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27 Jan

Homeownership – Preparing a Budget & Determining Affordability

Budgeting

Posted by: Kunaal Bhalla

 

Importance of Preparing a Budget when looking to purchase a home

The homebuying process, especially for 1st time homebuyers is an exciting time for many people. The idea of purchasing a new home conjures up many emotions about the dreams and possibilities for the future. While this a happy experience for most, it can be daunting at the same time. This is where the importance of working with qualified professionals, Realtors, Mortgage Brokers, and Lawyers can not be understated or stressed enough.

Being a Mortgage Broker for over 12 years, I have helped many 1st time buyers achieve the dream of homeownership. In all my years of experience, there is one element of the process that I regularly see being overlooked… The importance of preparing a budget in determining the true affordability of home ownership.

Why is it important?

People are generally under the impression that because they’ve been approved for a mortgage it means they can afford it. It is not so simple. The calculations used by lenders to determine affordability do not include many expenses that most Canadians incur. Preparing a budget will help you factor in all your monthly costs to give you a true sense of affordability.

When should you prepare it? What should your budget tell you?

It is a good idea to prepare a budget before you even begin looking for a new home. This will allow you to see exactly how much of your take-home pay you are spending, where it is being spent (discretionary vs. non-discretionary expenses), and how much you have left at the end of the month. Preparing and analyzing your budget at this point should give you an idea of what kind of mortgage payment you can comfortably afford while maintaining your current lifestyle. It can also give pause for thought… perhaps you did not realize what kind of effect a mortgage payment might have on your monthly budget and more thought is required on your part to determine if you want to take on this added cost OR how you can restructure your budget to accommodate for this new expense.

It also worth mentioning at this point, that if you are not sure how much your potential mortgage payment might be, there are several online calculators that can easily provide these numbers for you. A Mortgage Broker can also provide these numbers for you, based on today’s rates which will give you a more accurate dollar amount. Knowing what your mortgage payment would be, along with the budget you’ve prepared will allow you to examine these numbers through a clearer lens.

If you are now at the stage where you have zeroed in on a few properties or will be submitting an offer, it would also be wise to prepare a budget at this point. If you already created one previously, revisit it and add in the numbers based on the property or properties you are considering. You should now be including all the new costs you will be incurring once you’ve purchased your new home, including (but not limited too) your

  • Mortgage Payment
  • Property Taxes
  • Home Insurance
  • Estimated amounts for Heating, Hydro & Water
  • Car Insurance – This is not one people usually think off, but if you are moving to an area where you’ve never lived, you should check to see what impact (if any) it could have on your car insurance premiums. Not all areas are rated the same by insurers and even across the GTA, you will pay higher premiums in some areas. If you have 2 or more vehicles this is an added expense you will want to factor in.
  • Cable & Internet – if you are a 1st Time Buyer chances are you have not been paying for this in the past and it will be an added expense for you.

You should also allocate some % for miscellaneous expenses such as repairs, as there are always unexpected costs that arise when you are a homeowner. This budget will now very clearly show you, if you can afford your new home, once you’ve factored in ALL your expenses. It can be a real eye opener but also a valuable tool that you can use to help plan for your immediate future. Remember, if your budget shows you that it would be difficult to afford your new home, it doesn’t mean that you absolutely can’t. It will just require some thoughtful consideration on your part where you can save money in other areas of spending. The purpose of these budget exercises is not to discourage you from home ownership, but rather, to help you prepare for it!

Who can help you prepare the budget?

A budget is something that you can easily prepare yourself. There are many templates available online, and all it really takes is for you to put some time and effort into preparing it. The point of the exercise is to provide you with an accurate breakdown of where your money is being spent, so do yourself a favor and set aside some time where you can focus on concentrate when preparing it.

Now if you feel that you would be better served if you had some assistance in preparing your budget, possibly because you would not be honest enough with yourself, or you may not think of all the expenses to include, reach out to someone you know and trust. Your Accountant perhaps, your Financial Planner, a trusted member of your family, or your Mortgage Broker are all excellent people that can help you and provide the objectivity you need.

If you are looking for a good Budget template, please let me know and I will be happy to provide you with one that I use.

Not just for 1st Time Homebuyers

Preparing a budget is recommended not just for 1st time homebuyers, it should be done by anyone purchasing a new home. If you are moving into a larger home, where the mortgage expense and other homeownership costs will increase it would be prudent to put everything down on paper to see exactly how your total monthly expenditures will change. Can you really afford it? Will you be able to afford and enjoy the same lifestyle as you do currently? Or do you need to reduce your spending in other area’s?

It is also something that everyone should do on a yearly basis, if for nothing else just to clearly see where your money is being spent. It can help to identify area’s where spending can be curbed, and where opportunities to increase savings may exist. Preparing a budget is an essential part of any Financial Plan and something we should all get in a habit of doing.