10 Things To Consider When Budgeting For A New Home
You can’t buy a home without having some money saved up. The question is how much do you need to save? That answer will be different for every buyer, but we’ve come up with ten things you need to think about when building your budget.
Know Your Debt Ratio
Your debt ratio is an easy calculation that gives banks a quick snapshot of how much you can afford. This is calculated by adding up all your debt payments and expenses for one month and then dividing that number by your gross monthly income.
You’ll end up with a percentage (debt to income ratio) which you can show to your bank. The lower the DTI is, the better you look.
If you do the math and notice that your DTI is more than 35 per cent, you may struggle to get a loan.
Down Payment Requirements
This is an area many new homeowners struggle with. While banks will consider your DTI and your credit history when setting you up for a mortgage, they’ll also need to see some initiative on your part.
Mortgages require a down payment for you to be considered for a loan. In Alberta, the down payment rate is around 20%. If you’re purchasing a $300,000 home, you’ll need to save up $60,000 to put toward the mortgage.
First-time buyers often feel the weight of the down payment, but it’s not optional.
Down Payment Options
Understandably, the down payment on a home can be stressful to first time home buyers. However, there are options to consider if you can’t save up 20%.
Help from CMHC – On your own, you absolutely must come up with 5% of the down payment, but if you can’t afford the remaining 15% you can get a loan from the Canadian Mortgage and Housing Corporation. Just keep in mind the premiums for that loan might be high.
Financial Gift – That initial 5% of the down payment can be given to you as a gift from a friend or family member. However, it has to be a gift. The giver will be required to sign a letter indicating they do not require the money back. The rest of your application will need to be spot on because the fact that you can’t come up with any money on your own is a red flag for banks.
Government Programs – There are many different government programs available specifically for first time home buyers. This includes programs like the Home Buyer’s Plan and the Home Buyer’s Tax Credit.
Once you know you can afford the down payment and mortgage, you need to also budget for your closing costs. There are a wide variety of extra expenses that can come up after you have closed on your home.
These could include legal fees, property tax evaluations, home inspections, land survey fees, title insurance, and others.
Typically, these end up being around three or four per cent of the cost of the house. So, if you’re going for that $300,000 home, you should budget for an additional $9,000 to $12,000.
These costs aren’t set in stone, and some may not apply. However, you will have to pay some fees, so make sure you have additional funds available.
Bank Interest Fluctuations
Once you get your mortgage, you need to understand that the Bank of Canada’s interest rates fluctuate and will affect your payment.
If you have a fixed-rate mortgage, you lock into the interest rate at the time you signed up for your mortgage. However, you will need to renew that mortgage within a certain time period. When renewing your mortgage, you may have to adjust your payments depending on the interest rates at the time.
For variable-rate mortgages, each monthly payment could be different depending on what the interest rate is.
Interest fluctuations will affect those with variable mortgages more often than those with fixed mortgages. With a fixed mortgage you get more stability than a variable mortgage, however, if the interest rate drops temporarily you won’t benefit from it.
By law, every home has to have an insurance policy. In this way, it’s similar to auto insurance.
The cost of the insurance will vary depending on the company you use, and what your history with insurance has been like. There are also other variables such as a home’s age or location.
It would be wise to get a quote from an insurance broker when you find a house you’re interested in. Otherwise, the additional cost might catch you off guard.
Property taxes for your home are a yearly cost. These taxes can go up or down depending on several factors.
The municipality and neighbourhood you choose to live in will drive the tax costs for your property. There will also be assessments of your home to see what the value is. Your taxes will be based on a percentage of that value.
Average Utility Costs
If possible, it’s a good idea to get an estimated monthly cost of the utilities for the home you’re looking at. The easiest way to do this would be to ask the seller what the average costs are.
Sewage and water costs will depend upon the municipality you live in. However, your electricity and gas bills will change with the hardware in your home. For example, an older furnace will not be energy efficient. It may end up costing you more to run the furnace and heat your home than you were expecting.
Other costs to consider when budgeting for a home can include moving fees, storage rental units, new furniture, etc. These costs are typically forgotten about in the home buying process, but they should be included in your budget.
Rainy Day Savings
When you own a home, you are responsible for the repairs and maintenance of the building. Unfortunately, those things don’t necessarily come up on schedule. It would be wise to look at one of the more expensive repairs you may eventually have to make, and ensure you have enough money to set aside for that.