Purchasing your First House
Looking at purchasing your first house is an exciting time; there are so many thoughts running through your head such as what location, size of the rooms and the interior finishes, yard size and potential upgrades. Even the joy of looking online and through magazines for potential ideas for your dream bathroom or kitchen can take priority. There are certain financial items that need to be considered prior to taking those first steps, and each has an impact on what you can afford.
One of the first things many people do when considering purchasing a house is finding out how much they can afford. Finance calculators online can help give you a rough idea of your maximum purchase price. These calculators look at your gross annual income and debt to determine the maximum amount you can afford. There are two key items to consider when looking at what you can afford: that you are using gross income and the calculator provides the maximum amount you can afford. The calculator is calculating what you can spend based on your gross income; however, you actually take home less money due to taxes and possible benefit deductions. Instead of looking at your gross income, look at your actual net pay per month and ask yourself if you can afford the monthly expense. The calculator will tell you the highest-priced house that you can afford, but even if you can afford it, do you need it?
This should be one of the top priorities when looking at purchasing your first house: how comfortable are you with paying that much per month for your mortgage, utilities, etc. and maintaining your current lifestyle? This is where having a budget and knowing what you feel comfortable spending is important. Having your budget made before purchasing a house and knowing what you want to spend goes a long way towards successful homeownership. The last thing you want is to over-stretch yourself and end up in debt or unable to do the things you love because you bought a house. Also, if you are planning to start a family in the future, remember that your income will drop while maternity leave, so having a budget set up where you can afford the house on one income could be beneficial.
A mortgage is a large debt that has to be repaid to the lender, regardless of if something happens to you or your spouse. The smartest move is to purchase personally owned life insurance on yourself and your spouse to cover off the debt in case of death. This is different than the mortgage protection offered by your lender. Personally owned life insurance is owned by you, meaning you have control over it and the money goes to your named beneficiaries. Mortgage insurance is owned by the lender, so you have no control over it and all the money goes to the lender. You should consider personally owned life insurance when purchasing your first house to make sure if something happens to you, the house will be paid off in full.
Repayment of HBP/Savings
If you are taking money from your RRSP for the Home Buyers Plan (HBP) or even money from your savings, you should consider how are you going to pay it back. The HBP has a set schedule of 15 years to repay the money back; otherwise, the annual repayment amount will be added to your income and be taxed each year afterwards. There needs to be a plan in place to pay this money back each year or, better yet, automatically each month. If you took the money from your savings account, although you do not technically need to repay it, you should consider what you want to save for retirement. You should still be able to put away up to 10% of your pay monthly into your investments for long-term savings.
A house has lots of pieces that need to be in good working order to ensure that it lasts a long time, including the foundation, roof, windows, furnace and AC unit. Although most of these items should last a few years or longer, there is no guarantee that they will last that long and the unexpected can happen. Planning ahead for these unexpected expenses can save you from having to borrow additional funds through bank loans or credit cards. Plan to have upwards of $10,000 available in a high-interest savings account that you can access when needed. Having this money readily available will ensure that your unexpected expenses can be taken care of right away without falling into debt. When purchasing your house it would be wise to not use all of your savings, as repairs can happen sooner than later.
When you start to look at houses, it’s easy to start envisioning what you would change, whether it be the flooring, the wall colour, or the curtains. When you purchase your first house, you will spend time and effort to upgrade everything to fit your style and needs. Small changes such as painting can add up by the time you purchase paint, brushes, rollers, drop cloths, rags, and pans, you can easily end up spending $100. If you are looking at full renovations, such as taking walls down or installing new flooring or windows, the cost can end up being thousands of dollars. To prepare yourself and your budget for what is to come, take notes when looking at potential houses and write down what upgrades or renovations you would want to do. This will give you an idea of which ones are the most important and what the full cost of the house could be.
Each of these items should be considered when you are looking for a house. There is nothing wrong with purchasing a starter home for what you need today and moving to a larger one that fits your needs as they change. Take the first step of creating a budget and looking at what you are comfortable with spending, not what is the maximum that you can spend. A house is one of the biggest purchases you will make and knowing that you can comfortably afford it, even with renovations or unexpected expenses.