Buying your first home is an exciting milestone, but it comes with the challenges of saving up for a down payment and qualifying for a mortgage. You’ve probably heard that in Calgary’s current market, there are a few complexities to consider. With inflation, interest rate hikes, and limited inventory, it’s natural to feel that the path to homeownership might be difficult (or even impossible).
That being said, don’t count yourself out just yet! I’m here to provide you with a few practical tips that will help you turn your dream of homeownership into a tangible reality, despite the market’s challenges.
Home Buying Budget
It’s important to first calculate how much house you can afford. Lenders use the 28/36 rule, but it works great for buyers too! This rule calculates your front-end ratio (household expenses vs income) and your back-end ratio (debt vs income). This rule states that no more than 28% of your monthly gross income should go towards housing expenses and no more than 36% (which includes your household expenses) should go towards servicing debt. This leaves you with 64% of your income or more per month.
For example, let’s say my monthly household income is $5,000. To calculate my front-end ratio, I tally up my monthly household expenses (mortgage payment, condo fees, property tax, and homeowners’ insurance). We’ll say that these payments together cost $1,300, which is 26% of my monthly income. This means that my front-end ratio is 26%.
Note: when it comes to calculating your monthly mortgage, your best bet is to speak with a licensed mortgage broker. Many factors go into a mortgage payment, including the length of your mortgage and your interest rate. However, there are free online mortgage calculators that can give you a general starting point if you’re not there yet.
Down Payment
Now that you know your home buying budget, it’s time to calculate your down payment. This is where you can consider the type of house that you’re looking for, and possibly, what neighbourhood it’s in. If you want a single-family detached home, you can visit realtor.ca to find the median list price in a particular area or neighbourhood.
For example, if I want a single-family detached home in Haysboro, the median list price is $668,000. In general, most houses require a minimum 5% down payment. Be aware that for properties over $500,000, 10% down is needed on the amount that exceeds this threshold. For properties over $1,000,000, 20% down is needed on the entire property value.
For example, if I’m buying a home worth $668,000:
- 5% of $500,000 is $33,400
- 10% of $168,000 (the difference between $500,000 and the selling price of $668,000) is $16,800
This means that I should budget $50,200 for my down payment. Of course, this only covers the down payment, and having additional cash on hand is necessary for other costs associated with homeownership such as closing costs, home repairs, homeowners’ insurance, property taxes, and/or condo fees.
Saving
Now that you know your home buying budget and how much to save for your down payment, it’s time to take a look at your expenses. Track your monthly income and expenses and see where you can cut back and save more. Saving can be a personal experience, so I will offer some general tips:
- Set up automatic transfers into a dedicated savings account each month. Treat your savings as a non-negotiable expense, just like rent or utilities.
- Cut back on non-essential expenses. This might mean cooking at home more often, reducing subscription services, or finding more affordable transportation options.
- Consider opening a First Home Savings Account (FHSA) which functions like an RRSP and provides you with a tax deduction. Like a TFSA, there’s no obligation to pay back your tax-free withdrawal of up to $40,000.
- Consider using the Home Buyers’ Plan (HBP), which allows you to withdraw up to $35,000 tax-free from your RRSP to use as a down payment. Be aware that this money must be re-contributed into your account over a period of 15 years to avoid penalties.
- Explore opportunities to boost your income, such as a side gig, part-time job, or different career path. The extra income can accelerate your savings plan and get you closer to your homeownership goal.
Remember that saving for a down payment takes time and discipline but that it will bring you closer to your goal each month. By following these budgeting tips and staying committed to your financial plan, you’ll be well on your way to making your dream of owning a home in Calgary a reality.
