If you’re looking to buy a new home, chances are you’re overwhelmed. Don’t worry, it’s normal. Take Kelly, for example. She has decided she’s ready to purchase a place of her own, and feels she can swing a purchase price of $325,000, but no more. On the surface, it seems Kelly is on the right track, but there is much more to assessing your finances than “feeling good” about a purchase price.
Kelly’s not going to be paying $325,000 out of her pocket at any point, is she? What she will be doing is making interval mortgage payments, as well as putting down a down payment sum. The first step towards determining how much you can afford to spend on a new place is directly related to how much you can afford to spend on your living space, on a monthly basis. Let’s assume she’s comfortable spending $2,500 per month on living expenses. Kelly, for argument’s sake, also qualifies as a first-time home buyer and is able to withdraw $20,000 from her RRSP’s towards her down payment.
Assuming Kelly plans on adding an additional $5,000 to her $20,000 RRSP withdrawal, she now has a down payment of $25,000, which is just under 8 per cent. In most situations, I’d recommend a down payment of either 5 per cent or 20 per cent — 5 per cent as opposed to 0 per cent, in order to save on the brutal interest associated with 0 per cent, and 20 per cent as opposed to anything in between in order to reach the CMHC non-insurance minimum. However, because Kelly has the RRSP option, I’d recommend taking as much out of her RRSP as possible.
Getting back to the down payment of $25,000 — Kelly’s mortgage amount will be roughly $1,500 per month. If she wants to go for a condo she needs to add in maintenance fees. Chances are she’ll find her self totaling out at around $2,000-$2,200 per month; still below her maximum. Kelly also has the option of purchasing a home. There are other factors and details to consider but imagine she took the $500 she might pay on condo maintenance fees and put it towards her mortgage payment. In other words, Kelly purchased in the range of $400,000, with the same $25,000 down payment. Her mortgage would total in the range of $2,000-$2,200 per month, still below her limit. For the same monthly expenditure the actual purchase price of a piece of real estate can be dramatically different.