While buying a home as a newcomer in Canada can be a great financial achievement, there are a few things you need to consider before you make that leap and invest in a house.
The key things that you need to assess before you buy a house in Canada are:
This is the first thing you need to think about. Do you have some money in the bank?
Well, if you have some savings, or even financial support from family or friends, fine and good, that’s a good start. If you do not have any savings down for a house, you may want to consider building your house purchase savings budget because it really costs more than you may think.
Also, if you have a huge debt balance or a poor credit score, then you may not want to think about purchasing a house or committing to a mortgage just yet.
If you’ve never really thought about it, or you are just not sure, here are a few things you would need to consider in terms of actual money and finances for the initial purchase of a house:
- A down payment
- House closing fees
- Legal fees
- Realtor fees (If applicable)
- Brokerage fees (If applicable)
- Property tax
- House inspection fees
The timing of your life plays a significant role in determining if you’re indeed ready to commit to buying a house. Consider these few scenarios:
New Graduate or Newly wed
If you have just graduated and are in heavy debt with a lot of student loans, you may want to focus on paying off your student loans first before you buy a house. Also, if you have just recently spent a fortune on a wedding and exhausted all your savings, you may need some time to rebuild your savings for a house.
On the flip side, starting a new family may be a good reason to switch from renting to acquiring a new home.
New Comer, immigrant or new to a city?
If you have just moved to a new country or city, you may need some time to explore the new location to determine where to buy a house and settle. A key consideration you need to take into account is the varying house prices in different locations.
For example, in Canada, average house prices in British Columbia and Ontario are some of the highest in the country compared to other provinces.
Here is a snippet of average house prices in Canada, by provinces as seen on Statista.
You would also want to consider what works best for you or your family in terms of commute to work, proximity to schools, and other amenities.
Job and employment status
The average Canadian moves and relocates a lot due to the nature of their jobs, employment status, or family-related reasons.
You can always rent your house or sell it if you need to move, but the cost and effort of doing this especially on a tight timeline could be daunting.
Some people choose to rent because they are unsure about their stability in a country, province, or city.
Ideally, if you would be living in a location for a short period of time, between a few months to at most 1 year, then buying a house may not be the best decision at the time.
Goals and objectives
Your personal goals and objectives are valid. The decision to rent or buy a house may depend on your personal goals. Buying a house may not be part of your short or long-term goals and that’s totally fine.
Owning a house could be considered an investment in many terms, not necessarily for capital gains when you sell your house at a price higher than its purchase price and other associated selling costs, but also in the sense that you are securing an asset for the future.
Some people believe that the money invested in buying a house could be channeled towards other more lucrative investment platforms or businesses that would yield higher returns in the future.
If your goal is to buy a house as a form of securing financial assets for the future, you may want to consider the location of the house, the current mortgage market, interest rates, and other economic factors before making a commitment.
Also, maintaining a stable source of income would be very important to sustain paying off your mortgage. If you default on your mortgage payments, your house can be foreclosed and repossessed by banks or other financial institutions. This could also negatively impact your credit score.
Are you a renter?
The rule of thumb is that your rent expenses do not exceed 30% of your gross income.
For example, if your gross income is $3,000 i.e before any deductions, your rental expenses should not exceed 30% of that amount, which is $900.
Putting your net income into consideration, with an average tax plus other deductions of 25% – 30%, this amounts to a disposable income of $2,100 – $2,250. This disposable income, less rental expenses of $900 – $1,000, would leave you with about $1,200 – $1,250 to cater to other expenses such as daycare, feeding, clothing, transportation.
If you have outstanding debt, you may not even be able to pay anything towards your debt or save towards emergencies.
Your rental costs are a huge part of your expenses and you would need to plan to fit this into a realistic budget. You may also want to consider other costs that are directly related to your rental such as transportation costs to work.
If you find out that you spend almost 50% of your income on rental expenses, you may be better off paying that money into your own house via a mortgage.
Are you a home owner or trying to purchase a house?
Here are a few pros:
Your monthly mortgage payment is towards your property and considered building your equity, as whatever money paid towards principal is considered yours if the house is sold in the future.
Generally, there is an emotional satisfaction attached to owning your own home. Having your home may give you a sense of security and stability especially when payments are being made diligently or have been completed.
A few things to consider:
Purchasing a house on a mortgage is not really the end of the hurdle, there are additional expenses incurred for home maintenance.
Asides from the initial costs of purchasing a house, you will be expected to pay annual property taxes, homeowners association fees, condo fees, utilities, repairs, home insurance, etc.
The decision to rent or buy a house in Canada is a personal one. Buy a house if you are financially ready or keep renting if this works best for you. While buying a home has its pros, renting may be a beneficial option for some people.
Get a budgeting template to help you save for a house downpayment or analyze your monthly rent or mortgage expenses.