Emmanuelle Bertrand I Journalist
The first question that comes up when you start thinking about becoming a homeowner is, « Can I afford it? » Angela Lermieri, a financial planner with Desjardins, has 3 key pieces of advice to help you achieve your dream without breaking the bank.
- Consider all of your debts, not just the mortgage
« People’s first instinct is often to calculate their income compared to how much they expect the mortgage to be, » says Lermieri. But as she points out, « the best way to calculate your borrowing capacity is to make a budget that includes all expected cash outlays, starting with your debts. »
2 golden rules for borrowing:
a. No more than 32% of gross household income should be
- allocated to housing expenses like:
- Mortgage payments
- Municipal and school taxes
- Energy costs (heating and electricity)
- Condominium fees (if applicable)
b. No more than 40% of your gross household income should go to paying off your debts like:
- Housing expenses
- Car payments, if applicable
- Monthly credit and line of credit payments
- Personal bans (e.g., student ban)
- Other (e.g., alimony)
- Examine your lifestyle
The debt ratio is used as a reference point for calculating borrowing capacity, but it doesn’t determine everything! Iermieri tells her clients time and again: « The ratio only considers what you earn, but it doesn’t take into account what you spend! Some people with a high debt ratio have no problem paying their mortgage, while others with a reasonable ratio have a hard time making ends meet. »
It’s critical to know your priorities. If frequent restaurant meals are essential to your happiness, you need to factor them into your calculations.
- See where you can save—before and after you buy
It’s probably the biggest transaction you’ll ever make, so you need to plan for it. It’s really important that you put aside money—not just for the down payment, but also to cover all of the other expenses that can come up once you move into your home, especially the first year. Expenses to budget for:
Start-up costs like legal fees, land transfer taxes, adjustment costs and moving expenses
- Equipment and materials for routine home and property maintenance
- New doors and windows
- Roof maintenance
- Extra energy costs (think ice-cold winter like the one we just had!)
- Home insurance
- Possibly a new car or furniture
Once they’ve bought their new home, many people want to make accelerated mortgage payments, rather than setting any extra money aside in savings. « If you don’t have an emergency fund, you’ll run up debt for every little expense that comes up around the house. And remember, the interest rate on your mortgage is much lower than the one on your credit card! » says Iermieri. So leave a cushion for unexpected expenses: set up automatic transfers to a special account to build up a rainy day fund. Plus, the money will still be there later if you want to make a lump-sum mortgage payment.
At the end of the day, the best advice is still to have a good advisor—someone who will give you the facts, someone you will feel comfortable with, who can answer any questions you have.
Ready to take the leap? If you have any questions about your mortgage, contact a mortgage representative.