady job. Your income is one of the big things that lenders look at.
- Kevin has saved for a down payment: You will need to have a minimum down payment of 5% of the purchase price. Mortgages with a down payment of less than 20% are considered high-ratio, so you’d also have to get mortgage loan insurance.
- Kevin got help. Kevin and his partner spent some time when the kids were asleep investigating government programs and incentives for first time buyers. The Home Buyers’ Plan allows you to withdraw up to $35,000 tax-free from your Registered Retirement Savings Plan (RRSP).
https://www.rew.ca/mortgages
