Am I ready to buy a home? Questions to ask before entering the housing market

This article is part of Global News’s Home School series, which gives Canadians the basics they need to know about the housing market that they never learned in school.

Entering the housing market is viewed by many Canadians as an attractive choice, both financially and for the security of having a home to call your own.

The goal is common enough, but the how and when are trickier. How do you know when the timing is right to jump to owning from renting or living with family?

What makes the question so difficult is that it’s not just a matter of dollars and cents — personal circumstances, long-term goals and other life changes all factor into what ends up being, for many, the biggest financial decision of their lives.

Here’s what you need to know before you look to buy your first home.

There’s one thing that can’t be ignored when buying a home — how much money you’re bringing in.

Comparator site Ratehub.ca recently took a look at the minimum income needed to afford a home across 10 Canadian cities. To do so, it looked at both the average home price in each market as of January 2023, as well as what kind of a mortgage you’d have to qualify for to finance the purchase.

Depending on the city, the income needed to enter the housing market ranges significantly.

If you’re living in Toronto or Vancouver, for example, you’ll need to be bringing in more than $200,000 of annual income, either as an individual or split with a partner.

However, that figure is slightly more than $100,000 in markets such as Montreal, Halifax, and Calgary.

On the other end of the scale, you’ll need an income just under $80,000 annually to afford a home in Edmonton or Winnipeg.

Clay Jarvis, lead writer with NerdWallet Canada, tells Global News that while it’s certainly a hard time to break into the housing market, those who are especially keen to break in can find more affordable routes if they look outside the major hubs of Vancouver and Toronto.

He recommends talking to real estate and banking professionals to get a sense of what’s possible for you based on your income, credit history and current savings.

“Don’t get discouraged before you’ve looked into it and given yourself a chance,” he says.

“Get a lay of the land so that you can see the paths to homeownership that are available to you. Don’t think about the ones that are already closed. Go out there and find the ones that are open because they probably exist.

“They might be very narrow, but they’re probably there.”

Equally as important as how much money you’re making is how you’re spending it.

Jarvis says it’s important to track how much money you have left over at the end of each month to build up enough for a down payment — the money you pay upfront on your home purchase, the rest of which is typically covered off by your mortgage — as well as to handle the typical expenses that come with homeownership.

He says that as a rule of thumb, if you have a couple thousand dollars left over after your rent and other bills and necessities are covered off at the end of the month, that’s a pretty good signal you could be ready to handle the financial burden of owning a home.

You’ll need to keep up that habit to build up a down payment worth at least five per cent of your home’s total value. That’s just the legal minimum, Jarvis notes, and you’ll likely get a better rate on your mortgage from a lender if you’re able to put more down.

The average sale price of a home in Canada in January was around $612,000, according to the Canadian Real Estate Association (CREA). A five per cent down payment on the average property, then, works out to roughly $36,000 in savings.

That’s already a high bar to reach for many Canadians, Jarvis says, and that still might not be enough.

The more money you put down on your home purchase, the less risk a lender is taking on by giving you a mortgage, he notes. Putting down 10 or 20 per cent of your home’s value up front can reduce the amount you pay on your mortgage over the length of the loan.

“People need to understand that the bigger your down payment, the better off you’re going to be,” he says. “You should always try to borrow as little money as possible because it means that you’re going to be paying back way less in interest.”

Expecting Canadians to be able to save tens of thousands of dollars starting from scratch is not necessarily realistic, Jarvis says.

“That is, I think, where people have a lot of difficulty these days. And it’s no question why,” he says.

“People are already carrying a lot of debt. Inflation’s really high. And you have people like me telling you to save, save, save, save, save. So it’s really, really tough.”

So now is a good time for a gut check — is this degree of saving something that’s compatible with your life right now?

The process of saving for and then owning a home often comes with “sacrifices” and other changes to your lifestyle, Jarvis says.

He reflects on his own circumstance a few years ago, living in Toronto, when he and his wife were looking at homes in neighbouring communities an hour or so outside the city’s core.

Buying in an area they could afford would have meant not being able to see their friends downtown as often as they did or putting in the time and costs to commute in and out of the city regularly.

Those are some of the decisions you may have to weigh if you’re unable to afford a home in the area you currently rent in, Jarvis says.

If you’re gearing up to take a run at the housing market, take a look at your budget and see where you can make cuts, he recommends. If you’re living in a particularly expensive rental market, you might need to get another roommate or reconsider where you spend your money so you can direct more of your income towards savings goals.

One key skill that Jarvis says homeowners need to develop is saying “no” — to an extra vacation this year, to a new spring wardrobe, to any expense that is drawing down your ability to save for a home.

“I would start looking at whittling down your biggest expenses in any way that you can, because if you’re having trouble saving now, it’s not going to get any easier with where prices are these days,” Jarvis says.

As opposed to renting, which tends to give a tenant the flexibility of ending a lease at the end of a year or with a couple month’s notice, homeownership tends to come with a number of obligations that cannot be overlooked, Jarvis says.

When you take out a mortgage, there will typically be a term of anywhere between one to five years, at which point you would renew the deal with a new set of terms, or, potentially, break it if you need to sell your home.

“The penalties for breaking your mortgage early can be astronomical and can really knock a hole in your finances,” Jarvis says.

For that reason, going into a home purchase with as much clarity as you can for the upcoming years can be very beneficial.

If you’re single but starting a family is part of your goals, will meeting the right person in the next few months derail your plans to purchase a bachelor’s condo unit? Does the prospect of kids in the foreseeable future mean you’ll need space for a nursery? Is your job likely to change in the next few years, potentially taking you to a new city?

These are the kinds of questions to have answers for before you sign on the dotted line to buy your first home, Jarvis says. Certain kinds of mortgages, like those with a variable rate, can be better for those with a bit more uncertainty, he adds.

“If you have doubts about that, then you need to make sure that you’ve got a product that’s going to allow you to move without kicking your finances in the teeth.”

All that said, there’s no one profile of the kind of person who’s “right” to become a homeowner, Jarvis says.

“It’s really hard to come up with a one size fits all description of that ideal homeowner because so many different people make it work.”

If you’ve reached the end of this article and suddenly you’ve got doubts about whether homebuying is right for you — that’s natural, too!

Jarvis says the last — or perhaps, first — question to ask yourself before buying a home is what your reason is for making the purchase.

Is it just something you always heard about growing up, or is it an investment strategy? Are you looking for a solid foundation from which to raise a family, or do you just have a serious case of FOMO — the fear of missing out?

“You can’t be out there buying a house because you’re suffering from FOMO. That’s not a good reason,” Jarvis says.

“If you have a good reason for buying a home, it’s going to keep you committed if or when things get stressful — or money gets tight.”