All things considered… Can you afford to take the plunge?

That’s it: you’ve found your first house, the one that perfectly matches your expectations and needs. Before buying, you should not overlook the financial implications of your project.

For your dream to come true, the first step is to evaluate your financial situation. This analysis will help you determine the amount of your down payment and of the mortgage loan you may be granted. These budgeting considerations will enable you to see your situation clearly and to avoid unpleasant surprises.

Assets and liabilities

The goal of purchasing a home is to improve your quality of life as well as your long-term financial situation. But your projected purchase has to be financially feasible. Do you have debts, or savings? Do you have a good credit history?

Your net worth is what you have left once you’ve subtracted what you owe (liabilities) from what you own (assets). To determine your “assets”, make a list of everything you own, putting a realistic value to each item. Figure out your liabilities the same way. You’ll obtain your net worth by subtracting the amount of your liabilities from the amount of your assets. Do you end up with a positive number? So much the better. If you’re “in the red”, you may want to make some changes.

Expenses and consumer habits

Whether it’s a question of reducing your debt load or of increasing your savings, it’s very important to look at your options closely and objectively. The best way is to make note of all your purchases and expenses.

These expenses, together with your regular monthly bills, will give you a better picture of your current expenditures. Once you’ve organized and processed this information, you’ll have a clearer picture of your consumption habits. Classify your expenses according to categories. That will make it easy for you to establish priorities in your spending.

Borrowing limits

The amount of money you can earmark for purchasing a new house will depend on a number of factors, including your household’s gross income, your down payment, and the interest rate of the mortgage you need to obtain.

Generally speaking, the maximum amount of housing expenses, including the mortgage payment, taxes and heating and electricity costs, should not exceed 39% of the household’s gross income. Your total debt ratio, including other housing costs, cars, loans and credit cards, etc., should never be over 44% of this gross annual income. Regardless of these percentages, it is possible that your mortgage application will be rejected. Before applying for a loan from your financial institution, check your credit history. It reflects your past as a borrower. A bad credit history will negatively affect the evaluation of your application with your financial institution. You should therefore review your history to know what your profile is, and ask that any necessary corrections be made.

Mortgage loan and start-up costs

Next, you should determine exactly the amount of the mortgage loan that you’ll need. To establish this amount, you need to consider the amount of the down payment you currently have, and take into account the start-up costs. Normally ranging between $5,000 and $9,000, these costs include the location certificate, inspection costs, property transfer taxes (“welcome tax”), notary fees, fees for connection to public utilities, etc.

Depending on your available capital for a down payment, it is likely that you’ll need to obtain mortgage insurance from the Canada Mortgage and Housing Corporation (CMHC). The cost of this insurance varies from 0.5% to 2.9% of the amount of the loan, depending on the percentage the loan represents of your housing purchase. Additional premiums may be added to this amount. These elements should be verified with your financial institution. As well, it’s important to remember that a tax equal to 9% of the mortgage loan premium is payable at the time of the transaction, and cannot be added to the mortgage itself. Plan for it.

When it comes to mortgage loans, many financial institutions have developed mortgage products and services adapted to their clients’ profiles. Do you need more flexibility? You don’t want your budget to vary? These questions may guide your choice towards a short-term or a long-term mortgage. Don’t hesitate to negotiate your mortgage rate. All financial institutions can offer a reduction of up to 1.5% of the official rate for a five-year mortgage. If you prefer, deal with a mortgage broker. Their services are free, since they are paid by the financial institution that agrees to grant the loan, and they have experience negotiating.

Other expenses

When planning your budget, don’t forget to plan for other expenses that will come after the purchase of your new home:

• landscaping, garden and snow removal tools;
• window dressing and decorating materials;
• the purchase of household appliances, etc. (humidifier, dehumidifier, etc.);
• contingency fund for emergency situations;
• other expenses.

Source: Association provinciale des constructeurs d’habitations du Québec (APCHQ)