Unless you are born into wealth or pocketed a huge payday, you can’t impulse-buy a new home. For most of us, extensive planning and steadfast patience will reward us with a new home. But before you start shopping, you must first evaluate your personal and financial readiness through five key steps.
Financial Readiness
1. Secure a Steady Income
Consistent paycheques bring financial stability for yourself, but more importantly, it proves your reliability to the bank. When you apply for a mortgage, banks first look at income. Without steady pay, the bank views you as a higher risk of missing a mortgage payment. Aim for at least three years of steady pay for the most leeway in your application.
Steady pay also allows you to create an effective payment plan. With consistent money hitting your bank account at regular intervals, you always know how much money to allot to bills, food, and your mortgage. Not all careers allow for such stability, but you can still calculate an average pay and use that figure to develop a plan.
2. Pay Your Debts
People often overlook certain debts because of their origins. School debt, car debt, and vacation debt all get reclassified as “good debt.” Although it’s almost unavoidable to dodge any of the three debts, sometimes we can’t choose.
Many adult lives start with some sort of debt.
A clean slate means your reduced payments allow you to apply for a larger loan (mortgage). With a larger loan amount, more housing options will become available to you. When you pay off your debts, you also maximize your potential savings. This brings us to the next point.
3. Maximize Your Downpayment
If you plan to buy a house, start saving your down payment now. Every little bit counts. Across Canada, not just Ontario, home prices reached laughable highs in recent years. You need a lot of money to enter the housing market as a first-time home buyer.
Whether you buy with a partner or buy on your own, you should aim for fifty to a hundred thousand dollars in your TFSA (Tax-Free Savings Account) or First Home Savings Account (FHSA).
An ideal down payment should equate to a twenty per cent down payment for any properties. Any down payment lower than twenty per cent adds extra fees and increases your monthly payment. Many factors dictate your ideal down payment amount, which I outline in my mortgage guide.
Finances aren’t the only part of homeownership. Personal readiness matters just as much.
Personal Readiness
4. Learn Basic Financial Literacy
Once you purchase a home, money cycles through your account at rapid speeds. A normal part of home ownership involves budgeting, management, and investment. Improvement in these areas slows down the fluidity of your account, helping you feel more in control of your funds. With a solid knowledgebase, you will vault any hurdles emerging in front of you.
5. Commitment to Increased Responsibilities
Once you purchase your first home, your responsibilities triple. For a while, at least a year, your new routine consists of figuring out how to manage bills, chores, and food. It feels unmanageable, almost impossible at first, but everyone always learns.
Successful money management also starts with effective time management. Allot time to shop for food to squash temptation to order take-out. By creating a rough schedule to handle responsibilities, you learn to tackle problems as they come. You can defer some issues for a later day, but something always goes wrong when you least expect it. With a new home, you must commit to your new routine.
Money Method Tip: Don’t let saving for a house consume your entire life. Spend with purpose and remember to enjoy your saving journey.
Ready to start saving for your down payment? Learn how to make the most of your TFSA and FHSA in my next guide.
