Beyond the Price Tag: Understanding the True Cost of Homeownership

Buying a new home is an exciting milestone, especially for first-time buyers. The journey to homeownership can be both thrilling and daunting, filled with dreams of finding the perfect place to call your own. For those stepping into the real estate market for the first time, understanding the process and knowing what to expect can make all the difference. This guide offers the essential information and tips to help you confidently take the first steps towards purchasing your new home.

List your long-term goals to align with your homeownership vision

When considering homeownership, it's important to think about your future no matter how far it may seem and evaluate your long-term goals. Reflect on your life aspirations: Are you looking to advance in your career? Are you planning to start a family? Or are you focused on paying down your student loans? All these goals affect your homeownership and by writing them down and making a solid plan for the future, you can make a more informed and mindful decision when it’s time to buy your dream home. Here are some key points to consider:

• Career Goals: Are you looking to switch careers? Will your new job require relocation? Think about how your new salary and new place of residence could affect your overall homeownership costs and monthly expenses.
• Family Planning: Are you planning to start or expand your family? Evaluate how adding new members to the family could affect your overall budget, which ultimately affects the affordability of your mortgage payments.
• Financial Stability: Can you afford the mortgage payments and other associated costs? Or would you rather pay down all your incurred debt first? Determine the impact of homeownership on your monthly debt payments and long-term financial objectives.
• Lifestyle Preferences: Does the home and its associated costs align with your lifestyle preferences, like access to amenities and recreational activities? Consider how homeownership costs might impact your ability to enjoy these activities, like buying tickets to your favorite games or going on holidays.

Examine your expenses and income to map out future finances.

Imagine this: You and your friend earn the same salary, but your mortgage approvals differ. Why? Because everyone spends differently. Your friend might skip ski passes or holiday trips, while you prioritize them. Or, they might not plan on having kids soon, affecting their finances differently. When budgeting for a new home, consider both short-term and long-term expenses to make an informed decision. Here are some examples of how your short and long-term expenses affect your homeownership.

• Existing debt payments: Like we mentioned earlier, credit cards, car loans, and other loan payments can take a big chunk out of your paycheck. It's important to calculate how a mortgage payment could affect your monthly budget.
• Education costs: Tuition fees, certifications, or professional courses could impact your savings and your ability to afford a home.
• Daily living expenses: Groceries, utilities, and other daily expenses need to be considered when budgeting for a new home.
• Future home maintenance and major repairs: Owning a home comes with additional costs like maintenance and repairs. It's important to budget for these long-term expenses and ensure you have six months of emergency fund set aside as well.
• Long-term financial goals: Saving for children's education or retirement are important long-term financial goals that can affect how much you can put toward your mortgage each month.

→ Creating a personal budget is a great way to understand and adjust your spending habits, plan for unexpected expenses, and save for important goals like homeownership.

Beyond expenses, think about your current and future income. You might be earning a lot now, but what if you decide to switch careers or take a job with better work-life balance but less pay? These changes can significantly impact the size of the mortgage you can comfortably manage.

→ Tools like Mortgage calculators can assist you in estimating your maximum loan amount and determining your borrowing capacity based on your monthly financial commitments.

Evaluate your total-debt-service ratio to find your affordability

Understanding your total-debt-service ratio (TDS) is important when determining your borrowing capacity – which measures your gross monthly income against your total monthly expenses.

Lenders generally prefer a lower TDS because it shows that you have financial flexibility and are less likely to default on a loan, which can lead to a mortgage approval and a better interest rate for your new home. This allows you to manage mortgage payments and other expenses comfortably without stretching your budget too thin – helping you save for emergencies like unexpected home repairs like a roof leak. On the flip side though, a high TDS could potentially mean a loan denial or a higher interest rate on your new mortgage.

Be aware of additional homeownership costs like maintenance and property taxes.

We often think that the only major homeownership expense is our mortgage payment, but that’s just the beginning of many other expenses waiting for you. Just buying a home can have unexpected costs. The Canada Mortgage and Housing Corporation estimates land transfer taxes, legal fees, and other expenses add up a significant amount to the purchase price of your home (external link). After that, you may have to pay for other costs like:

• Home insurance: Required by lenders, costs vary by location and coverage. If your down payment is under 20%, mortgage default insurance is needed, which is typically added to your mortgage.
• Property taxes and other fees: Sellers may prepay property taxes, utility bills, or condo fees, which you must reimburse from the closing date onward.
• Initial repairs and costs: You may need new furniture, minor fixes, or renovations like painting before moving in.

→ Discover the comprehensive list of the nine lesser-known expenses associated with purchasing a home to prevent any unforeseen costs.

Talk to an expert to start your homeownership journey

A mortgage is a long-term commitment, with a typical repayment period of 10 to 30 years. For that reason, you should spend some time reflecting on your life goals before your buy a home.  If you’re still not sure how much you should borrow, consider meeting with a financial advisor.

Want to find out more? Our  Mortgages  page is full of other useful tips and tools.