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Want to buy a house? Now? How?

Buying or up-sizing your home is a big decision.  In the current real estate market, it can feel impossible.  How do you get the information that you need to make a decision on the right home for you?

Most of us are familiar with lenders ratios and pre-approvals.  Lenders are looking for your payments to be between 30-40% of your income.  30% includes mortgage payment, property tax and heating; 40% includes mortgage payment, property tax, heating and any other debt payments (including spousal or child support payments).  There's some flex in those percentages, depending on the lender.

What you need to be aware of as the buyer is that lenders are looking at your gross, or pre-tax, income.  Depending on your income, your average tax rate could be 34-43%.  If you're approved using a 40% ratio, and you're in a 43% tax bracket, 83% of your money is already spent.  This puts you in a tight corner when it comes to the rest of your life.

It's important to calculate home affordability for yourself using your after-tax income, your other fixed costs (things that you've already committed to that have a regular price tag attached to them, like your cell phone, other memberships etc).  Then look at how much is left over- this will let you know how much is available for other necessities- like groceries, clothes and gas, as well as the other things you want to do- travel, continuing education, having children, planning a wedding.  it's also important to look at your saving capacity- you will need to save for unexpected expenses (or times of lower/no income), home maintenance costs, and long-term savings.

It's also important to look objectively at the current real estate market- Canadians have a love of owning.  We generally view it as a responsible way to build wealth.  Recently, we have only been talking, and behaving, like real estate prices always go up, not down.  as outlined here , Canadian real estate has an average growth rate of 1.8% per year since 1982.  That's below the average rate of inflation (2-3% per year).  It also doesn't include the costs of interest (on your mortgage), maintenance, and the increase in the price of utilities.  While some of these costs will also happen with renting, it is worth reviewing what exactly your home can do for you, and what you should expect it to do for you.  And, don't give in to the pressure of "buying right now, because if you don't you're getting farther away and farther away from owning."  Make sure it's something that you manage for the forseeable future.

For a quick look at ownership levels in different countries, click here

For a quick look at net worth in different countries, click here

Listen to the full episode of Sara makes Sense- To Own or not to Own, is that REALLY the question?