If you want to enter the real estate market with clarity and confidence, determining your budget as a first-time homebuyer is an essential first step. Establishing what you can afford isn’t just about numbers, you should also consider the lifestyle you want to maintain and your financial comfort levels.
A house you love can quickly become a source of frustration if too much of your monthly income is required to keep up mortgage payments. Even if you’ve qualified for a big maximum, you may choose a property that leaves you with a bigger margin. Take time to clearly outline your boundaries when you’re shopping for a new home, so you don’t waste time on a house that doesn’t make financial sense for you. These tips will help you figure out the kind of property you can really afford.
5 tips for establishing how much home you can afford
When you’re setting your budget, you’ll likely already have numbers in mind. But be sure to consider surprise costs, homebuyer benefit programs, and your down payment. You’ll need to take all aspects of your current and future financial situation into account in order to establish a suitable mortgage rate for your budget and lifestyle. Once you’ve figured out how much money you’ll need to buy, you can move forward and start considering properties that comfortably fit within your budgetary limitations.
1. Get pre-qualified or preapproved and establish your down payment
Before you apply for a mortgage, you’ll need to get a pre-qualification or preapproval. You can use online resources like RBC’s True House Affordability* tool to get pre-qualified without affecting your credit score. Or use RBC Preapproval to calculate your preapproval numbers.
Pre-qualification sets you off in the right direction by establishing how much you may be able to afford based on your current financial situation.
Preapproval signifies that a lender is conditionally committing to loan you money. You’ll know exactly how much you can afford and will be more likely to secure the home you want.
Establish your down payment
Once you’ve been pre-qualified or preapproved, you’ll need to establish a down payment that makes sense for you. If your down payment covers less than 20% of the price of your home, you’ll need to purchase mortgage loan insurance. If you spend a big piece of your savings on a big down payment, you might end up with a tighter financial situation than you anticipated. The percentage of down payment that you put down upfront will also affect what you’re able to afford to pay monthly.
2. Map out your budget
Take some time to hone in on the details of your financial situation before you step back to assess the big picture and take the next step. Just because you qualify for a specific mortgage doesn’t mean that it’s wise to push your budget to the limit.
- Gather financial information like your income reports, past tax documents, any budgeting tools you use to map out your monthly expenses, and your credit score.
- Calculate how much you (and your co-buyer or partner, if relevant) make each month. Include revenue like investments and rental earning in addition to any salaried income.
- Add up all of your monthly expenses. If you’re already using a budgeting tool, you can use the average from past months. Include costs like debt payments, loans, car expenses, and other regular payments you need to make. Once you’ve established which baseline and extra costs are important to your quality of life, you can start exploring the possibilities for your budget.
- Subtract these expenses from your monthly income to get a rough sense of how much money you’ll have left. This isn’t the amount that you should be spending on a home, but it’ll help clarify your bottom line and start thinking through potential scenarios and financial possibilities.
3. Step back to consider the big picture
Now that you’ve been preapproved or pre-qualified, step back to consider how the budget you’re envisioning would actually affect your day-to-day life. Choosing a higher mortgage payment could require you to cut other costs, and may put you in a vulnerable position if you encounter life changes you don’t anticipate. How much of your yearly income would you need to cover your mortgage costs based on the sort of property or home you’re considering purchasing?
Does your budget still work for your future?
When you’re exploring your down payment and mortgage options as a first-time homebuyer, think about how your choices will be impacted if your circumstances change in the future. You should consider factors like whether you’re planning on growing your family or if you can comfortably afford your mortgage even if your income stays the same, or changes unexpectedly.
4. Consider surprise costs that may come up
Once you’ve mapped out your expectations and qualifications for a down payment and a mortgage, you’ll also want to factor in other costs, which can be easily missed. Mortgage closing involves home inspections, appraisals, and notary and administrative fees, which all cost money. You should also think about potential surprises down the road and work with your mortgage professional to customize a plan that will be financially sustainable.
5. Explore first-time homebuyer benefits and programs to save money
There are Canadian first-time homebuyer benefits and programs that could help you offset the cost of buying a home, or provide benefits when you do.
- The First-Time Home Buyer Incentive is a shared-equity program with the Government of Canada. This incentive offers five or 10% of a home’s purchase price toward your down payment. This program is available to first-time Canadian homebuyers who make a yearly income of less than $150,000.
- The Home Buyer’s Amount gives eligible individuals a $5,000 non-refundable income tax credit amount on a qualifying home purchased during that tax year.
- The Home Buyer’s Plan (HBP) allows eligible Canadians to withdraw up to $35,000 per year from their registered savings plans (RRSPs) to buy or build a qualifying home for themselves or for a relative with a disability.
- The Canadian Mortgage and Housing Corporation (CMHC), Canadian Guaranty, and Genworth Canada offer assistance for first-time homebuyers who require support in making a down payment.
- Some individuals may qualify for a rebate for part of the GST or HST that you paid to purchase, build, or renovate your new home. Check out the GST/HST New Housing Rebate to learn more.
Looking for support to find the right home for you?
Navigate the complex homebuying process with OJO. Our tailored home search experience is based on the features and details you care about most, so you can find a home that fits.
