Can I afford to own a home again?
In Canada, we have a penchant for owning our homes, but it doesn’t always work out. Whether caused by divorce, death, insolvency or just the desire for a lifestyle change, sometimes we put up the for sale sign, hand in our keys and go find somewhere else to live.
For many, this is a good move. The responsibility of owning a home is a big one – and it’s more than just financial. Oftentimes, people find renting to be less expensive and stressful, as the needs of the home are looked after by the landlord.
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For others homeownership might have been a point of pride; one that hurt to leave behind.
If you’re in the latter camp, you might be wondering if you can afford to own a home again. Here are the signs you might be (financially) ready to get back into the housing market.
You have enough income to carry a mortgage
The top metric lenders use to decide how much mortgage you can afford is called your debt service ratio. This calculation looks at how much money you make, and whether it’s enough to pay for the carrying costs of a home: the mortgage, property tax, heat and, if they apply, half condo maintenance fees.
If all of those carrying costs add up to no more than 39% of your pre-tax income you can likely qualify for a mortgage, although many people prefer to keep this number closer to 32% to leave breathing room in their budget.
Note that all sources of income count toward this ratio, so if you’re receiving spousal support or child support these payments should count when qualifying for a mortgage as long as you can show that it’s being paid reliably. Conversely, if you are paying spousal support or child support to an ex, that amount will be deducted from your income.
Your debt is in check
In addition to your housing costs, lenders also want to see that you can afford to pay all of your other debts. Lenders allow your debt repayments and housing costs to total no more than 44% of your before-tax income. If you’re working on paying down a large amount of debt, that could hurt your chances of getting a mortgage.
This number also includes things like car payments and credit cards. Consult with a mortgage affordability calculator to get a sense of how much you can afford to spend on a home based on your income and debts.
You have a down payment saved up
It’s ideal to have 20% of the purchase price saved for a down payment, however it is possible to get a mortgage with as little as 5% down on the condition that you purchase mortgage insurance. If you have enough savings to cover a down payment, you may be able to afford to buy a home again.
One place you can look for these savings that you might not think about is your registered retirement savings plan (RRSP). A federal program called the Home Buyers’ Plan (HBP) allows first-time homebuyers to withdraw up to $35,000 from their RRSP tax-free to buy or build a home. Of important note is the federal government’s definition of a first-time homebuyer. As long as you haven’t owned a home (or lived with a common law partner in a home they owned) in the last 4 years, you can access this program.
If you don’t have savings for a down payment, this could be a good way to save as long as you meet the conditions. There are several RRSP rules to be aware of, so do your research before you commit to using your RRSP to save for a home.
You can cover closing costs
It’s recommended you save about 1.5% of the purchase price for closing costs, which include lawyer fees, title insurance, and adjustments. That means for a home of $500,000 you should aim to save at least $7,500 to make sure you can cover your expenses.
Unfortunately, the generous definition of a first-time homebuyer doesn’t apply when it comes to land transfer taxes. The areas in Canada that offer land transfer tax rebates (B.C., Ontario, Toronto and PEI) all have rules saying you can’t have owned property before, anywhere in the world, to qualify.
You’re ready to do the work
Owning a home is work. There’s always something to do and always something that needs to be fixed. If you can qualify for a mortgage and you can afford to pay for maintenance on a property (rule of thumb is 1% of the value of the property annually) with money left over to eat and have fun, you might be able to afford to own a home again.
Check in with a mortgage broker to get started
Your best ally when determining whether you can afford a mortgage is a mortgage broker. It doesn’t cost you anything to work with a broker, and they can walk you through the entire qualification process. A mortgage broker can also help you get a mortgage pre-approval and lock in the best mortgage rate.
Owning a home for a second time could be within your reach. If your finances are in shape, you have savings for a down payment and closing costs and you’re ready to do the maintenance on a home, you might be able to afford to own a home again.