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February 26, 2018

You want to buy a house and you are wondering how much of an investment you can afford?

The two most important rules to respect are:

  1. Don’t rely on the maximum that a bank would grant you. You are the one who will have to live with your mortgage for 20 years; therefore, you should be very cautious.
  2. Be sure to have at your disposal more than the 5% down-payment required by the bank. Don’t forget that you will also have to be able to handle important fees such as moving costs, the welcome tax and notary fees.

Budget your finances with the goal of purchasing a home, not a prison.

Housing costs

This budgetary item is the most important. A small sacrifice in this area when purchasing a house or choosing an apartment will help in a big way… and for a long time!

We believe that this amount (rent or mortgage, municipal and school taxes, condo fees, heating) should not exceed 25% of your gross income. However, if you take the maximum that your financial institution offers, you may, in many cases, reach 32% of your gross income.

“I have never seen someone be able to manage their budget with these ratios” asserts Marie-Hélène Legault, economist and author of the guide “Acheter une maison” (transl.: Buying a house) published in the Protégez-Vous collection.

Here is how to calculate your percentage called “Gross Debt Service Ratio (GDS)”:

Example:

  Monthly
Goss income (before taxes) $6,000
   
Mortgage $1,200
Municipal and school taxes $250
Electricity/Heating $200
Total expenses $1,650
   
Total expenses divided by gross income 27.5%

 

When is the best time to buy?

Many people dream of owning their own house. Knowing when to buy can make all the difference. For example, a new couple who has just moved in together should be careful before committing to the joint purchase of a house. Indeed, were they unfortunate enough to separate, the fully financed house may be difficult to sell if brokers’ fees are taken into account. Also, during the separation, the person who stays in the house may have a hard time handling all the costs alone, and the person who leaves will also have a hard time paying rent on top of the contribution for the mortgage while the house is up for sale.

Similarly, buying a house just before the arrival of a first baby can create significant stress on household finances. There is often a tendency to underestimate the combined effect of reduced income during parental leave with a significant increase in expenses associated with the arrival of a first child. The first year may therefore not be the best time for big changes in all facets of our lives!

Buying a house is the biggest life purchase for the vast majority of people. A stable personal and financial situation will ensure that this long-term investment is synonymous with happiness and a healthy bottom line. 

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