8 years ago when we bought our townhome, I can say without any bashfulness that we were totally clueless about what went into buying and owning a home in Canada. We looked at over 30 homes in 3 neighbourhoods, had a very tense offer go bad last minute and faced with nowhere to live, decided to rent with the only landlord that would sign a lease on the last Friday of the month without a background check and let us move in the next week. We ended up liking the neighbourhood so much that 6 months later when our lease expired, we decided to buy a townhome that had come up for sale in the complex. Eight years and one additional kid later, we were ready to move on to the "grownup" home. Earlier this month, we closed out on that home and now I can share the steps that got us here.
- City/Area: First step was to determine which part of the city we wanted to live in. Calgary is divided into quadrants and each quadrant has it's own quirks and personalities. We started out living in the South-West quadrant and decided we wanted to remain here.
- Neighbouhood: Next up was to narrow down on which neighbourhood in Calgary Southwest would work best for us as a family. Here's where school choice, proximity to office, road network access, parks and recreational facility access played a role. Since I wanted a home that we could live in for the next 20 years, I had to consider high school choices and locations even though my kids are still in elementary school.
- Living Space Size: Depending on which opinion you read, the square footage requirement for a family home can vary from 100 - 700 sq.ft per person. Our current home is 2100 sq.ft of living space and just a tad too small. I settled on needing 500 sq.ft per person which equated to at least 2500 sq.ft of living space for our family of 5. The home we eventually bought is ~2700 sq.ft so bang on.
Building Type and Style: There are several options available for building type and style but not all options are available in all neighbourhoods. Building type to consider - with their accompanying pros and cons - include detached, semi-detached, attached, duplex, triplex, multi-family, high-rise, low-rise, mobile home etc. It's good to be fairly flexible with this because the next few steps can affect your available choices. We wanted a single family detached home. Downpayment available: Here we took stock of how much downpayment we could afford for a home. This is any combination of money that's available to be locked down into this home purchase. Downpayment can come from equity in current home, savings, liquidation of other assets and cash gifts from friends and family. Loan amount accessible: This is the step where we find out how much the banks were willing to loan us as mortgage. You can either consult the in-house mortgage specialist in your everyday bank or reach out to a mortgage broker. Either way, the loan amount number is a critical one to have on hand along with what the interest rate and estimated monthly payments will be. How much home can we buy? The very simple calculation for this is below:
- Living space = Above grade area + finished basement space.
How much home can we afford? Ah ha! This is different from step 7. Just because you can buy it doesn't mean you can afford it! How much home you can afford is simply another way of saying how much of your monthly/annual expenses can be spent on housing. One prolific rule of thumb in personal finance circles is to spend 30% of your income on housing. I'm not a fan of generic rules of thumb. I prefer to work with actual numbers using the calculation below. Mandatory expenses is things like insurance, utilities and loan repayments. Chosen optional expenses are things like private school tuition for kids, travel, entertainment etc. Basically the things you'd like to have so as not to be house poor.
- Downpayment + Home loan amount = how much home we can buy
Bring it all together: This is where you work backwards from step 8 to step 1 to determine what works BEST for your family right now. In other words, use your desire housing expenses to determine how much mortgage you can afford (this could be different from what the bank tells you). Then knowing how much mortgage you can afford, add that to your available downpayment amount to know how the maximum amount you can spend on buying your new home. Does that amount buy you the house style you want in the right size and the desired neighbourhood? If yes, congratulations and proceed to step 10. If no, decide which of the items in steps 1-5 you'll need to change on to get the home you want and which ones you're inflexible with. Armed with all this knowledge of exactly what you want and can afford, go ahead and call a realtor and let them know the specs for your new home search.
- Income - Mandatory expenses - chosen optional expenses - savings = Housing expenses
- Housing expenses = Mortgage + property tax + home insurance + maintenance + HOA fees
Having all the information in the above really helped us with our new home search. Our criteria was so well-defined that we could tell when what we wanted exactly became available. We looked at 3 homes, made offers for 2 and bought 1.
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