So you want to buy a house

You’re in your twenties. You’ve got a solid job and your partner has a good job too, giving you a gross household income of $125,000 a year. Or you’re single and independent and have a gross income of $50,000 a year. Your parents may even help you out and are ready to gift you a healthy down payment.

Now it’s time to determine how much you can afford.

Online mortgage calculators, like the one provided by Financial Consumer Agency of Canada, will give you a rough idea. And this is where many people start.

Your bank gives you a magic number for buying, shows you your interest rate, amortization rate, and what you’re monthly mortgage payment will be…

While this may seem doable, it is highly recommend you do more work before heading out to find that dream home. You need to be cautious before jumping right to the maximum mortgage potential your bank offers you — you want to make sure you have some wiggle room & that you’re not living just to pay your mortgage.

Online calculators are good tools, but they aren’t always realistic, it is always best to speak to a financial advisor and find what is best for you. A chat with a professional will help put things in perspective. You might be asked about your plans to start a family, how much you are contributing to your RRSP, what your career goals are, how old your cars are, etc. This conversation will get you thinking about whether you really want to borrow the maximum amount allotted to you. You also need to consider the ramifications of rates rising in the future.

There will be property taxes, homeowner’s insurance, utilities and regular maintenance. There may be emergencies, like a leaking roof, a broken furnace or a flooded basement. There could be landscaping, snow removal costs or condo fees. All this needs to be rolled into the budgeting process. You may have to buy a lawnmower, or a snowblower…

There are some guidelines for determining a target home price.

There’s total shelter costs, which include monthly payments for principal and interest, taxes, heating and a condo fee, if there is one. This total is divided by monthly gross household income. As a general rule, the total monthly housing costs should be no more than 35% of gross household monthly income.

Then there is the total debt-servicing-ratio calculation, which adds other monthly debt payments to shelter costs. This total is divided by gross monthly income. Again, as a general rule, servicing these costs should be no more than 42% of gross household income.

At this point, you might think a less expensive property might be more reasonable…

A pre-approval will help you refine the process and know exactly what you have to work with when you find the right place and are ready to make an offer. A pre-approval entails a credit check and information such as the rate being offered (usually locked in for 120 days), as well prepayment options. Ask for details about  closing costs like land transfer taxes and legal fees.