How much should I spend on a house? If you’re asking yourself this question, you’re already on the right track. Unfortunately, many people fail to purchase homes within their means, leading to financial distress and potential foreclosures.
Thankfully, you can come up with a practical budget by simply assessing your current employment situation, any upcoming life expenses you may have, and your gross annual income. If you’re not sure where to get started, please keep reading to learn more!
Why It’s Important to Have a Reasonable Housing Budget
Creating a reasonable housing budget is important for several reasons. First, it will help you secure a mortgage loan with a good interest rate. If you attempt to acquire a mortgage loan that’s too large relative to your debt and income, you’ll likely either be denied the loan or given a high-interest rate. If you apply for an appropriate mortgage loan, the bank will probably have much more confidence in your ability to pay it back and will give you a more competitive rate as a result.
Having a well-thought-out and practical housing budget will also prevent you from getting in over your head on a mortgage loan. If you don’t have a set budget, you could end up purchasing a home that you can’t afford to keep long-term. Even if you’re able to make your mortgage loan payments, you could become overwhelmed with upkeep costs or utility bills.
What Percentage of Income Should Be Spent on a House?
The percentage of your gross annual income spent on housing, or “mortgage expenses,” should not be more than 30% to 32%. This includes your monthly mortgage payments, interest, heating costs, and property taxes. Of course, your gross annual income isn’t the only factor you should take into consideration.
What down payment do you have saved up? In Canada, you need a minimum down payment of 5% of the purchase price on homes costing $500,000 or less. For homes between $500,000 and $999,999, you need 5% of the first $500,000 of the price and 10% for the rest of the price over $500,000. If the largest down payment you’re able to put down is $15,000, for example, you shouldn’t bother looking at homes over $300,000.
You should also take into consideration your anticipated closing costs, your current spending habits, your current debts, and the stability of your household income. If your employment situation is unstable, then making a budget based on your gross annual income could lead to trouble down the road.
What Other Factors Influence How Much I Should Be Spending?
You should also take major upcoming expenses into account when deciding how much you can spend on a home. Perhaps you’re pregnant or are planning on having a child in the next year or so. Maybe you want to change career paths, purchase a new car, or go on a big vacation.
These factors shouldn’t necessarily keep you from purchasing a home, but they should be taken into consideration when making the budget itself. If you feel as though your budget is too small for the house you really want, you may have to make some sacrifices, such as delaying any major purchases for a few more years.
Contact an Expert REALTOR® to Maximize Your Budget
Once you’ve created a proper housing budget, you can take the next step and contact a professional Ontario real estate agent. Our REALTORS® are here to help you make the most of your budget. They’ll use their market knowledge and negotiating skills to ensure you get the best possible prices when selling your home and buying a new one.
Contact a Fully-licensed REALTOR® today!
Looking for an experienced REALTOR® that specializes in real estate across Wellington County? At Royal City Realty we are focused on helping you unlock your future.