Ask yourself the right questions when buying your first home

You’ve scrimped, you’ve saved, you’ve sacrificed, you’ve done everything possible to get yourself in good financial shape, and now the reward: a down payment for your first home.

But before plunging into that long-awaited home purchase, take the time to step back and consider what that purchase will mean in both the short and long term. By asking the tough questions now, you could save yourself a great deal of hardship (not to mention money) down the line.

Is now the right time to buy?

When it comes to real estate, it can be easy to get caught up in the hype, especially in an environment where interest rates are low and home values have been rising for years, as they have in Victoria and Vancouver until very recently.¹

If you find yourself getting caught up, put on the brakes, take a deep breath and ask yourself: is now the right time?

Before getting into any new mortgage, one of the most important things to consider is your financial stability. Is your employment secure? Have there been layoffs at work? Is your industry prone to peaks and valleys? Even if your employment is stable, is there a chance that you could be transferred, forcing you to move right after making your purchase?

Another consideration is your living situation. Is it likely to change in the near term? For example, if you’re currently single but thinking of moving in with someone, you may want to hold off on ownership until you have a better idea what a space for two might look like. If you live with a partner and think kids might be in your immediate future, rushing to buy a one-bedroom might be the wrong way to go. Whatever your circumstances, make sure that the home you buy is one you’ll want to live in at least a couple of years down the road.

Also worth considering is whether the current real estate market is a good one to buy into. A home purchase is, after all, a major investment, and if real estate values drop immediately after you buy, you might have been better off waiting. In most cases, what you pay in monthly rent will be less than your monthly mortgage, and while waiting out the market you might choose to use that extra money to pay off other debts or further build your down payment.

How much can you afford?

When it comes to mortgages, there is the amount that lenders are willing to approve, and then there is the amount that you can actually afford to pay. In some cases, these will be one and the same, but it’s important to figure that out for yourself before buying your first home.

Approval of your mortgage is largely based on your down payment and the lender’s assessment of whether you can afford your monthly payments. To qualify for a mortgage, your monthly housing costs (mortgage payments, plus expenses like property taxes, waste removal and heating costs, condo or strata fees) shouldn’t exceed 35 per cent of your gross monthly income, and your total debt service ratio (your combined debts) shouldn’t exceed 42 per cent, although these numbers will vary slightly from lender to lender.

Before going shopping with your pre-approved mortgage, however, it’s important to remember that this amount represents the lender’s maximum, not necessarily yours. It’s up to you to make sure your mortgage payment actually fits into the broader picture of your budget. Will you still be able to afford to save for retirement or your children’s education? How about eating out once in a while? Just think—if your mortgage and others debts are taking a 42 per cent bite out of your gross monthly income, that doesn’t leave a lot of wriggle room, and any little extras that come up might be enough to put you in a bind.

Once you take a harder look at your budget, you might find that 30 to 35 per cent is a more comfortable target for your total debt service ratio, with housing representing closer to 25 per cent. If this latter number is too tough to achieve for your first home purchase, the solution might be to pay down other debts before buying.

Whatever number you land on, a good way to figure out if your hypothetical mortgage is really workable for you is to test-drive it for six months before buying. Take the difference between the mortgage payment and associated costs (property tax, strata fees, etc.) and your monthly rent and set it aside in a separate account every month. If it’s a struggle, you know the mortgage amount is too high. If you’re feeling comfortable, you can move ahead with renewed confidence, and as an added bonus, you can use the extra money you’ve saved to boost your down payment or help with other closing or moving costs.

Do you have a plan for emergencies?

Things happen. Loss of employment, sickness, sudden expenses—unexpected events always have the potential to upset our carefully balanced budgets, and the closer we are to the red line, the more damaging those events can be. For this reason, as you take on your mortgage, you’ll want to have an emergency fund in place to give you a soft place to fall if things don’t go as planned. At minimum you should have enough to cover your core expenses for three to six months, but the more you have available, obviously, the better.

One word of caution: don’t count on your line of credit. Lenders often have the power to cut off lines of credit with short notice, so if you find yourself in real trouble, that last line of defense could turn out to be no defense at all.

Finally, consider purchasing life and disability insurance before purchasing your first home. Yes, this will represent an additional monthly cost, but having enough coverage to make your mortgage payments can be critical when crisis strikes. If money is tight, you can consider options like taking a term life policy that lasts about as long as your mortgage does, lowering your monthly premiums. That way, at the very least, you’ll always be assured of the roof over your family’s head.