4 steps to budget for a home purchase amid rising rates and costs

Interest rates recently increased a full percentage point – the biggest hike we’ve seen from the Bank of Canada since 1998. With rising inflation and spikes in the cost of living, many potential homebuyers are wondering when the right time is to purchase a home. In light of market conditions, it’s probably a good idea to take a more stringent approach to spending in general right now. For those looking to buy sooner than later, the first thing you’ll want to do is create a detailed budget. With many anticipated changes expected to come, this is one sure way you can be prepared as a home buyer.

 

Step 1: Identify all your expenses and liabilities

 

The first step to establishing a realistic budget is understanding how much money is coming into your bank account, and how much is leaving on a monthly basis. This can take the form of fixed monthly expenses, such as your car payment or other costs you frequently incur.

You can start by reviewing your finances from the last three months. This will give you a solid overview of your monthly income, along with your aggregated expenses and average monthly spending. It will also help you identify patterns in your spending that can potentially be avoided, as well as bring your attention to expenses you may not be aware of, such as monthly subscriptions we often forget about.

Step 2: Eliminate unnecessary purchases

 

This next step is essential because it gives buyers an opportunity to evaluate where their money is going and make the necessary changes. Once you understand what your household is earning and spending, it’s time to start cutting expenses and saving. What this really means is cutting back on non-essential spending.

Although prices in fuel and food are on the rise, these are two examples of essential purchases many Canadians can’t go without. That’s why being conscious of non-essential spending has become that much more important to us, especially if we’re planning to buy a home. Consider cutting expenses such as dining out, reviewing monthly subscriptions such as Spotify or Apple Music, deferring vacations or a new vehicle.

It’s important that your budget is realistic and sustainable to your current lifestyle. For example, if you have a demanding job and young kids, budget three nights of take-out per month, versus eight nights. Even the smallest changes can make a difference over time.

Step 3: Pay off your debt

 

While this might not “feel” like saving, paying off your debt can save you a great deal of money. For example, if you have credit cards or a line of credit, you’re saving on the interest charged to your unpaid balances – which can fluctuate significantly. It’s important to remember that the highest interest rates are most often associated with credit cards. Minimizing your debts is also one less monthly expense, and can do wonders for your monthly budget. The faster you rid yourself of debt, the faster you can save for a down payment.

Eliminating debt also serves as a good primer for your mortgage application. Your debt-to-income ratio (total monthly debt/gross monthly income multiplied by 100) is a key factor lenders will consider for approval, so it’s wise to get a handle on it now before you begin the process.

Step 4: Automate your payments

 

Your budget is now in place. Here comes the hard part – sticking to it. Holding yourself accountable to your budget can seem daunting, but nowadays, it’s incredibly easy to manage and make your payments. Online banking gives us the ability to automate everything and ensure we never miss a beat. Once you know your budget and have a better understanding of your monthly contributions, you can easily set up your payments in advance – giving you one less thing to worry about.

It’s important to remember that volatility in markets is temporary, and what we’re experiencing right now won’t last forever. One thing we do have control over is how much we spend and being conscious of that is one step forward in the right direction. The prospect of buying a home right now is possible, but it’s essential that you have a robust budget and a good sense of your affordability before you make any moves.

 

Original source: NextHome

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