The main difference between a home buyer and a homeowner is that a buyer has money to spend, and an owner is spending money. The most significant adjustment for first-time homebuyers can be the financial impact on your budget and the cost of owning.
Based on data from a 2019 rent report from PadMapper, the average cost of a rental unit in Canada is $1,251.25 per month. In December 2019, the average price of a home in Canada was $472,000. If buyers put the suggested 20% down payment of $94,400 and had a 25-year amortization period, their monthly mortgage payment would be $1,258.67.
Although the difference between renting and owning doesn’t seem to be too significant with the base cost, homeownership comes with a few more monthly expenses than if you were to rent, such as property taxes, condo fees, and garbage collection, to name a few.
The moment my husband and I filled out our new budget (you can find a great housing cost budget template here), we realized it would take more than a week or two to get comfortable with the change — literally. We’re now five months in, and I know our numbers like the back of my hand, but it would have been simpler to understand what to expect before we made a move.
How can you financially prepare for homeownership? Let me count the ways…
1. Refresh or revise your budget
Before you jump into owning a home, the first step is to get serious about your financial situation. Crossing your fingers that you have enough money coming in each month isn’t enough. You need to create a budget that provides you and your family room to breathe and a bit of a cushion in case your expenses suddenly increase, or your income suddenly decreases. Take inventory of your income and expenses, plug the numbers into a mortgage calculator and see if those numbers align with your budget.
Your budget should help you gain a better perspective on what you earn and spend each month, and to ensure you are not overspending. Budgets should include daily, weekly, monthly and annual expenses. Ensure that your fixed payments (such as your mortgage and property taxes) are taken care of and use any leftover funds to cover discretionary – or non-essential — costs.
“Future homebuyers should do what they need to do to feel confident about their decision,” says financial expert and founder of The Wellth Company, Lisa Zamparo. You should feel comfortable asking a lot of questions, building spreadsheets or working with a financial planner to help you run the numbers. Zamparo says that the first time you walk into the new home, you want to think, “Wow, I did it!” not “Uh oh, what did I do?”
2. Test drive your mortgage
Angela Calla, Canadian mortgage broker and author of The Mortgage Code, always recommends first-time homebuyers to take their mortgage for a test drive. This tactic can give buyers a hands-on look at how much they can genuinely afford to spend on their monthly housing costs. “If you realize you can handle that, you benefit in two ways,” says Calla. “You’ll find out how much of a mortgage you can or can’t afford, and you’ll have built-in savings for your down payment fund.”
The best way to approach this strategy is by setting aside any additional cost of owning that your proposed mortgage would yield. Don’t forget to include your property taxes, home insurance and the most common housing budget line items. As a renter, if something in your unit requires maintenance, it’s typically on the landlord to cover the costs. While you test run your mortgage, take that money to repair any housing issues and add it to your savings account that holds all of the additional monthly expenses that you’d incur as a homeowner.
3. Save up an emergency fund
Since homeownership comes with a responsibility to maintain your property and deal with regular improvements, an emergency fund is crucial. If you plan to have a smooth transition into the economic side effects of owning a home, Zamparo says a good rule of thumb is to consider budgeting 1% to 2% of the purchase price of a home for annual maintenance.
Keep in mind that home improvements will need to be made, and appliances will break down. You might even be inspired to do an HGTV style home renovation project as soon as you transition into your new place. Don’t be afraid to make some trade-offs until you have a fully-funded account dedicated strictly to financial emergencies. “It makes sense to trade some nights out on the town with nights cozied up at home,” says Zamparo. “For me, it’s not just about spending less, but about taking the time to enjoy the big purchase you’ve just made.”
4. Avoid future payment shock
A typical financial challenge among new homeowners is the adjustments to their mortgage once it goes up for renewal. Calla says that a mortgage professional can help you to proactively manage your mortgage from day one even if interest rates were to increase. “The last thing you want to have is future payment shock,” says Calla. Over 40% of Canadians are living paycheque to paycheque, which would make even a slight increase on a mortgage payment each month too much to manage.
A practical way to stay ahead of any increases in expenses would be to consider your budget based on job loss or any unexpected time away from work. For example, if my husband or I were to lose our job, it was necessary for us that we could afford to pay the mortgage on one income. Calla says to remember that adjusting from living rent-free to paying a mortgage is all about making modifications in your lifestyle or deciding if the lifestyle that you’re living is consistent with your goals. Many people would consider these adjustments as sacrifices, but Calla says to think, instead, of these as choices. “You’re deciding to build equity in a future home.”
People pursue homeownership so that they can set down roots, provide a safe environment for their family and grow into their new living space. For me, those reasons were just another form of encouragement to get my financial situation and the cost of owning sorted before jumping into a significant purchase.
You want to enter your new home with the ease of mind in knowing that you can enjoy the place rather than worry about the mortgage payments — and getting your finances in order is step one to achieving that fairytale ending.