Want to purchase your first property? You may need to rethink your budget for this major purchase. Read on to learn how.
Following certain steps will ensure you reach your goal. Here’s some guidance from Cynthia Laventure, financial security advisor and owner of Groupe Financier Symbiose.
Be Honest with Yourself: Prepare a Realistic and Detailed Budget!
The first step is, of course, to plan a realistic budget that corresponds to your lifestyle. For instance, if you’re a salaried employee, your budget will look different from that of someone who’s self-employed. Here are a few tips.
STEP 1
Draft a Base Budget
For this step, take out your bank statements from the last two years and note down your actual net income (what is deposited into your bank account) and expenditures.
Next, analyze the results by comparing them not only with the optimal budget (see step 2), but also with you and your family’s principal objectives.
STEP 2
Optimize Your Budget
Now that you have your base budget in hand, you can refine it to bring it closer to the structure of an optimal budget.
Our professional advisor recommends the 80-10-10-2 rule for salaried workers.
The 80-10-10-2 Rule:
80%: should be allocated to essential needs, i.e., rent and car payments, insurance, electricity and telephone bills, groceries, gas, restaurant meals, clothing, private medical appointments, and tax payments, etc.
10 %: should be directed toward savings for short- and medium-term goals, such as building an emergency fund for the unexpected, contributing to a child’s Registered Education Savings Plan (RESP), saving for trips, or buying a holiday home. In other words, goals that can be achieved before retirement.
10%: should go toward long-term planning, such as saving for retirement or for paying for life and disability insurance.
- Within this 10%, 2% must serve as a safety net in case of serious illness or disability.
STEP 3
Adjust Your Budget in Preparation for Buying Your First Home
You’ve drawn up your base budget and now understand what your optimal budget should look like. It’s time to start crunching the numbers to see how you can make your homeownership dream a reality taking to your particular circumstances into account. This often implies cutting back on certain expenses.
Ask yourself the following questions:
- How much are you willing to put aside each month?
- What are you willing to give up in order to achieve your goal?
Every situation is unique; you must set realistic expectations.
Pro Tip
You’re always the best judge of what you can afford. Purchasing a house or condo at this time may prove financially unwise unless you can find a property that costs exactly the same as your current rent, including all related expenses, such as municipal taxes, maintenance fees, home insurance. This also implies you already have enough for a downpayment.
STEP 4
Plan for Future Expenses
It’s just as important to consider the future as you play around with your budget. Do you have any more or less major expenses planned in the next few years, such as a new car, a wedding, children? And don’t forget that your income will go down while you’re on maternity and paternity leave.
Your home budget must be sustainable over the long term!
STEP 5
Draw Up a List of Your Future Home Costs
Generally speaking, owning a home costs more than renting. Don’t forget to include the following expenses when drafting your budget:
- Mortgage payments
- Municipal and school taxes
- Urgent repairs (like reshingling the roof or replacing a leaky toilet)
- Moving fees (approximately 2.5% of the property’s value)
- The downpayment (5% for a $500,000 property)
- The welcome tax
- New furniture
- Condo fees, if applicable
- Yard maintenance (like snow removal)
- Home and mortgage insurance
These represent the basic cost of owning a home. Remember, there’s always something that needs taking care of, from repairs to regular upkeep.
STEP 6
Stay as Objective as Possible
While you’re out house hunting for your first home, there’s a strong possibility that you’ll fall in love with a property that exceeds your budget. If it’s priced only slightly more than what you planned to spend and you’ve really fallen hard, you may want to consider revising your budget to see if you can make it fit.
However, you must remain realistic: if you aren’t ready to cut some expenses from your current budget to afford this property, it probably means that you should keep looking. You’re sure to find a home eventually that checks all your boxes!
Rapid Fire Round of Questions with a Professional
Can I still buy a home if I have debts?
Yes, during the application process, banking institutions will review your assets, liabilities, and debts (student loans, credit cards, car loans, etc.). While this type of debt reduces your borrowing capacity, it doesn’t lead to insolvency. It all depends on your debt-to-equity ratio, meaning your ability to reimburse a mortgage based on your admissible income and your payment records at the credit bureau, including payments for pre-existing debts.
You may qualify for a mortgage notwithstanding these debts following a comprehensive analysis of your financial situation.
It’s different though if you owe the government money, outstanding income tax, for example. The bank will insist that this debt be repaid before granting you a loan. This is because the bank needs to protect itself: should you default on your mortgage and lose your home, the government, rather than the bank, will have priority if the property is repossessed.
Must I absolutely stick to my budget?
A budget is a useful tool for tracking and adjusting your spending according to your life goals. That said, keep in mind that there will be periods during your life when adhering to your budget won’t be possible. Sometimes you’ll have to compromise on savings, while at other times you’ll be able to put more aside. And that’s perfectly normal! The purpose of a budget is to steer you more effectively toward your financial goals, whether that’s acquiring a house or something else.
What’s the biggest mistake people make when drafting a budget?
Not saving enough money for retirement if you’re self-employed or an employee without a pension fund. Even if you want to save to buy a house, putting money aside for retirement remains essential.
